Foreword:

An investment reserve can be a great thing, it smoothes out volatility and in extreme phases you have the opportunity to implement something meaningful in your portfolio, which has a very calming effect psychologically.

Unfortunately, the expected additional return from buy the dip often fails to materialize, as the opportunity costs eat everything up again.

Very nicely described here by Gerd Kommer:

https://gerd-kommer.de/buy-the-dip/

But what if we turn a few screws, don't hold our investment reserves in cash and buy leveraged?

I have thought too much about this topic and built a model for a war chest, which I am also implementing myself.

Building up the reserve:

Investment Reserve

-------------------------------------------

EURO

30.0% Money Market / 0-1y Bonds EUR $CSH2 (+0%)

30.0% German Gov. Bonds 7+Y $X03G (-0,08%)

-------------------------------------30%

Swiss Franc

20.0% Swiss Gov.Bonds 7-10Y $CH0440081393 (-0,01%)

-------------------------------------20%

Swiss Gold

20.0% Gold $EWG2 (-8,65%)

-------------------------------------20%

==========100%==========

The reserve must be structured in such a way that it is not torn apart in a crisis. In the best-case scenario, parts of the reserve should even rise during crises.

This is why part of it consists of government bonds; in economic crises, interest rates are generally lowered, which is why long-term bonds should rise.

As inflationary phases may well occur, I have decided to include gold, especially as gold has a low correlation with equities.

The total of 30% in money market funds exists in order to have a volatility-free position.

This reserve is not a standalone, it should be seen as part of a global portfolio and can make up between 10% and 30% of the total portfolio.

It is not intended to generate returns, but merely to compensate for inflation and to remain stable in value during crises.

The strategy:

As an anchor point we use the all-time high of the $ACWI (USD) from -10% we invest step by step. We try to buy the ACWI with increasing leverage. As there is no 2x ACWI, FTSE All-World, MSCI World or similar, we have to build our own as best we can. I only try to use ETFs and ETCs as long as this is practical, as they have no counterparty risk.

Mode 1 ACWI -10% - Lev. 1.28x - Correction

5.0% MSCI USA 2X Lev. $CL2 (-3,33%)

12.5% World ex USA $EXUS (-1,27%)

-------------------------------------17,5%

Mode 2 ACWI -20% - 1.55x Lev - Crisis

5.0% MSCI USA 2X Lev. $CL2 (-3,33%)

4.5% Euro Stoxx 50 2X Lev. $LVE (-2,65%)

1.5% FTSE 100 2X Lev. $LUK2

3.0% Japan $PRAJ (-1,51%)

6.0% Emerging markets $EIMI (-2,72%)

-------------------------------------20,0%

Mode 3 ACWI -30% - 1.68x Lev - Escalation I

12.5% MSCI USA 2X Lev. $CL2 (-3,33%)

6.0% Euro Stoxx 50 2X Lev. $LVE (-2,65%)

2.0% FTSE 100 2X Lev. $LUK2

4.0% Japan $PRAJ (-1,51%)

5.5% Emerging markets $EIMI (-2,72%)

-------------------------------------30,0%

Mode 4 ACWI- 40% - 3x Lev. - Escalation II

32.5% MSCI ACWI 2x Lev. $null (-2,29%)

-------------------------------------32,5%

==========100%==========

Rebalancing

After the crash is before the crash, the investment reserve must be replenished.

After the price has recovered a distance of approx. 60% from the low to the top (ACWI), I would recommend selling all MSCI ACWI 2X Lev. positions and thus filling the reserve.

You can then fill the rest of the reserve with your savings rates and partial sales of the 2x positions.

Since we do not put the return from this "trade" completely back into the bond, but keep a part of the "Do-It-Yourself-Leveraged-Getto-ACWI", we build up a small leverage over time, at favorable conditions.

Problems and risks:

Especially if it goes down further than 50%, things can get ugly.

In the 2019 financial crisis, for example, we would have made -58%. As a result, the recovery would have taken 1 year longer than if we had bought a normal ACWI. However, in all other corrections (including Corona), we would have come out of the crisis better with this strategy and would have generated an annual outperformance of 1-2% p.a. after tax (varies depending on the period).

In long bull markets, without significant corrections, this strategy underperforms. In sideways markets, we should outperform a 100% equity portfolio due to the interest income.

It is not entirely clear which part of the investment reserve will be sold first and which last. Depending on the nature of the crisis, some shares may rise and others may fall.

If it is a debt crisis, for example, it may not be wise to sell your gold right at the beginning. If it is an economic crisis, long-dated bonds are king, although inflation-linked bonds will probably suffer somewhat.

If you don't want to be caught on the wrong foot here, you can always sell 50% of the best-performing asset and 50% of the worst-performing asset at the same time.

Which wouldn't be a good thing if we had two cycles in quick succession before we had the opportunity to rebalance.

Colorful pictures:

I have recreated the period from 01.01.2018 to 01.01.2025 in ExtraETF.

Unfortunately, you can't currently share the portfolio there, which is why I've used a few screenshots here.

I chose this period because I am familiar with it and it had both negative and positive interest rates. In addition, there were a total of 3 drops of more than 10% and a bond crash.

Note during the negative interest rate phase, the portfolio held no bonds (except the inflation-indexed ones) and instead held negative interest cash.

Here you can see a

100% FTSE-All World $VWCE (-1,36%) vs

80% FTSE-All World + 20% investment reserve.

Maximum Drawdown VS FTSE-All World

Although we buy leveraged products, the maximum drawdown is lower, at least as long as it does not go lower than approx. 35%.

The meme for Sunday (even if it's not Sunday):

I have created an 80% FTSE All-World + 20% Reserve portfolio starting 01.01.2025 and will continue to maintain this, so everyone can see the real performance of this module. And of course I will update you when we are down 10%.

What do you think of the pyramized investment reserve and the Do-It-Yourself-Leveraged-Getto-ACWI?

Trade has worked out. Short-term recovery could now come to an end.

Leverage Europe and integrate risk parity strategy into world portfolio

"Leverage For ETF Autists(HFEA)" aka Risk Parity Strategy with Leveraged ETFs.

(What HFEA is at all I have explained in another post).

@SharkAce had the idea the other day to map a leveraged world portfolio through MSCI USA x2 and Stoxx50 x2. Sounds good for now. Here's my little deep dive on it (and there's a little 2008 action in there too):

On the way to the leveraged world portfolio we have to do 4 quests:

1. ideal weighting of EU stocks to bonds.

2. ideal weighting of US stocks to Treasuries

3. weighting US to EU

4. FTSE All-World as basis?

Two things in advance

1. the only thing we really care about in this strategy is the maximum drawdown and the compound annual growth rate(CAGR). You can keep an eye on the volatility, but that's not really important.

2) I have only worked with ETFs that are tradable in Germany, so no WisheitsBaum ETPs or Burger Land ETFs.

Is this possible and if so does it make sense?

Spoiler: Yes

Risk Parity with leverage in simple words: price of stocks and bonds behave uncorrelated to a certain degree. Thus less drawdown and more returns.

Additionally we want to weight the EU part higher for diversification. We keep in mind the maximum drawdown of the FTSE All-World in March 2020 of about -19% and the EU share of 16.9%, so we aim for similar values for our world portfolio pie.

Emerging markets should not interest us at all for now, as we are completely focused on the US and the EU as a factor.

Our ingredients for the cake:

-2 eggs

- Amundi ETF Leveraged MSCI USA Daily UCITS ETF EUR

- iShares USD Treasury Bond 20+yr UCITS ETF USD (Acc)

- Lyxor EURO STOXX 50 Daily (2x) Leveraged UCITS ETF - Acc

- Lyxor Euro Government Bond 15+Y (DR) UCITS ETF - Acc

Quest 1: Europe. Find out which ratio of stocks/bonds is best

Initial situation: 10,000€ single investment, savings plan 200€ monthly. 2007-2017 and 2010-present.

Benchmark: Stoxx Europe 600 (because Stoxx50 is just garbage, my grandma would beat it).

Weightings of 90%-50% Stoxx50 fly right out, they have much stronger drawdowns than the benchmark, both in 2009 and 2020 and perform worse or the same.

So we look at weightings of 45%-10% Stoxx50

2007-2017 auuuaa, vodka and beer, auuaaaa

Benchmark: CAGR: 4.35%, max drawdown: -33.8%.

Here 30/70 performed best with: CAGR: 5.33%, max drawdown: -13.9%, volatility: 15%.

2010-today Corona Time

Benchmark: CAGR: 6.07%, max. drawdown: -21.6%

Winner: 45/55 with CAGR: 7.59%, max. drawdown: -20.6% Vola: 15.6%

Chart 2007-2021: https://i.imgur.com/3lswi2E.png

Drawdowns: https://i.imgur.com/3zjhnjC.png

So we decide to use the golden mean: 40/60 Stocks/Bonds and from now on we only look at the period 2010-today, since the other funds did not exist before 2010 and the comparison would otherwise be meaningless. There we get:

CAGR: 7.35%, Drawdown: -18.6%, Vola: 14.4%.

Quest 1 passed.

Quest 2: USA. Find out which ratio of stocks/bonds is best.

Initial situation: 10,000€ one-time investment, savings plan 200€ monthly. 2010-today

Benchmark: FTSE All-World: CAGR: 8,48%, max. drawdown: -19,1%

I compared everything between 90/10 and 10/90 stocks/bonds.

Here 60/40 performs best

CAGR: 22%, max. drawdown: -19%, volatility: 13.8%

Chart: https://i.imgur.com/W6iBH3M.png

Drawdowns: https://i.imgur.com/Ydv7hgb.png

Quest 2 also passed.

Quest 3: World. Find out which USA/EU ratio is best.

Totally don't care. We already have the winners of Quest 1 and 2. Both have the same drawdown and a higher CAGR than the FTSE. So no matter what ratio we put them in, we will always outperform the FTSE and underperform the US HFEA portfolio. So the question is how big should our EU share be in the portfolio. Logically, the CAGR will be between 7%-22%.

Quest 4: FTSE All-World as base yes/no

Since the US/EU portfolio has performed better than the FTSE and worse than the US only portfolio, the answer is individual. No matter what your EU allocation is, it will always outperform the FTSE.

Here is an example of what I have found to make sense:

Variant1 FTSE+US/EU HFEA factor: 50%+35%US/15%EU: CAGR: 11.1%, max. drawdown: -18.2%, Vola: 13%, EU share: ~23%.

Let's now compare this with 50% FTSE/50% US HFEA with: CAGR: 12.3%, max drawdown: -17.9%, vola: 13.8%, EU share: 8.4%.

Conclusion:

Does it make sense to do this? Yes. We were able to increase the EU share to 23% and outperform the FTSE growth rate by ~30%.

Chart: https://i.imgur.com/vK7rBEf.png

Drawdowns: https://i.imgur.com/e9iFw7s.png

Maximum yearly loss: https://i.imgur.com/1z13f3R.png

But is all this shit worth it? Nope. FTSE+US HFEA performs better and is easier. The difference to the portfolio without EU are -1.2% and a huge ass of effort to calculate that (70% of 50%, then 60% of that, then 60% of that again, just so you know how big 1 ETF share should be. And that x5 for all ETFs. FML.) Then rather do without the diversification in regions and diversify over time. Leverage properly for the first 10 years, at higher risk and then drive lower and lower risk over the next decades with higher capital by taking the leverage out and then shifting into bonds. Not like the dividend strategy, where there is the same risk and no return from start to finish.

And before the question comes again, why not everyone does this. Because most simply have no bock to deal intensively with anything. They want to open youtube and learn from @finanzfluss and @AKTIENMITKOPF which ETF and which gaming stock they should buy and then it's the weekend. No hate, I watch them too. In addition, it is for private investors simply still a relatively new concept. We are just no hedges and are dependent on ETFs. Of which there are 2 in Germany of which I know. The oldest jellyfish I have found was December 2017* where someone has tried with a demo account and 3 people have reacted in the thread on it... So if you wonder why not all do, then ask yourself why you have just heard the first time.

That's it from me you robbers. Have a nice sunday. Follow me on TikTok and buy my coin. Cheers to you!

Sources:

https://squirtgame.xyz/

https://backtest.curvo.eu/compare?config=%7B%22investmentPatterns%22%3A%5B%5B%22one-off%22%2C10000%5D%2C%5B%22recurrent%22%2C1%2C200%5D%5D%2C%22rebalancingStrategy%22%3A%22Quarterly%20rebalancing%22%7D&portfolios=NoIg4gNg9gRghhABAZQKYVQYwC6ICICWAbgQCaoB22IANMKHgKIAMrAgswGICsAqgBIBGWoIC64oA%2C%20NoIgYgKgygogBAQQDZILQHUD2AnJATEAGmFAEkYAGCgIQGkBWagRQgA4KiBGAXV6A%2C%20NoIgYgKgygogtAVSgehguAJMMCCACAVgAZli88QAaYUMAJSKIEYiB2AggNiaaqIDoATEwC61EAEkYjAEJgAspwgBhAgA4%2B-JgBYxtBsyLbOagJxqAzJqKc9IADIImgtayKCLgk9dN2psgGkCGQBFCDUiTQIRGKA%2C%20NoIgYgKgygog1AAgKpQLQAkwwIIIKwAMA9ISADTCgCSMBBAQgNJ70CKEAHAeQQHR4BdCuABKdAIwEA7HjwA2ceJ68AzEOq0GYALJyIAYTwdlAJgHmgA

https://www.de.vanguard/professionell/produktart/etf/aktien/9679/ftse-all-world-ucits-etf-usd-accumulating

https://www.optimizedportfolio.com/hedgefundie-adventure/

*https://community.ig.com/forums/topic/3072-leveraged-etf-risk-parity-portfolio/

First tranche purchased. DiVeRsiVe of my 100% USA portfolio. Since BNP Paribas has a large share, BNP trading position closed.

A few days ago I came across several posts here on the topic of leveraged ETFs.

I am looking for an ETF for my portfolio that tracks Europe. I am leaning towards selling my existing individual European stocks (exception: SAP) at a profit and starting a savings plan for this ETF and holding it for the long term.

Have you had any experience with this or a similar ETF?