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OVERVIEW

There is a lot of fear in the markets right now. That is completely normal to have some fear when the news is scary or your investments drop in value. But what can or should you do in times like this.

To discuss this, let’s look at two hypothetical investments.

  • US stock market will be simulated using the S&P 500.
  • Portfolio 1 (300% Leverage): This portfolio will use 300% leverage and invest using the allocation in the table below. This portfolio is not an investment that Tines Capital offers. We believe we have investment options with a much better risk/reward ratio. This portfolio is for demonstration purposes only. Investors should not use leverage without the guidance of a qualified professional. Even with the use of a professional leverage may not be suitable.
AssetEffective
Allocation
US Stocks117%
US Long-Term Treasuries117%
Gold with 3X Leverage66%
Portfolio 1 is the hypothetical result of these holdings with a monthly rebalance. The total allocation is equal to 300% because this portfolio is using 3X leverage.

Year to Date Returns

As shown in the image below, Portfolio 1 has done much worse than the US stock market this year. When an investment drops in value it is normal to want to switch to an investment that is up in value. But is this a wise behavior? As you may have guessed the answer is a big fat “NO!” Investments should be picked by evaluating your time horizon, risk, tolerance and the future prospects of the investment. If you don’t take these factors into account you are highly likely to jump in or out of your investments at a bad time. The vast majority of investors underperform the market, and about 70% of it is caused by investors withdrawing their investments during periods of crisis1.

Previous Periods One Year Periods

This years bad returns are by no means the only time this has happened. One or both investments had a negative return in the years 2000, 2001, 2002, 2008, 2013, 2015, 2018, and 2022 YTD.

Results for A Patient Investor

Investors in either asset would have had lots of drops in value and reasons to switch investments or sell and hold cash. But as Warren Buffett says,

“The stock market is a device for transferring money from the impatient to the patient.”

-Warren Buffett

Now that we have zoomed in and looked at the scary one year results lets zoom out and look at some long-term results. When we do we see that the S&P 500 may have turned a $10,000 investment into $42,000 and Portfolio 1 may have turned it into $171,000. If a client had jumped out in any of the down periods they likely would have done much worse than sticking with the plan.

What Investors should Focus On

  1. Time Horizon: How many years can you leave the money invested and not need to spend it? This will change how aggressively the funds should be invested.
  2. Risk Tolerance: Are you willing to see your investments value fluctuate and remain patient and consistent. Your portfolio needs to be stable enough that you remain consistent even if something like the 2008 financial crisis, dotcom crash, European debt crisis, the flash crash of 1987, a nuclear bomb drop, or any other scary thing happens. It is extremely hard to appropriately time jumping out then in to investments based on recent performance or news.
  3. Investment Approach: Investments need to be picked based on what they are and their outlook, not their recent performance. For example, stocks/businesses may decline in value, but whether they do well in the future is not going to be based on what has already happened. The future price performance of a stock (or any investment) will be based primarily on the following:
    • How much profit does the real business or investment make in the future?
    • Is that profit higher or lower than what speculators expected?
    • How will expectations of that investment change?

What is Right For YOu

Our job at Tines Capital is to help you find and stick with the investments that are best for you. Reach out and let us help you!

Sources and Details

  1. 2020 Dalbar Report
  2. The data in this post was pulled from portfoliovisualizer.com. We cannot make an guarantees to the accuracy. This is a link to the simulation.
  3. Previous performance does not guarantee future results.
  4. Modeling assets with leverage is difficult because it requires assuming an interest rate charged for the leverage. The interest rate used in this simulation was based upon the results of these two simulations attempting to match the results of UPRO with 3X VFINX and TMF with 3X VUSTX. The best match to UPRO used a 4% interest rate. The best match to TMF used a 2% interest rate. Since the software does not permit using two rates, 4% was used for both bonds and stocks.
  5. Portfolio 1 is not a portfolio that Tines Capital uses for clients. However, Tines Capital does use 3X leveraged ETFS and other complex ETFs for some clients with various portions of their investments under Tines Capital.
  6. PDF of simulation
  7. PDF of UPRO with 3X VFINX
  8. PDF of TMF with 3X VUSTX