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Portfolios

This is a deep dive into the 4 Portfolios I offer: Conservative, Moderate, Aggressive, and Pratik's Portfolio.

Aggressive

The Aggressive Portfolio is perfect for risk-tolerant, adventurous investors: those willing to take high-risk, high-return bets to make money as fast as possible. This is good for investors who have a long time horizon for their investments (e.g. ages 18 – 30) or who can handle seeing volatile swings in their portfolio month-to-month.

The Aggressive Portfolio exclusively invests in Leveraged ETF’s, financial products introduced in 2006 that use derivatives, swaps, or other debt instruments to amplify the returns of an underlying index or set of assets. While a traditional ETF typically tracks the securities in its underlying index on a one-to-one basis, a LETF may aim for a 2:1 or 3:1 ratio.


Leverage is a double-edged sword, since it can lead to both significant gains and losses. But the Aggressive Portfolio is based on the same methodology as the other models, and is held to the same high backtesting standards – the only difference is the usage of 2x and 3x holdings to magnify the overall volatility. If the research is sound, why not use leverage to boost topline returns? 

The backtesting data only goes back to the year 2016, which is when providers ProShares and Direxion made these leveraged products available to retail investors. The Aggressive Portfolio is designed to have a similar Maximum Drawdown to the S&P 500 Index (28.56% vs. 23.93% during the 2019 Covid crash), but to vastly exceed the SPY in annual returns (66.36% vs 13.47%). The Sharpe Ratio is 1.55 and the Sortino Ratio is 4.11, outperforming the SPY substantially on a risk-adjusted basis. The graph below is provided by PortfolioVisualizer.com and is plotted month-to-month from Jan 2016 to Jan 2024.

Screenshot 2024-02-22 at 12.45.21 AM.png

ETF Exposure

Like in the Moderate Portfolio, the ETF universe can be divided into 3 parts:

1. US Stock Market Indexes

2. US Sector ETF's

3. Hedges Against the US Stock Market

This is to cover as wide a universe of investment opportunities as possible, to both improve risk diversification and overall performance.  

It is important to note again that the investments below are Leveraged ETF's (LETFs), meaning that they double or triple the daily movement of the benchmark index that they track. This comes with a set of risks. For any holding period for more than a day, your return may be higher or lower than the daily target benchmark amount due to repeated compounding effects. These differences can be significant. Smaller index gains/losses and higher index volatility contribute to returns worse than the daily target rate. Larger index gains/losses and lower index volatility contribute to returns better than the daily target rate.  The funds should not be expected to provide two or three times or negative two or three times the return of the benchmark’s cumulative return for periods greater than a day. 

Information is provided by the issuers of the funds, Direxion and ProShares.

UPRO: UltraPro S&P500 (3x)

URTY: UltraPro Russell2000 (3x)

UMDD: UltraPro MidCap400 (3x)

UDOW: UltraPro Dow30 (3x)

TQQQ: UltraPro
QQQ (3x)

Leveraged US Stock Market Indexes:

These include, but are not limited to, the following ETFs:

ProShares UltraPro S&P500 seeks daily investment results, before fees and expenses, that correspond to three times (3x) the daily performance of the S&P 500 Index.

ProShares UltraPro Russell2000 seeks daily investment results, before fees and expenses, that correspond to three times (3x) the daily performance of the Russell 2000 Index.

ProShares UltraPro MidCap400 seeks daily investment results, before fees and expenses, that correspond to three times (3x) the daily performance of the S&P MidCap 400 Index. The S&P MidCap 400 Index is comprised of 400 companies that broadly represent companies with midrange market capitalization between $3.6 billion and $13.1 billion. The S&P MidCap 400 was launched in 1991 and is one of several leading indexes issued by S&P that investors use as a gauge for market performance and directional trends in U.S. stocks.

ProShares UltraPro® Dow30 seeks daily investment results, before fees and expenses, that correspond to three times (3x) the daily performance of the Dow Jones Industrial Average. The Dow Jones Industrial Average (DJIA) is a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq. Also referred to as the Dow 30, the index is considered to be a gauge of the broader U.S. economy.

ProShares UltraPro® QQQ seeks daily investment results, before fees and expenses, that correspond to three times (3x) the daily performance of the Nasdaq-100 Index

Leveraged US Sector ETFs: 

These include, but are not limited to, the following ETFs:

The Direxion Daily Regional Banks Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the performance of the S&P Regional Banks Select Industry Index.

The Direxion Daily Retail Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the performance of the S&P Retail Select Industry Index. 

EDC: Direxion Daily MSCI Emerging Markets Bull 3X Shares

NUGT: Direxion Daily Gold Miners Index Bull (2x)

TMF: Direxion Daily 20+ Year Treasury Bull 3X Shares

TMV: Direxion Daily 20+ Year Treasury Bear 3X Shares

Leveraged Total US Market Hedges:

These include, but are not limited to, the following ETFs:

 

The Direxion Daily MSCI Emerging Markets Bull 3X Shares seeks daily investment results, before fees and expenses, of 300 % of the performance of the MSCI Emerging Markets Index. 
 

The Direxion Daily Gold Miners Index Bull 2X Shares seeks daily investment results, before fees and expenses, of 200% of the performance of the NYSE Arca Gold Miners Index. These funds track a separate commodity-related equity index consisting of a basket of gold miner-related stocks. They do not invest in physical commodities and should not be expected to directly track the price performance of gold.

The Direxion Daily 20+ Year Treasury Bull & Bear 3X Shares seek daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), of the performance of the ICE U.S. Treasury 20+ Year Bond Index. 

Stats Since Inception

The goal of the Aggressive Portfolio is earn highest return possible based on the research, but ensure that one important method of ascertaining risk (Maximum Drawdown) closely mirrors the Maximum Drawdown of the S&P 500 Market Index. This can be observed in the statistics below, from Jan 2016 to Jan 2024:

Aggressive Stats.png

Compounded Annual Growth Rate (CAGR)

Higher is Better

The compounded annual growth rate (CAGR) is one of the most accurate ways to calculate and determine returns for any investment that can rise or fall in value over time. A higher CAGR means higher annual returns on average, which is preferable to most investors assuming all else is equal. Investors can compare the CAGR of two or more alternatives to evaluate how well one investment performed relative to another.

 

The Aggressive Portfolio has a much higher CAGR (63.41%) than the S&P 500's (12.75%), implying that the Aggressive Portfolio vastly outperformed the SPY Market Index over the last 8 years.

Average Monthly Returns

Higher is Better

Average Monthly Returns is the percent change that an investor should reasonably expect to see their portfolio rise or fall each month. A higher number is preferable to a lower number because it implies higher compounded earnings over time. 

 

The Aggressive Portfolio increased an impressive 4.68% per month on average, compared to the SPY's 0.68% monthly average over the last 8 years.

Lower is Better

A Maximum Drawdown (MDD) is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum drawdown is an indicator of downside risk over a specified time period.

A low maximum drawdown is preferred as this indicates that losses from investment were small. If an investment never lost a penny, the maximum drawdown would be zero. The worst possible maximum drawdown would be -100%, meaning the investment is completely worthless.

The Aggressive Portfolio's Maximum Drawdown of -28.56% is slightly worse than the S&P 500's Maximum Drawdown of -23.93%. 

Worst Year

Lower is Better

Worst Year is the calendar-aligned year between 2016 and 2024 with the absolute worst performance. Most investors would prefer a lower Worst Year to a higher one, since a 'lower trough' implies a portfolio that declined less over a 12-month period than another portfolio would have.

The Aggressive Portfolio's Worst Year is -10.25% compared to the S&P 500's -18.17%.

Higher is Better

The Sharpe ratio is a mathematical expression that helps investors compare the return of an investment with its risk. To calculate the Sharpe ratio, investors can subtract the risk-free rate of return from the expected rate of return, and then divide that result by the standard deviation (the asset's volatility.) The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance.

The Aggressive Portfolio's Sharpe ratio of 1.50 dominates the SPY's Sharpe Ratio of 0.74 over the same time period.

Higher is Better

The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset's standard deviation of negative portfolio returns—downside deviation—instead of the total standard deviation of portfolio returns.  Because the Sortino ratio focuses only on the negative deviation of a portfolio's returns from the mean, it is thought to give a better view of a portfolio's risk-adjusted performance, since positive volatility is a benefit.

Just like the Sharpe ratio, a higher Sortino ratio result is better. When looking at two similar investments, a rational investor would prefer the one with the higher Sortino ratio because it means that the investment is earning more return per unit of the bad risk that it takes on.

The Aggressive Portfolio's Sortino Ratio of 3.98 demolishes the SPY's Sortino Ratio of 1.14 over the same time period.

Up-to-Date Backtest

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