TMF: Minimalist Portfolio Could Turn $25,000 Into $1 Million ...

I explain how TMF could be used in a minimalist portfolio to turn ... 40/40/20 upro/tmf/tqqq does a fair bit better than most others, ... DMMartinsResearchMarketplaceFollowSummaryAnunderappreciatedETFliketheDirexionDaily20+YearTreasuryBull3XSharescouldbeusefulincreatingsubstantialvalueinthelongterm.Superiorresultscouldcomefromsimplycombiningtwofundsandrebalancing,ratherthanfromovercomplicatedinvestmentstrategies.IexplainhowTMFcouldbeusedinaminimalistportfoliototurn$25,000into$1millionin25years.Lookingforahelpinghandinthemarket?MembersofStorm-ResistantGrowthgetexclusiveideasandguidancetonavigateanyclimate.LearnMore»PMImages/DigitalVisionviaGettyImagesThequote"lifeisreallysimple,butweinsistonmakingitcomplicated,"attributedtoConfucius,shouldberecitedmoreoftenintheinvestmentworld.Amidsomuchinnovationinthefinancialservicesindustry,IbelievethataminimalistportfolioofonlytwoETFscouldturn$25,000investedtodayinto$1million,orevenmore,in25years.OneofthesefundsistheunderappreciatedDirexionDaily20+YearTreasuryBull3XShares(NYSEARCA:TMF).That'sright:I'mtalkingtriple-leveragedtreasuryETFinayearofhighinflationandrisinginterestrates.Today,IshowwhyI'mconfidentinthesimpleideaofusinggovernmentbondsstrategicallytoproducewhatIbelievecanbeaggressivelong-termreturnsandsubstantial,multi-decadevalueoutofamodestinitialinvestment.WhatisTMFDirexionDaily20+YearTreasuryBull3XSharesisaleveragedfundthattracksthedailypricemovementsoflong-termtreasuries.Forinstance:IfanETFliketheiShares20+YearTreasuryBondETF(TLT)isup1%onagivenday,TMFislikelytoendthetradingsession3%higher.Iftheformerisdown1%instead,thelatterwillprobablybe3%lower.Thefundisgenerallythoughttobeagoodtradinginstrument,atbest.ThisisthecasebecausethegoalofdeliveringthreetimesthedailyreturnsoftreasuryinstrumentsdoesnotmeanthatTMFwillalsoproduce3xthelong-termgainsingovernmentbonds.Infact,duetohighervolatilityandtheheftymanagementfeeof1.06%,long-termreturnsinTMFarelikelytobelowerthanthreetimestheperformanceofafundlikeTLT.Butthechartbelowshowsthat,evenoveramulti-yearperiod,TMFdoesaverydecent(notperfect)jobofmimickingTLTataratioofnearly3x.ThebluelineistheperformanceofTLToverthepastdecade-plus.Theredlineisa33/67portfolioofTMFandcash,rebalancedquarterly.ThedifferenceinCAGRisonlyabout70bps,halfofwhichattributedtohigherfundfees,whichtellsmethatTMFcouldarguablybeusedaspartofalong-termstrategyaswell.PortfolioVisualizerportfoliovisualizer.comTheproblemwithastock-onlyapproachMostgrowthinvestorsprobablybelievethatbuyingstocksisthebestwaytoproducethehighestreturnspossibleovertime.ButIwouldarguethattheequity-onlyapproachhasacoupleofimportantflaws.Stockstendtoperformbestwhentheeconomyishummingandthemarketisinastateofrelativecalmness.Whenthisisnotthecase,equitiescancausequiteabitofdamagetogrowthportfolios.ThechartbelowshowsthemaximumdrawdownsintheS&P500(orangeline)andtheNasdaq(purpleline)sincethelate1990s.Noticethattheformercorrectedsharplythreetimesinthepasttwodecadesalone:Rightaroundtherecessionsof2001,2008and2020.Thelatter,whilehavingoutperformedtheS&P500throughtheentireperioddepictedbelow,stayedinadrawdownthatreachedasdeepas75%foralongperiodofaround15years.Ouch.DatabyYChartsOneofthemostpopularsolutionstominimizepainfulbutsporadiclossesinthestockmarkethasbeentoaddbondstotheportfolio.Buttheclassic60/40approach(60%broadUSstocksand40%long-termtreasuries),whilehavinglimitedmaximumdrawdownstolessthan30%sincethemid-1980s,hasproducedannualreturnsthathavelaggedthoseoftheS&P500overthepastfewdecades.Whyshouldgrowthinvestorsbotherwiththediversifiedapproach,iftheultimatelong-termgoalistomaximizeassetvalue?TMFcouldbeasolutionThisiswhereTMFcomesin.Sinceits2009inception,theETFhasproducedreturnsof9.5%peryear,whilealsodeliveringdizzyingvolatilityofnearly40%peryear.Inisolation,thesenumbersarenotimpressive,sincedecentgainswouldhavecomeattheexpenseofdisproportionatelyhighrisks.ThemuchbetternewsisthatTMF'scorrelationwiththestockmarkethasbeen-0.41sinceinception,suggestingthatthefundhashistoricallybeenanoutstandingequitydiversifier-thatis,agoodcomplementtostocksduringperiodsofmarketandmacroeconomicdistress.Ifblended50/50witha3xleveragedstockfund,liketheProSharesUltraProS&P500(UPRO),theresultswouldhavebeenimpressive:34%CAGRsince2009,only22%volatilityandmaximumdrawdownofmerely20%in2015.AddressingthetwoelephantsintheroomTheminimalist50/50portfolioofTMFandUPROdescribedaboveleavestwoimportantquestionshangingintheair:(1)Wouldithaveworkedpriorto2009,especiallyduringthefinancialcrisisof2008,and(2)coulditcontinuetoworkgoingforward,especiallynowthatyieldsremainclosetotheirall-timelows-i.e.atoughenvironmentforstocksandbonds,shouldinterestratesriseastheyareexpectedto?Toanswerthefirstquestionabove,Ipreparedmyownbacktestusingtwounleveredfundsthathavebeenaroundsincethe1980s:Vanguard500IndexFundInvestorShares(VFINX)representingUSstocks,andVanguardLong-TermTreasuryFundInvestorShares(VUSTX)asaproxyforUStreasuries.Iusedthesetwofundstosimulatea3x-leveragedstocks-and-bondsstrategythatshouldresemblethe50/50TMFplusUPROportfolio,rebalancedmonthlyinthiscase,ifonecouldhavebeensetupin1986.Tobetterreplicatethehistoricalperformance,Iadjustedthereturnsby(1)1%inannualETFfeesand(2)thedragcausedbyanaveragerisk-freerateof2%peryear.Thechartbelowshowstheresults,followedbysomekeyobservations:DMMartinsResearch,datafromYahooFinancefinance.yahoo.comAnnualizedreturnswouldhavebeenanoutstanding28%,withannualizedvolatilityof27%.Thisroughlymeansthedoublingoftheportfolio'svalueeverythreeyears,onaverage,overthemulti-decadeperiod.Themaximumdrawdownofnearly60%wouldhavehappenedinFebruary2009.Whileugly,thecorrectionwouldhavebeenroughlyinlinewiththepullbackinstockpricesaroundthesametime.OtherthanduringtheGreatRecession,theaggressive50/50portfoliowouldhave,atworst,dippedbyamaximumoflessthan40%in2002and1987.Manyfearthatanyinvestmentstrategyinvolvingbondstodaymaybedoomedduetorisingyieldsin2022.Butworthnoting,theFedfundsratespikedfromnearlyzeroattheendof2015to2.4%bytheendof2018.Duringthisperiod,the50/50TMF-UPROportfoliowouldhaveclimbed12%peryear,beatingtheperformanceoftheS&P500.Andbetweenthestartof2004andmid-2006,ratesincreasedfrom1%toover5%-yetIestimatethatthe50/50portfoliowouldhaveproducedannualizedreturnsof18%.Thesecondelephantintheroom:Couldtheoutstandinghistoricalperformancedescribedabovecontinueinthefuture?WhileIdonotknowtheanswertothisone,Icanmakesomeestimatesandtakeaninformedguess.First,onthetreasuryside,yieldstendtobethebestpredictoroflong-termreturns.Currently,the30-yeargovernmentbondyieldsaround2.1%.Therefore,giveortakefeesandvolatilitydrag,Ifinditreasonabletothinkthata3xtreasuryfundcoulddeliver6%inannualgainsoverthenextdecadeortwo.Onthestockside,theS&P500hasbeenonatear.Butdespiteannualreturnsof16%inthepastdecade,IfinditprudenttoassumethatUSstockscouldofferannualizedgainsofnomorethan10%inthenextcoupleofdecades.Shouldthisproveaccurate,UPROcouldclimbbyaround26%or27%peryearinthelongterm.BlendthetwoETFsaboveata50/50ratio,andaleveragedstocks-and-bondsportfoliocouldrealisticallyoffer16%inannualreturnstogrowthinvestorsgoingforward.Thatwouldbeenoughtoturn$25,000investedtodayinto$1millionin25years,assumingtaxdeferment-nottooterribleofaretirementnestegg.PartingwordsThekeymessagesofthisarticleare(1)anunderappreciatedETFlikeTMFcouldbeusefulincreatingsubstantialvalueinthelongterm,and(2)achievingsuperiorresultscouldbedonesimplyandpassivelybycombiningtwofundsandrebalancingoften,ratherthanbyovercomplicatingtheinvestmentstrategy.Inmyview,thebiggestchallengehereisdiligentlystayingthecourse.Itishumannaturetofeeluncomfortablebeingacontrarian-afterall,notmanyinvestorsareusingleveragedbondsintheirgrowthportfolios-especiallyinthecaseofsizableshort-termunderperformancethatcouldtestinvestors'resolve.Perhapsknowinghowtodealwiththesechallengesiswhatseparatestheoutperformersfromtheunderperformersinthelonghaul.Joinourcommunity"Thinkingoutsidethebox"iswhatItrytodoeverydayalongsidemyStorm-ResistantGrowth(orSRG)premiumcommunityonSeekingAlpha.Since2017,Ihavebeenworkingdiligentlytogeneratemarket-likereturnswithlowerriskthroughmulti-assetclassdiversification.Tobecomeamemberofthiscommunityandfurtherexploretheinvestmentopportunities,clickheretotakeadvantageofthe14-dayfreetrialtoday.ThisarticlewaswrittenbyDMMartinsResearch20.33KFollowersFollowAuthorofStorm-ResistantGrowthAthoughtfulstrategytogrowyourportfoliowithlowerriskDanielMartinsisaNapa,California-basedanalystandfounderofindependentresearchfirmDMMartinsResearch.Thefirm'sworkiscenteredaroundbuildingmoreefficient,easilyreplicableportfoliosthatareproperlyrisk-balancedforgrowthwithlessdownsiderisk.---DanielisalsothefounderandportfoliomanageratDMMartinsCapitalManagementLLC.HeisaformerequityresearchprofessionalatFBRCapitalMarketsinNewYorkCityandfinanceanalystathedgefundBridgewaterAssociates,wherehedevelopedmostofhisinvestmentmanagementskillsearlierinhiscareer.DanielholdsanMBAinFinancialInstrumentsandMarketsfromNewYorkUniversity'sSternSchoolofBusiness.---Asofmid-September2020:-Thefirm'sAll-EquitiesSRGportfolio,availabletosubscribers,hadbeenbeatingtheS&P500byover10percentagepointsperyearsinceinception,withcomparablelevelsofrisk.-TheMulti-AssetSRG"sisterportfolio"hadproducedmarket-beatingreturnssinceinception,withrisk-adjustedperformancemorethantwiceasstrongastheS&P500.-DMMartinsResearchwasratedbyTipRanksamongthetop3%expertsinthemarket,includingindependentresearchersaswellasprofessionalWallStreetanalysts.---OnSeekingAlpha,DMMartinsResearchhascollaboratedwithRiskResearch,Inc.DMMartinsResearchalsorunstheAppleMavenchannel:thestreet.com/appleFollowDisclosure:I/wehaveabeneficiallongpositioninthesharesofTMF,UPROeitherthroughstockownership,options,orotherderivatives.Iwrotethisarticlemyself,anditexpressesmyownopinions.Iamnotreceivingcompensationforit(otherthanfromSeekingAlpha).Ihavenobusinessrelationshipwithanycompanywhosestockismentionedinthisarticle.24Likes80CommentsToensurethisdoesn’thappeninthefuture,pleaseenableJavascriptandcookiesinyourbrowser.Isthishappeningtoyoufrequently?Pleasereportitonourfeedbackforum.Ifyouhaveanad-blockerenabledyoumaybeblockedfromproceeding.Pleasedisableyourad-blockerandrefresh.