Saturday, November 02, 2013

85/15 the Taleb Portfolio

Roger Nusbaum has a blog entry about the Taleb Portfolio (link). Basically, it is keeping 85% to 90% very safe and taking big risks with the rest. In a recent study, 85% in CDs or cash equivalents, and 15% in triple-leveraged ETFs was a winning mix. The caveats as always, are that this is backwards looking. What worked last time may fail the next time.

/edit to add: stable markets would be a time when the 85/15 would under perform standard buy-and-hold. For example, if the stock market (or other market is someone is trading gold or bonds) is up say 5%, a triple-leveraged ETF would likely be down 10% to 15% for the year because of decay and costs, while the average ETF might be up 4.7% (after modest costs). Some might chirp that the interest earned from the CD or Treasury bills might make up for that. However, keep in mind, that if interest rates go up, the decay and carrying costs for the leveraged ETFs will tend to go up as well.

As a fan of process, I find ideas interesting. That said, I am a relatively old dog in the markets (I started trading in 1987), and never have been a big fan of the leveraged ETFs. Others find them useful. Leveraged ETFs are a way to avoid margin calls while using margin and a way to use leverage in retirement accounts.

As I always say, there are a thousand different ways to make money in the markets. Find one (or two or more) that work for you, that match your personality, your strengths. What works for another person may not work for me and vice-versa.

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