The comedian was famously asked in Duck Soup. We investors are facing a similar challenge from the experts and regulators who are here to look after us.
Today s topic is the famously crazy 3 X retirement portfolio that we are told to not buy because sooner or later it will wipe us out.
It is over a decade since the Securities and Exchange Commission warned mom and pop not to put their investment funds into leveraged mutual funds that are designed to give them two or three times the daily performance of stocks and bonds, up and down.
It is over a year since I reported that investors who ignored this advice had since made more money than Croesus and were laughing all the way to the bank.
I am not making any recommendations, I just tell you what is happening.
The basic portfolio in question is 50% in ProShares UltraPro S&P 500 UPRO, designed to give you three times the performance of the S&P 500 stock index, and 50% in DirexionDaily 20 Year Treasury Bull 3 X TMF, designed to give you three times the performance of long-term U.S. Treasury bonds.
This year, the portfolio, rebalanced quarterly, has gone up 29% - even though it shouldn't be. The bond and stock markets have been volatile, with bonds especially tanking and then rallying, and that is supposed to be poison to these funds.
The more sensible portfolio that ignored these volatile funds, and instead split its money equally between a plain U.S. stock market fund and a plain long-term Treasury bond fund, is up just 9%.
This 3 x portfolio would have turned a $1,000 investment into $15,100 in the last decade, if rebalanced quarterly.
The simple, 1 x equivalent: $2,760, or less than a fifth as much.
So much for the wisdom of the experts!
It adds to my suspicion that one can get better financial advice from watching old Marx Brothers movies than you can from reading economics textbooks. The Communists should get their economic analysis from the wrong Marx Theoretically, these leveraged funds are a disaster waiting to happen for long-term investors. These funds are designed to give you 3 x the performance of the underlying assets - stocks and bonds per day. They do this by trading in derivatives. You can start playing the financial equivalent of Russian roulette once you hold them for longer than a day. If the stock market goes up one day and drops the next, you could end up much worse off than you started. It takes a 100% gain to recover from a 50% loss, and you can suffer from the famous paradox of percentages.
The bond fund UPRO fell 40% in the first three months of the year during the bond market rout, and it is still down about 15%.
I am not offering a view here, but I wouldn't take this risk with my own money. After Friday's stock market selloff, I was drawn to take a look at this portfolio.
When the stock market tank, the one asset that tends to do well is the U.S. Treasury bonds. That is the main reason why investors own some Treasury bonds, no matter what view they take of the economy or stock market. Treasurys offer a form of insurance in case of a stock market tank and things go to hell in a handcart.
On Friday PIMCO's 25 year Zero Coupon ETF ZROZ and Vanguard's Extended Duration Treasury ETF EDV went up 3% or more, providing a helpful cushion for portfolios while their stocks fell. The TMF offered more than twice the cushion, rising more than twice as much or 7%.
We should not take a long-term position in this 3 x Treasury Bond fund as a way to insure the rest of our portfolios. It may have worked in practice, and it may carry on working in practice for all I know, but it doesn't work in theory.
Or, as Chico might say, who you gonna believe -- experts or the market?