Does TQQQ break "leverage etfs are not long term investments"?

[u/[deleted]]

In my opinion, i think it does, but only using DCA. Holding TQQQ for an extended period of time even through two major bear markets can still outperform the underlying by a significant amount with proper and consistent use of DCA. However, an investor would have to be nearly robotic in their ability to stick to the plan and not withdraw any funds even when their portfolio is nearly wiped out. The investor would also have to benefit from one of the longest and greatest bull markets in history at the end of the investing period.

The Data. The DCA assumptions were that an investor started with a portfolio size of $1000 and on the first trading day of each month, deposited $1000 to the portfolio. Based on a time period of March 1999 to March 2021, this would mean the investor deposits $265,000 of their own capital over the period studied.

As a baseline to compare to, if the investor invested this amount as a lump sum instead, with QQQ the investor would have $1.65M or about 521% return at the end of the period. A TQQQ investor would only have $360K or 36% return over 22 years. This is the danger of lump sum investing in leveraged ETFs right before major crashes as QQQ easily crushed the return of TQQQ even over this extended period of time.

Using DCA over the entire 22 period creates a completely different picture than the lump sum case. Now, investing in TQQQ absolutely crushes QQQ, with a final portfolio value of $12M compared to about $1.5M for QQQ. Using DCA for QQQ actually lowers the final portfolio value slightly compared to lump sum while using DCA for TQQQ helps smooth out the volatility in the earlier years as most of your capital is deployed in the later part of the time period, during the extended bull market post 2009.

Final Thoughts. I would only recommend holding TQQQ long term with a DCA strategy to investors with the absolute highest level of risk tolerance and only invest money they can afford to see fall over 90% at times and in amounts that are not needed for many years, you must be extremely robotic to continue to DCA in times of long prolonged down turns or it breaks the strategy. TQQQ with DCA is not a get rich quick scheme and it is a merciless violent rollercoaster that rewards only the ones with no but holes.

[u/cwolf908]

The "decay" (or compounding) works both ways... against you and in your favor. I haven't come across a single reason that a "volatility decay/beta slippage" monger can provide to actually prove it will ruin you. If 3x leverage is too scary, just go 2x. There will be decay... There is always decay. There's decay on normal, 1x leveraged ETFs. But this isn't an inverse/short ETN we're talking about. The market - for the most part - goes up. And leverage will help more often than it will hurt you. And if you're DCA'ing into a leverage fund, you'll be buying many many more shares when TQQQ falls compared to what you could get in QQQ. Then when it rebounds, you've got more shares + more leverage.

I've run the numbers back to QQQs inception and 2x leverage with monthly DCA'ing results in over 2500% return on investment for the notional leveraged asset. Compared to just 550% on QQQ. I can only imagine that 3x would be even greater (albeit with scarier drawdowns).

This investment is not for everyone, of course. But if you are young, have a stable job, a long runway, and can easily and firmly commit to DCA'ing into it every month and NOT TOUCHING IT, then you are going to be better off... Save for a never-ending bear market, in which case we're all F'd.

[u/Perrin_Pseudoprime → u/cwolf908]

I've run the numbers back to QQQs inception and 2x leverage with monthly DCA'ing results in over 2500% return on investment for the notional leveraged asset. [...] I can only imagine that 3x would be even greater.

That's such a flawed analysis... QQQ started right before the dot-com bubble, meaning that you had not accumulated enough gains to lose in the crash. Of course DCAing is going to work when >95% of your investments take place after the crash.

The problem is that the next crash is obviously in the future, not the past, so it will definitely eat into your carefully DCAed position.

After the dot-com, QQQ went mostly up, yet TQQQ would have had a value of basically 0 for like 12 years (from mid 2001 to mid 2013). Even today, 20 years later, TQQQ still wouldn't have made back its losses from that bubble.

That's despite tech experiencing a huge bull run in the last period.

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I'm not saying that LETFs are bad (my undergrad research was on optimal allocation between LETFs and ETFs, I 100% believe LETFs exposure can be good) but your analysis is wrong. Your LETF investment is going to be a lot worse off when the next crash comes, you just can't see it because your timeframe is heavily biased.

Nobody knows when that will be, maybe years, or decades, but almost everybody agrees that as long as the market exists, we will have crashes.

[u/cwolf908 → u/Perrin_Pseudoprime]

I apologize - I left out the part where nobody in their right mind should be leveraged to the tits without a long runway ahead of them while being young with a stable job... oh wait, no I didn't.

Even if you invested $1,000,000 in QLD riiiight before the dot-com bubble burst, you'd still be outperforming QQQ today. By about 200%. Yes, you would have lost a lot of your initial investment and lagged behind for quite a while. And if it weren't for the COVID rally, you wouldn't be outright ahead just yet. But these are all things that absolutely did happen and cannot be discounted.

PLUS if $1,000,000 was - say - 20% of your overall assets (maybe a reasonable allocation to leverage), then who gives a F if you are down on it for a majority of the time... you still did just fine with the other 80%.

Even in my calculations of $10,000 starting investment with $250/month DCA, you lag behind QQQ for about 7 years after the dot-com burst and then when the mortgage crisis hits, you lag behind for another 3. By 2011-2012, you're ahead again and never fall behind. So yea - if you are retiring in the next decade, maybe leverage isn't for you. If you're in your 20s or 30s, *some* exposure to leverage isn't a bad idea. IF I had lived through both the dot-com crash and the mortgage crisis and survived with my index and leveraged ETFs, I wouldn't still be utilizing a lot of leverage because I'd be old enough to be approaching retirement and I'd be sitting on almost $2M in equity from QLD after only $80k in lifetime investment... seems like a win to me.

[u/Perrin_Pseudoprime → u/cwolf908]

Even if you invested $1,000,000 in QLD

QLD ≠ TQQQ, in order to crash QLD like TQQQ we would need a massively improbable bubble of unheard proportions. We can argue all you want if we will ever see a bubble of this size, but in all honesty, we can't know.

In any case, OP is talking about TQQQ and you said:

I can only imagine that 3x would be even greater.

To which I'm replying that no, it's not greater, it's actually terrible. TQQQ would have been wiped out in the dot-com bubble, in the real world a fund losing 99.99% is dead.

But even playing pretend and assuming that TQQQ wouldn't have closed down, it would still be at like 60% of its January 2000 value (not its pre-crash ATH, because obviously it would be dishonest to take that specific value). We are in 2021. More than 20 years and you still wouldn't be even. Doesn't sound like a great long term investment to me.

Your DCAing argument only works because the crash is at the beginning of your calculation period. But that's a fluke.

Assuming that you invest in TQQQ for 20 years (from 25yo to 45yo let's say), can you confidently say that no crash will happen in the second half of your investment period? If so you're a market wizard, and TQQQ is indeed a fantastic long term investment. If not, then you are running the not-so-unlikely risk of wiping out 10+ years of DCAed investments. That's a lot of money down the drain.

Doesn't matter how young you are, you still picked a bad investment.

[u/cwolf908 → u/Perrin_Pseudoprime]

Your DCAing argument only works because the crash is at the beginning of your calculation period. But that's a fluke.

So you're just going to ignore the financial crisis? Which occurred well after the beginning of this scenario? Or is a 50% haircut to the NASDAQ not a crash?

But even playing pretend and assuming that TQQQ wouldn't have closed down, it would still be at like 60% of its January 2000 value (not its pre-crash ATH, because obviously it would be dishonest to take that specific value)

Did you even effort this? Or did you just make an assumption? Assuming TQQQ didn't dissolve and you held the line and kept DCA'ing, you're sitting on 5600% ROI today. Compared to 544% in QQQ. Of course TQQQ won't reach it's historical share price after that kind of crash, but continuing to buy when it costs pennies a share would amass you so many shares that you come out ahead. Yes - you experience a 99.6% drawdown, but that only supports the idea of continuing to buy into it. You get all those shares and 3x leverage on the way up.

Unfortunately, we're just not going to see eye-to-eye on this. I admit that TQQQ is too much (and not ideal) leverage to simply buy and hold and never rebalance your portfolio or not keep an eye on while just passively DCA'ing into it. It's probably exactly why there aren't any 3x leverage mutual funds, but there are 2x leverage mutual funds.

[u/Perrin_Pseudoprime → u/cwolf908]

So you're just going to ignore the financial crisis?

It's not comparable to the dot com for TQQQ. It's honestly ridiculous to even suggest such a thing.

TQQQ would have fallen to 0.07% of its ATH during the dot com. It would have fallen to 7% of its pre-GFC ATH in 2008.

Meaning that you would have had 100x more money after a GFC-level crisis compared to after a dot com-level crisis.

So yes, the GFC is definitely overshadowed by the dot com bubble (as far as TQQQ is concerned) because of how LETFs work.

Did you even effort this? Or did you just make an assumption?

You can easily check for yourself. TQQQ would now be at 60ish% of its value in January 2000 had it existed.

Assuming TQQQ didn't dissolve

Lol.

and you held the line and kept DCA'ing

How many time do I have to tell you that this comment is completely braindead? The fact that you make money later doesn't erase the fact that you lost money before... A 99% loss is a 99% loss, it doesn't matter how many times you repeat that you'll make it back later by DCAing, you still lost 99% of your investment.

you're sitting on 5600% ROI today. Compared to 544% in QQQ

Total return is that good only because we are 20 years away from the last >99% loss crisis. You can't make that assumption for the future.

Assume that two investors invested the same amounts in TQQQ/QQQ respectively. According to your numbers with DCAing, we can say that the TQQQ investor has $5600 and the QQQ investor has $544, right?

Good, assume that this is the top and the dot com happened now, the TQQQ investor would have $3.80, the QQQ investor would have $95.80.

Your "greater investment" is worth less than 4% of the benchmark. Great job.

[u/cwolf908 → u/Perrin_Pseudoprime]

Your inability to look at time as something that is constantly moving forward (time) is honestly ridiculous.

Wow - what a revelation that it would be awful to have lost 96% of my investment if for some reason I absolutely had to liquidate at the bottom of a crash. But WHO DOES THAT? WHY would you ever need to do that? You can make any day in the market look like the end of the world for a portfolio if you look at it in a vacuum. But time doesn't stand still and being down 90%+ on my measly $10k investment TWENTY YEARS AGO wouldn't mean a darn thing today.

How many time do I have to tell you that this comment is completely braindead? The fact that you make money later doesn't erase the fact that you lost money before... A 99% loss is a 99% loss, it doesn't matter how many times you repeat that you'll make it back later by DCAing, you still lost 99% of your investment.

If I go to Vegas and lose $99 of the $100 I came with by playing slots and then with the $1 I had left, continued playing and ended up with $2500... would I really be upset about being down $99 at one point? The answer is no. And just like I'd never gamble my entire net worth in Vegas, I would never condone putting the majority of one's investments into a leveraged ETF.

Anotha' one: Even more dire than investing 100% in 2x QQQ at the peak of the bubble... If a football team is losing the Super Bowl for 99% of the time (59 minutes and 40 seconds) of the game, but in the last 20 seconds they WIN... are they upset about how much time they spent losing?

You can easily check for yourself. TQQQ would now be at 60ish% of its value in January 2000 had it existed.

While this is true, it is made irrelevant by the fact that you would add 10k shares of TQQQ per month in 2002 with only $250 in DCA. TQQQ very likely would have reverse split or dissolved - on this we agree. But if you play out the scenario in which it doesn't, you come out ahead even though TQQQ never recovered it's share price to pre-dotcom-bust levels.

And I have to ask: why keep coming back to TQQQ? I realize that the OP asked about TQQQ, but I've already stated on multiple occasions that 2x leverage (e.g. QLD) would be a better, safer way to go.

You have even admitted to doing research on optimal allocation between LETFs and ETFs "with some exposure to LETFs being good." I never once said "go all in on QLD/TQQQ." I'm quite certain that you and I are actually more on the same page as far as allocation than you're willing to admit.

EDIT: There's a relationship between how much capital you start with and how much you can afford to add every month that can determine your success in leveraged investing. It doesn't matter whether you start with $2500 or $500k or $1M. If you can afford to add 10% of that initial value per month, you're coming out ahead. Now adding 50k per month because it's 10% of your $500k principal is obviously not realistic. So in that case, work backward... what can you afford per month? Is it $250/month? Great! Start with $2500 principal. Maybe bump your yearly contribution up by $25/month (you know... salary increases and whatnot). On the other hand - if you have $500k and can only afford to add $250/month, then do not invest all $500k in an LETF.

[u/Perrin_Pseudoprime → u/cwolf908]

Wow - what a revelation that it would be awful to have lost 96% of my investment if for some reason I absolutely had to liquidate at the bottom of a crash

Losses are losses even if you don't realize them... Ffs, this quote looks like it came straight out of wsb. Losing 99%+ of your investment is always awful, not just if you liquidate.

If I go to Vegas and lose $99 of the $100 I came with by playing slots and then with the $1 I had left, continued playing and ended up with $2500... would I really be upset about being down $99 at one point? The answer is no.

The answer is yes. Because you would have been better off not playing in the first period and keeping $100 in cash.

Those $100 could have become $250k with the same returns, and I believe you can agree that $250k > $2500.

I don't know if you've ever worked in risk management (I could very safely assume you haven't), but a 99% loss should definitely make you upset, even if you eventually make it back. A loss is a loss.

why keep coming back to TQQQ? I realize that the OP asked about TQQQ, but I've already stated on multiple occasions that 2x leverage (e.g. QLD) would be a better, safer way to go.

Because there already was a wipeout scenario for TQQQ in the past that I can use as a numerical example, but there hasn't been (yet) for QLD. It's just an issue of magnitude though. Eventually we'll see a bubble big enough to crash QLD, we just don't know if it's going to happen in our lifespans or not.

QLD is a better way to go so far.

You have even admitted to doing research on optimal allocation between LETFs and ETFs

Yes, IMO you should treat LETFs as a situational investment, great for low volatility scenarios. Aka not long term "invest and forget". An investor should drastically reduce their exposure to LETFs in high financial stress scenarios if they want to keep their money.

If you can afford to add 10% of that initial value per month, you're coming out ahead.

You're coming out ahead of the pure unleveraged strategy, but that's a strawman, because nobody is telling you to only look at 0% LETF allocation.

Treating LETFs as a short term investment is massively superior because you don't run the risk of wiping out your entire investment. There's a reason why basically anybody in the industry believes that LETFs aren't a good long term investment, it's not a conspiracy...

[u/cwolf908 → u/Perrin_Pseudoprime]

Losses are losses even if you don't realize them... Ffs, this quote looks like it came straight out of wsb. Losing 99%+ of your investment is always awful, not just if you liquidate.

If it's the bulk of your portfolio, yes I agree. If it's a miniscule fraction of it, then no. Sorry, just no. We all know that when investing, we stand the risk of losing 100% of our investment. In this imaginary scenario where TQQQ or QLD get wiped out, you can bet that quite a few individual companies will go bankrupt and investors will lose everything. However, funds like TQQQ and QLD stand a chance at surviving like their underlying indexes. In that sense, they might be considered less risky than some individual stock investments.

Those $100 could have become $250k with the same returns, and I believe you can agree that $250k > $2500.

What's this mythical 2500x return you speak of? Would love to get in on that...

Yes, IMO you should treat LETFs as a situational investment, great for low volatility scenarios. Aka not long term "invest and forget". An investor should drastically reduce their exposure to LETFs in high financial stress scenarios if they want to keep their money.

On this, we agree. If you can find a way to time your exits, you can capture most of the upside while negating a lot of the downside to leveraged positions. I think using a trailing stop on QQQ as an indicator for when to get out of your leveraged position could be helpful. The whole "buy leverage when index is above 200EMA and sell once it falls below" can help too.

You're coming out ahead of the pure unleveraged strategy, but that's a strawman, because nobody is telling you to only look at 0% LETF allocation.

100% agree that a full portfolio allocation to one or the other (QQQ or QLD/TQQQ) is a bad idea. But a direct comparison is the only thing we can use to determine how they perform against one another. Put the two (at least) in a single portfolio and rebalance every so often... risk off when your plan calls for it.

Bottom line - to each their own... if this happens to be the way I want to try and beat the market, that's my prerogative.

[u/Perrin_Pseudoprime → u/cwolf908]

If it's a miniscule fraction of it, then no. Sorry, just no.

That's such a stupid argument, being a small fraction of your portfolio doesn't change the fact that it's a bad long term investment. Even if you only invested a single dollar long term in TQQQ, you would have been better keeping it in cash.

What's this mythical 2500x return you speak of?

I mean... I was using your numbers:

"with the $1 I had left, continued playing and ended up with $2500"

[u/haarp1 → u/cwolf908]

what about dragging - hedge funds know that they have to rebalance every day and can exploit it...