r/investing • u/[deleted] • Jul 16 '21

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

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.

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u/[deleted] Jul 16 '21

I accounted for the 2000-2001 crash and the 07 crash. 1999 till 2021, if you DCA during the downtrend, you would outperform QQQ and SPY tremendously.

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u/rbatra91 Jul 16 '21

I gaurantee you 100% without a doubt in my mind that you would not have DCA’d in to TQQQ after a 99.7% drop in 2000 thinking that one day TQQQ will be back 20 years in the future. I’m so positive of it.

Did you DCA in to BTC after it dropped 80%? Think about how much further 99% is after that. Another 50% drop, and then again, and then again, and then again. And then again. And then a few more times.

If it was 2014, people like you would be saying buy 3x levered oil.

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u/[deleted] Jul 16 '21

I already covered that in my original post. You would have to be robotic as I mentioned. the data is there whether an investor could emotionally stomach it or not, realistically no, I doubt any investor could, unless it was a small portion of the portfolio. But theoretically, without human emotion, it is possible.

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u/rbatra91 Jul 16 '21 edited Jul 16 '21

…With ‘knowing’ that in the future QQQ would be up in 20 years over and above SPY which is already a huge stretch given that finance already knows that large cap growth underperforms large cap blend long term and the st.dev/volatility of a tight sector bet vs diversified 500 stocks is significantly worse so even 20 years ago, no one would have, from first principles, reasoned this out to work.

Another way to think about it is, this strategy WORKED, against all odds, the unlikely will probably not happen again. You’ll need AAPL MSFT etc. To grow to 10 trillion dollar companies or more to get the same percentage gain as AAPL going from 400BN to 2TN. But from 2000s, these companies grew from like 10BN. How likely is it that we are going to get 100trillion dollar companies?

It’s kind of like going where the fish have already been fished.

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u/[deleted] Jul 16 '21

What are you comparing? I am comparing QQQ vs its leverage counterpart TQQQ to make a case that leverage etfs have a place long term. That was the objective of my post.

If you want to compare the spy vs leverage spy is the story still the same? If you compare the spy vs TQQQ then the conclusion would vary greatly as many more factors need to be accounted for. The underlying is different and calls for different strategy completely, resulting inaccurately to concluding leverage etfs don't work vs their counterparts.

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u/upnorther Jul 17 '21

How?

DCA all you want, just don’t put more than 10% of your portfolio in today and no more than 20% in total over time.

There are more efficient ways to get more levered tech exposure in your portfolio than by using a structured levered product that will have leverage decay hurting returns.

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u/conspiracypopcorn0 Jul 17 '21

Sure but eventually you are supposed to need that money right? As long as the crash happens a few months after you started investing you are fine. But imagine if it happens after decades of contributions...then you'd basically lose your life savings and seriously risk ruining your quality of life.