{"id":2142,"date":"2020-08-25T04:10:57","date_gmt":"2020-08-25T04:10:57","guid":{"rendered":"https:\/\/straussresearch.com\/?p=2142"},"modified":"2020-08-25T05:11:40","modified_gmt":"2020-08-25T05:11:40","slug":"our-investment-strategy-has-far-outperformed-a-buy-and-hold-approach-this-year","status":"publish","type":"post","link":"https:\/\/straussresearch.com\/index.php\/2020\/08\/25\/our-investment-strategy-has-far-outperformed-a-buy-and-hold-approach-this-year\/","title":{"rendered":"Our Investment Strategy Has Far Outperformed a Buy-and-Hold Approach This Year"},"content":{"rendered":"\t\t
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This report will discuss the results of the investment strategy that we recommended in our market comments for the week ending March 13, 2020.<\/p>

At that time, we made an extremely valuable call on the market, when we advised buying triple leveraged exchange traded funds (ETFs)<\/strong>.\u00a0 Since then, these ETFs have produced dramatic gains as the market has recovered, as seen in the chart below.<\/p>

Figure 1\u00a0 \u00a0\u00a0Triple Leveraged Nasdaq 100 ETF\u00a0 (ticker symbol TQQQ) <\/u><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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In our market comments for the week ending 3-13-20<\/a>,<\/u><\/strong>\u00a0 we wrote: \u201cLarge percentage gains can be made by buying at very oversold levels, especially using double or triple leveraged ETFs<\/strong> \u2026 This is not just for short-term trading purposes.\u00a0 We may want to hold these stocks or ETFs for years, and buying them at very oversold levels can make a major contribution to performance.\u00a0 Thus it would make sense to place buy limit orders on a variety of stocks and ETFs, such as TQQQ in the $35 – $45 range<\/strong>.\u201c<\/p>

(Note:\u00a0 in general, a buy limit order is an order to buy at a specified price, which is below the current price.\u00a0 This order stays in effect for 30 days or more, and will be executed only if the market price drops to this limit price.)\u00a0<\/p>

The Invesco QQQ Trust (ticker symbol QQQ) is an ETF that holds 100 large stocks in the Nasdaq 100 index, including Apple, Amazon, Microsoft, Facebook, etc.\u00a0 QQQ is one of the oldest and most widely traded ETFs in the stock market, with average daily trading volume of over 40 million shares.<\/p>

In recent years many triple leveraged ETFs have been introduced, which are designed to move three times as much as the underlying index.\u00a0 We recommended buying the ETF with ticker symbol TQQQ, which is the triple leveraged version of QQQ.\u00a0 So if QQQ rises by 10%, TQQQ rises by 30% (there is some tracking error over time).<\/p>

When we wrote our comments in mid-March 2020, the stock market was plunging amid the coronavirus outbreak, and on March 13th<\/sup>, TQQQ closed at $57.\u00a0 Note that we did not recommend buying TQQQ at that point, as that would have been like \u201ctrying to catch a falling knife.\u201d\u00a0 Instead, our strategy was to place buy limit orders at very low prices, so that if the market kept falling and reached those prices, we would be buying at extremely oversold levels.\u00a0<\/p>

Over the following six trading days, the market continued its sharp decline, and TQQQ hit an intra-day low near $33 on March 18th<\/sup>.\u00a0 This meant that all of our buy limit orders were filled, resulting in a TQQQ position with an average cost of $40. <\/strong><\/p>

The market then turned up in April and has been rising steadily for the past five months (as seen in the chart above).\u00a0 By 7-31-20, the price of TQQQ had risen to $119, an increase of almost 200%.\u00a0<\/p>

Thus our strategy of buying triple leveraged ETFs near the market lows in March has made a major contribution to our investment performance this year, and has far outperformed a buy-and-hold strategy.<\/strong><\/p>

The exact contribution to performance would depend on a variety of factors, such as what percentage of an account was invested in ETFs such as TQQQ, and when they were sold.\u00a0<\/p>

After buying the ETFs, we can manage the position in a number of ways, such as selling all or part of the shares, placing sell limit orders, placing stop-loss orders, holding part of the position as a long term investment, etc.<\/p>

With this in mind, we will look at several scenarios to assess the impact of buying triple leveraged ETFs when the market was near its lows in March.<\/u><\/strong><\/p>

Base Case Scenario:\u00a0 30% Cash and 70% S&P 500, with no ETFs<\/u><\/strong><\/p>

With the large V-shaped move in the market this year, the year-to-date price change of the S&P 500 through July was a gain of 1.2% (for simplicity we will not include dividends, and assume that cash had a return of zero).\u00a0<\/p>

A basic investment strategy would be an asset allocation of 30% cash and 70% stocks, with the stock portion invested in the S&P 500.\u00a0 For a portfolio valued at $1.0 million at year-end 2019, this strategy produces a year-to-date return of 0.9% as of 7-31-20, and the value of the portfolio rises to $1.009 million.<\/p>


Scenario #2:\u00a0 <\/u><\/strong>Investing 10% in TQQQ in March and selling the position in April<\/u><\/strong><\/p>

This scenario is shown in Figure 2 below.\u00a0 A $1.0 million dollar portfolio starts the year with an asset allocation of 30% cash and 70% S&P 500, but in mid-March we place buy limit orders on TQQQ, as recommended in our blog post, moving 10% from cash into TQQQ.\u00a0 As mentioned above, these orders were all filled by March 18th<\/sup>.\u00a0<\/p>

In mid-April, when the price of TQQQ reached $60, we recommended taking profits to lock in a 50% gain.\u00a0 By this time the $100,000 position in TQQQ has risen to $150,000.\u00a0 We sell the TQQQ position and move the proceeds into the S&P 500.<\/p>

By July 31st<\/sup> the S&P 500 rises by another 14.9%.\u00a0 This means that as of 7-31-20, the value of the total portfolio has risen to $1.081 million, for a year-to-date return of 8.1%.<\/strong>\u00a0 This is 7.2% above the return of 0.9% from the basic buy-and-hold approach.<\/p>

Figure 2\u00a0 \u00a0 \u00a0Investing 10% in TQQQ in March and selling it in April<\/u><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Scenario #3:\u00a0 <\/u><\/strong>Investing 30% in TQQQ in March and selling the position in April<\/u><\/strong><\/p>

Buying TQQQ in late March 2020 was actually a very low risk proposition, for two reasons:\u00a0<\/p>