The Case For And Against The UPRO/TMF Combo

By | June 11, 2020

I read an article on Seeking Alpha this week from 2016 which stated that holding 50% in UPRO and 50% in TMF and rebalancing weekly outperforms the best performing stock in the S&P 500. Over the past year, I believe this performance would have been about a 49% gain, where the S&P had a small decline during the past 12 months. The gain may be more per year over a multi-year period.

It was also said that this combination of UPRO and TMF reduced volatility and decreased drawdown, which is the maximum decline in the portfolio. The article went on to say that this is a better way to go than picking individual stocks.

What is UPRO?

UPRO is the S&P 500. On steroids. It uses whatever it uses to produce 3 times the result (up or down) of the S&P 500 on a daily basis.

I kind of like UPRO. I feel that it can be useful as a small portion of your portfolio. It is an ETF that could be one of your 10. Since the S&P 500 has an average return around 9%, over the long term UPRO probably returns around 27%. Beating 20% is pretty good.

What is TMF?

TMF is the long-term treasury bond market. On steroids. It returns 3 times a basket of long term treasury bonds. I haven’t done much research on TMF, but I would expect it is mostly stable and moves (generally) the opposite direction of the S&P. Rebalancing UPRO and TMF weekly would get you lower priced shares of both funds over time, which produces the wonderful return. 49% is a return that can be beat but why? If you can earn 49% consistently or even on average, I would stick with it.

What You Would Be Giving Up Doing TMF/UPRO Investing?

There is no free lunch right? I am pretty comfortable with the triple long term bond fund. However, I would be concerned holding a large chunk of UPRO.

Over the entire stock market history, the market has never declined 35% from peak to trough. That means that UPRO should never go to zero right? You see, a 35% decline in the S&P should mean that UPRO is wiped out. Will it ever happen? Who knows, but it could. Are you willing to bet half of your portfolio that it never will?

I had also heard that interest rates might have a negative impact on long-term bonds. I think this is less of an issue but could cause declines in this portfolio. Something minor to think about.

I Really Like Focus Investing

Depending on what you invest in, focus investing could beat 49% return. Or it could return nothing, or negative, for a couple of years. But I feel that the actual risk is less. And the return should be pretty good depending on your picks. You don’t have to pick a large cap stock from the S&P by the way. You can pick small cap stocks.

Your Risk In Focus Investing Is You

How do you mitigate yourself as a risk factor? You learn to desensitize yourself to market moves. Or better yet, get excited when the market declines so you can buy your picks at cheaper prices. To do this, you must raise cash at the market highs, when you think the market is going nowhere but up.

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