I have always been intrigued by the power of leverage. Using leverage means borrowing money to invest in something for the purpose of magnifying your profit potential.
When you are right, leverage works in your favor. When you are wrong though, leverage could result in disastrous results and bankruptcy.
An interesting leveraged instrument is SSO, which generates double the daily return of the S&P 500 through investments in stock index futures. If the S&P 500 rises by 1 %, SSO will increase by about 2%. The changes are never EXACTLY twice the rate of change for S&P 500 due to tracking errors.
I gathered daily data for S&P 500 going back to 1950. I then calculated the returns for the 58 year period for twice the daily changes in the index. I didn’t account for taxes, commissions, dividends and interest for simplicity purposes. The results are truly astonishing.
Investors who could have stomached the extra volatility from the increased exposure to the S&P 500 could have enjoyed average annual returns of almost 14.33% annually. The worst drawdown in annual returns occurred from 1972-1974 -68.60%, and 69.50% during the 2000 - 2003 bear markets. In addition to that, investors who bought the back tested index at the end of 1999 are still underwater by 37%.Here are the results per decade:
Year $1 invested at the beginning of the decade grows to: at the end of the decade
1950's $ 11.32
1960's $ 2.13
1970's $ 1.14
1980's $ 7.77
1990's $ 14.14
2000's $ 0.78
For example if you invested $1 in the SSO at the end of 1980, your investment would have grown to $55 by the end of 2007. On the other hand, the same $1 investment in an S&P index fund would have grown to $22.50.
So how should investors incorporate leverage in their portfolios? I believe that a 5% to 10% of ones portfolio could be invested in a leveraged instrument like SSO as a long-term investment. Over time this investment should boost your profitability overall.
- Outperform S&P500 with S&P500 futures, Part 1
- Outperform S&P500 with S&P500 futures, Part 2
- Covered Calls for additional income
- An alternative strategy to covered calls
My goal is to purchase quality companies that grow earnings and dividends at an attractive price. Most members of the dividend champions li...
The biggest fallacy out there is that each dollar reinvested by companies will automatically translate into more profits. Unfortunately, r...
Every week I go through the list of dividend increases , as part of my monitoring process. I monitor the dividend increases from companies I...
Dividend investing is as sexy as watching paint dry on the wall. Defining an entry criteria that selects quality dividend stocks with ris...
This guest post has been wrote by Mike McNeil, passionate investor, founder of Dividend Stocks Rock and author of The Dividend Guy Blog . ...
Every week, I review the list of dividend increases as part of my monitoring process. I usually focus on companies I already own. However, ...
There were several companies over the past week, which raised dividends to shareholders. I isolated six of those companies, which have mana...
The most important question that investors ask themselves is how much money do they need to retire . There are several things to consider, i...
Every week, I review the list of dividend increases as part of my monitoring process . I usually focus my attention on companies that have m...
The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverages worldwide. This dividend king has paid uninterrupt...