Cost of Leverage Can Be Devastating!

[Scataphagos]

Notice how the QQQ made new highs... but the TQQQ (3x leverage on the QQQ) did not. One might think, "if the QQQ regained the high, the TQQQ should have also... but not the case.

While the QQQ rebounded ~50%, the TQQQ bounced ~200%, but fell short of making new highs. The difference is the "cost of leverage"... mostly the premium paid for leverage instruments.

Notice how the decline into the March low, the QQQ lost ~31% from its high... while the TQQQ lost ~73%.

Bottom Line.... Leverage is good when it goes in your favor and can overcome the "costs of leverage"... but when leverage goes against you, the "costs of leverage" compound losses and are a serious burden.

FWIW...

 

[S2007S]

Good chart comparison, the only way to make it work in your favor is to cost average on the way down.

The drop on QLD from top to bottom was around -30% while TQQQ is minus -72%

 

[Scataphagos]

the only way to make it work in your favor is to cost average on the way down.

Not necessarily.

If the market does not "bounce back quickly" and rather "stays down and down and down", the losses from the cost of leverage can make it nearly impossible to recover for those who were on the wrong side of the market early-on.

 

[Snuskpelle]

Simply don't hold w/ leverage waiting for trend to resume... 1x for counter trend trades on daily bars is harsh enough.

IOW buy & hold of TQQQ shouldn't be a thing (but bet there are some people trying it).

 

[Scataphagos]

Simply don't hold w/ leverage waiting for trend to resume

YES!

Some say leveraged ETFs are for "day trades only". I don't agree. They are also for the "swing" play. That is, the gain on the swing play to be more than enough to offset the cost of leverage in the short term when the play moves in your favor.

 

[jys78]

When it comes to a leveraged instrument like TQQQ, the worst is a slow grind of chopping up and down. Under persistent trends, the returns will be magnified in both directions ie >3X gains in a continuous uptrend, >3X losses in a continuous downtrend.

Very simple math that seemingly very few people trading these instruments understand.

 

[ironchef]

Good chart comparison, the only way to make it work in your favor is to cost average on the way down.

The drop on QLD from top to bottom was around -30% while TQQQ is minus -72%

I thought you guys said never average down?

 

[S2007S]

I thought you guys said never average down?

I never said that, others probably have

 

[qwerty11]

Since inception it is up 5300% while the Nasdaq only 360% so not devastating at all.........

 

[Snuskpelle]

^Sure, but eventually there will be a DD to set it back a decade (and it's not given it will recover at the rate it ascended since inception). It's a great lottery ticket for sure, which probably fits the objective of some individuals.

More seriously, something like 20% of portfolio in TQQQ and rebalance yearly could work reasonably well, haven't backtested it though, and still large luck factor.