Jan. 5, 2022

There were still a few more things to share from the QuantConnect ETF Constituents Universe thread. 

I have already written six articles on this freely available trading strategy, exploring its general behavior and showing the results of some 46 simulations where three variables controlled its outcome. Variables determined by administrative decisions before the program even started.

These variables were independent of the game being played but still determined how the strategy would play out. They were the initial capital used, which evidently would have a tremendous impact on the final result, the method of weighing stock positions, and the applied leverage.

The achievable growth rate was left to the strategy's trading mechanics.

Trading Method

What kind of methods could we use to increase overall return over the entire investment interval? We could do even better if we elected to improve on the program's code.

This trading strategy had a very simple proposition: trade by weekly rebalancing the QQQ's 100 constituent stocks, tracking and mimicking the NASDAQ 100 index.

It could be considered an index copycat or closet indexer.

The code is free; you can clone it and redo all the presented backtests on the QuantConnect website. You could also change the code to add new features, enhance its strengths, and dampen or remove its weaknesses. It is all up to you. You do have the basic template to do the job. What might be missing is the money. We'll look at that too.

Using QQQ

In my article Use QQQ - Make the Money and Keep IT, test #2 showed a 12.24-year simulation starting on 7/27/2009 and going up to 10/18/2021 using an initial stake of one million.

The strategy generated a 20.76% CAGR. This is rather impressive for a market index imitator. That is about the same average CAGR achieved by Mr. Buffett over his 50+ career at the helm of Berkshire Hathaway.

Technically, the strategy is doing very little, but at the same time doing a lot. Doing very little in the sense that you could have bought QQQ outright and have done slightly better over the period. And doing much in the number of trades performed, some 56,913 trades in the above one million dollar scenario.

The US historical market average return has been in the vicinity of 10% over the long term, usually a bit lower. Getting a long-term 20%+ CAGR gets to be remarkable. I know you can do better, and some of you, much better. But, as a baseline, as a minimum, you could do with very little effort, practically none in some cases; it does merit the word "remarkable".

Some Long-Term Perspective

We might need to look at this with some perspective.

One million at 10% for 20 years gives:

F(T) = 1,000,000 ∙ (1 + 0.10)20 = $ 6,727,500

while at a 20% CAGR would result in

F(T) = 1,000,000 ∙ (1 + 0.20)20 = $ 38,337,600

That is the prize for the added 10% points in CAGR. It becomes even more dramatic if you increase the investment period to 30 years:

F(T) = 1,000,000 ∙ (1 + 0.20)30 = $ 237,376,314

The stakes are indeed high.

So the question is: what should you do with such a strategy where time demonstrably is a major ingredient to its success?

Future Value Formula

We can use the future value formula to express the outcome of a trading strategy as we did above:

F(T) = F0 ∙ (1 + g)t

It is the formula used in preparing the Do It Yourself Pension table below. Whatever the end result, it can be expressed in terms of the compounding growth rate and time, all scaled by whatever initial capital F0 you had to start with.

You could rearrange the equation to determine the growth rate needed to achieve a specific goal, say a gain factor of 10 to 1. For instance: 101/20 - 1 = 0.12018. A 12.018% CAGR over 20 years would increase the initial capital by 10 times. We all know those things, so why bother putting them out again?

The point is to do something about it and put it to work to our advantage, even if it will take years to unfold. It should be noted that reaching your own retirement goals might also require a number of years to get there.

So, where should you apply something like this?

The program will take just a few minutes a week during market hours to operate. Or, you could buy QQQ outright and hold for those 20^+ years.

You have some: "But, what if this or that?" to express.

But, if the price of QQQ goes down? Yes, it might, and for sure, it will fluctuate all the time, up and down. But what if, in 20 years, QQQ is lower? What then? Well, everything will be down too. QQQ holds the top 100 stocks by value on NASDAQ. In 20 years' time, the value of the top 100 stocks (whatever the composition of QQQ) should probably be worth 10 times what they are today. Just like now, the top 100 today are worth more than 10 times those that were the top 100 of 20 years ago. But why do it if you do not know you will be there 20 years from now to enjoy it? Isn't that the perfect excuse to do nothing and procrastinate till the end of time?

Any objection can become a reason for not doing anything. It is rather easy to come up with a lot of those too, and they can always serve as excuses. In the investment world, could have, should have, would have does not count for much. If no action is taken on the "I knew that...", then it is the same as you did not know, same result: no reward.

Looking forward is not having some vision. It is simply planning for what you know you can do. Whatever it is you do, there will be some effort involved in doing it, even if, at times, very little.

Your Child's Retirement Fund

It is during our adult lives that we usually start thinking about retirement plans. But today, I would like to make the case for gifting your child their own retirement plan from birth or any time thereafter. You could even build one for yourself. You might retire at 65, but you still might have another 30 to 40 years to go.

You buy and hold $ 100,000 worth of QQQ for your child from birth. You manage those funds while your child is too young. And use the above-cited program or any other that can generate a 20% CAGR or better.

By age 13, your child could be a millionaire. By age 21, the fund might be in the vicinity of $ 4,660,512. By age 51, he/she might be a billionaire without even having tried to make a single penny.

All because YOU started early.

That outcome is more than sufficient. The retirement fund will be giving your child the freedom to do whatever he/she wants. What you are giving your child is time. It is where the power of compounding really matters.

As said, you can set it up for your child from birth. Instead of gifting your inheritance, which implies that you will get old before it happens, maybe even over 100 with your child already in retirement, you could set up his/her own retirement fund and see him/her prosper all their life, and still end up giving your child the remaining inheritance anyway.

Where It All Goes

At the end of the game, at your child's retirement, the initial stake might just appear small in comparison. Your child at age 65 would have 140,210 times the original stake ($ 100,000∙(1+0.20)65 = 14,021,064,692).

So yes, your child would be set for life, more than ready to enter retirement and do whatever he or she pleases. He/she could certainly withdraw some equity along the way.

One nice thing would be for your child to do the same thing for their own children. By age 21, they would have more than enough to start the ball rolling again.

Your child, as an adult, should, in turn, find ways to maintain the CAGR at 20% or better. Don't worry, there are many ways to do so, and most probably, you and your child will figure it out.


The QQQ ETF has interesting properties. For one, it has a very very low probability of going bankrupt. It is invested in the top 100 NASDAQ stocks by market capitalization.

Using QQQ entirely outsources your stock selection process to something you should also do if you used your own strategy design to do the job. That is, put the heaviest weights on the best performers, which is what is being done by the QQQ ETF.

Whatever the changes in the composition of the top 100 stocks, the ETF is taking care of it for you. They do not need your input or comments; those in charge of the ETF are doing the job. The question should be: is it a good selection? A more appropriate question should have been: Can QQQ provide an outcome above the historical market average? I think the 46 simulations presented in my previous articles clearly demonstrated that point.

Return Expectations
Return Expectations

The above chart gives why QQQ is winning the game. It was taken from one of my books.

Stock returns are sorted by the highest value. The final results, starting from a normalized point, are sorted by their percent advance over time. The graph is on a semi-log scale where exponentials like CAGR curves will appear as straight lines.

The stocks are sorted by return, and they have this fanned-out display since they all have their own rate of return. The stocks below 100 are losing money while those above are increasing over time.

The chart should have over 8,000 lines distributed around the displayed market average. The number of lines on the above chart is sufficient to get the general idea. A lot of the NASDAQ stocks are not even considered since the emphasis is on the selected candidates above market average. The average of the selected average will turn out to be above market average by design, which is what gives QQQ its upside edge.

QQQ is overweight on the tradable candidates and superweighted on the few top performers, thereby raising its average above market averages.

It is how the QQQ ETF is built, and it is designed to do the same thing going forward. Since the top 100 NASDAQ stocks by value will not all go bankrupt at the same time, QQQ is pretty much part of the really, really, too big-to-fail ETFs.

It is not the case of one company going bankrupt; it is the case of 100 of them, the best of them, doing it all at the same time, which would mean a total collapse of the entire US economy. You most certainly will have to wait a long time for that one.

Even the financial crisis of 2008 was not sufficient to put it down. However, QQQ did suffer a relatively large drawdown, like all other index trackers for that matter. It is saying this is pretty much a secured bet. In 20 years' time, QQQ will still be there, and I expect it to be much bigger, about 10 times higher or more. All the top 100 NASDAQ stocks will continue to grow, whatever the composition of the QQQ ETF.

Those that fall off over time will be replaced by newcomers with even greater potential. As a premise, the program will only trade the stocks that made the 100 list and will continue trading them as long as they stay on the list. They stop performing as the best stocks out there, they are simply dropped and replaced by even better performers, which evidently will be to your advantage.

The What You Can Do

You have $ 100,000 lying around, or, you take a $ 100,000 loan to pay it back at the speed you want, it does not matter much in the scheme of things.

The objective is to place that $ 100,000 in QQQ and leave it there for 20 years.

End result, based on cited simulations:

F(T) = 100,000 ∙ (1 + 0.20)20 = $ 3,833,760

which is the reason your initial loan arrangements did not matter so much. I know, money is money, but, the above outcome is too.

Your child, by age 20, should have over 3 million in his/her trading account. By age 30, the account should be close to:

F(T) = 100,000 ∙ (1 + 0.20)30 = $ 23,737,631

This makes the initial loan minuscule in comparison. Sure, you made the effort of securing the loan and making the payments, but it was for your child, a way of giving them more than an edge in life.

If you added a zero to the initial loan, the results would also acquire that zero. So your 30-year-old child would now be looking at $ 237,376,310. Should it be considered worth the effort? I think so. How about you?

Furthermore, you could do the same thing for yourself with the same benefits.

The cost of not providing the additional 10 years is:

100,000 ∙ (1 + 0.20)30 - 100,000 ∙ (1 + 0.20)20 = $ 19,903,871

In the million-dollar initial account case, we simply add a zero, making it: $ 199,038,710. Something again worth considering. However, it is not everybody that has a million lying around or could borrow that money with something like $ 6,000+ in monthly payments for 20 years.

Your Retirement Account

Some creative solutions are needed. At least, a $ 100,000 stake could be made to look like some contribution to a pension plan, something around $ 500 to $ 600 per month, thereby making millions of parents enabling their child to reach the status of millionaire by the time they reach 21. What a start for their adult life.

Say you already make contributions to your pension plan, about $ 500 a month, as in a recent ad by a major bank.

According to the ad below, the retirement account would have $ 254,424 dollars by contributing $ 500 per month for 25 years. Of that amount, you would have supplied $ 150,000 of your own ($ 500 ∙ 25 ∙ 12 = $ 150,000). So, in total, you would have really earned $ 104,424 dollars. Money is money, I understand. If it is all you can do, then why not? However, one should realize that just buying the goods you need when they are on special would have, over 25 years, generated more than that. Regardless, I am not here to tell you how to shop.

Pension Plan Contributions
Pension Contributions

 Let's change things around.

Instead of contributing $ 500 per month to your pension fund, you opt to pay back around $ 500 a month on a $ 100,000 loan.

In both cases, every month, you are paying $ 500. It is what you do with that $ 500 that matters.

With your $ 100,000 loan, you buy $ 100,000 worth of QQQ, which you intend to hold for 25 years too. Based on the future value equation, you might have:

F(T) = 100,000 ∙ (1 + 0.20)25 = $ 9,539,622

of which you would have contributed $ 150,000 plus the interest paid on the loan.

The $ 100,000 loan at 4% over 25 years would have a monthly payment of $ 527.84, about $ 17.69 per day. It does give it some perspective. Total for all the payments would be $ 158,351.05, of which $ 58,351.05 would be for the interest on the loan. Now, compare it to the monthly contribution to the retirement plan in the ad above.

On one hand, your total value (including your contributions) is $ 254,424 dollars, and on the other, your retirement fund could be in the area of $ 9,000,000. Which course of action should you take? Isn't 5 minutes a week too much to ask?

In both cases, your contribution is about $ 500 a month. You let somebody do it for you, you get back $ 254,424. A lot of it your own money, about 41% of it.

You do it yourself and get $ 9,539,622 or something near that amount for your effort (which was not that much).

Shouldn't you explore the: do it yourself route? It seems to me to be to your advantage in more ways than one.

Do It Yourself Pension Fund

DIY Fund

You want to build your own retirement fund and make it big. At least, it is much bigger than just accepting an overall low-return monthly contribution plan. You do not have the time to manage it; your job has priority. I understand, but... The task can be done in just a few minutes a week. All is in how you will do it. And here, you have a simple solution you can use to reap the higher rewards.

The above table gives the achieved CAGR over the years with an initial stake of $ 100,000. The higher the CAGR the better, the longer the investment period the better. Adding a zero to the initial stake will add a zero to the final results in the above table.

It is not only with stocks that you can achieve this, there are many other routes, a lot of other assets, a lot of other possibilities. The point is to reach the 20% long-term CAGR or better. And you can do it yourself.

I know this cannot be applied by everyone, but for those who can or could; think about it. And for those already doing it, keep the ball rolling and protect your fund.


Related Articles:

Building Your Retirement Fund

Build Your Own Indexed Retirement Fund

Take the Money and Keep it – II

Use QQQ - Make the Money and Keep IT

A Trading Strategy Of Interest - PART II

A Trading Strategy Of Interest

Created: Jan. 5, 2022, © Guy R. Fleury. All rights reserved.