You Will Earn Every Penny You Make

September 12, 2024

We do not always see the ease with which we could build a decent retirement fund. Often, it might just be the outcome of a single decision, which can turn out to be: will you do it or not?

The process will be boring since you will have to do the same things repeatedly, but we are accustomed to such things; it is called work.

You can decide to work for others or work for yourself. It is all a matter of choice. But, overall, you are the one to choose.

Over the past two years, I have written about using the QQQ ETF as a short-term and long-term trading vehicle. The goal was to build a retirement fund of significance, large enough to be financially worry-free for the rest of your life.

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One of the strategies was rebalancing the QQQs weekly in an effort to capture all the price change nuances in the composition of that ETF. QQQ has been around since 1999 and provides some 25 years of data. It allows us to study its price gyrations under various market conditions, including the market meltdown in 2000, the financial crisis in 2008, and the COVID-19-related drawdown in 2020. All major market events that did not telegraph that much their duration or that they were coming our way.

The objective was not to adapt to those price fluctuations but to extract what would be the general average behavior of those price movements without some "pre-knowledge" of those events. I wanted trading methods that would simply survive what was thrown at them and prosper to such an extent that they would provide higher returns than market average proxies. Thereby helping build a decent investment fund that could later turn into a more than significant retirement fund to be used again later as a legacy fund for the children.

I was interested in long-term averages of all types: long-term variance, long-term growth rates, long-term volatility, long-term trends, and average long-term daily, weekly, and monthly price movements. I wanted averages on everything, smoothing out the data and then trying to make sense of it all.

But one thing remained obscure. I could not predict the next short-term move. Statistical data is not enough. Even today, I cannot predict the next move with any assured probability. I am in the same dilemma as everybody else: tomorrow, the price might go up if it does not go down. I still have to pick which direction to prefer the next time I am at the right edge of any price chart. Surprisingly, that decision was easy and a winner: you play for the long side. You play for the long-term market average since, in general, the market does go up in the long run.

Rebalancing The QQQs

Rebalancing the 100 stocks in QQQ weekly was almost equivalent to buying and holding QQQ for the duration. It should have been expected since the strategy was always fully invested in the market. Only minor changes to its weekly stock inventory would be taking place.

You had almost a mirror image of the NDX index. We should have been expecting that QQQ's average long-term return would tend to the NDX's average return: r_{avg_QQQ} → r_{avg_NDX}. It was a reasonable assumption. Simulations and math would confirm it. QQQ's return would approach r_{avg_NDX} minus frictional costs.

The conclusion was simple: buy QQQ outright and hold for the duration. At least, you would exceed SPY's long-term average return (~10%).

It would require a single investment decision. After all, the market average has been going up for over 200 years. Refer to Figure #1 in There Is Always A Better Retirement Fund - Part II. Simulations on weekly rebalancing QQQ over the last 24 years had an outcome close to a ~15% CAGR, just for picking QQQ over SPY and holding for those 24 years.

Nonetheless, you could do more. Increase the overall CAGR by improving the trading methods, as shown in the QQQ series of articles on my website. It was also up to you to refine those trading methods further to increase the strategy's performance.

Going For More

But I wanted more. At least, we would have QQQ's long-term average return to fall back on.

One thing is for sure, QQQ would not go bankrupt simply due to its stock composition. It maintains an updated and frequently rebalanced list of NASDAQ's top 100 highest-valued stocks. Stocks on that list will not go bankrupt while on the list. It takes a lot for any company to be on that select list and even more to remain on it.

One thing any investor should consider is that an average 15% compounded return over 20 to 30 years is much better than doing the same thing at 5% or less in a savings account.

For example: F(t) = F₀ ∙ (1 + 0.15)³⁰ = 66.21 ∙ F₀, while F(t) = F₀ ∙ (1 + 0.05)³⁰ = 4.32 ∙ F₀. You will find in QQQ To The Rescue an example of a savings account ad using monthly contributions.

Both the above scenarios have a positive CAGR, but the choice should be clear.

Which you choose is important since that single decision is worth money.

Putting one million in either of these, we would have to compare the outcome of 66 million to 4, a 62 million dollar difference. Sure, the ride would be bumpier with its ups and downs, but would you consider the 62 million as a reasonable compensation for your ongoing anxiety and misery? Answer the question: if only I had known. But you knew... Or were never told, or ignored it. The outcome of a single investment decision can matter in the long run.

The real investment risk is getting out at the wrong time by accepting a significant drawdown. But also in the same category, not going for the higher growth rates. The risk of missing out on the big thing. There is such a thing as an opportunity cost. The above choice is an example.

For instance, you could have picked Berkshire Hathaway some 30 years ago and had a 20% CAGR, which would translate to F(t) = F₀ ∙ (1 + 0.20)³⁰ = 237.37 ∙ F₀.

Could you have had the foresight to pick Berkshire 30 years ago? Yes, and easily. Mr. Buffett had already been on the job for over 20 years and had outstanding results. Again, a single decision that was worth some 233 million. You could have watched Mr. Buffett weekly during those 30 years to decide if you wanted to keep going with his investment methods at the helm of Berkshire. He would have demonstrated that he was a good and reasonable choice year after year.

Nonetheless, all along, it was your choice to make. You put the money on the table and then wait, wait, and wait some more. There was nothing to do, no need to intervene, no help requested, no additional funding to bail you out, and nobody to force you to do anything. Your fund, with all its ups and downs, just continuously, on average, would have prospered.

So, a 35-year-old managing to put one million in Berkshire would have retired with some 237 million and change, all of it, just for sitting on his or her hands and waiting to appreciate their retirement.

From the above, your first question should have been: where or how could I have had that money?

It became more your ability to borrow money than to invest. It was not the investment methods you lacked; it was the money.

How much would you pay someone to borrow one million for 20 or 30 years?

Could it be treated like a mortgage since the stocks you intend to buy are liquid assets and could serve as collateral for your loan? Your lender would have a secured loan and could rely on its repayment. The borrower would not go bankrupt while holding QQQ for 20 or 30 years. With the borrowed money, again, a single decision: buy Berkshire, QQQ, or SPY.

Your gain will come from the spread between your investment and loan rates. If your loan, to give your lender some incentive, is at 10%, then SPY should not be part of your solution.

The lender would get his 10% interest. The loan could be paid back. But you would only make about 10% on your investment in SPY, giving you a net of zero. So, you need a better investment vehicle than SPY to reach your goal.

You already have two other readymade solutions: Berkshire and QQQ. In both cases, the spread would be either 10% or 5%. Taking Berkshire, you would get the spread, a growth rate of 10% on invested capital: F(t) = $1,000,000 ∙ (1 + 0.10)³⁰ = $17,449,402, all based on your ability to borrow and make a single investment decision, which many have.

But, regardless, you can do better.

From Berkshire's return level, you could jump to the In & Out trading strategy, which could provide a 25%+ CAGR. But here, you would have some work to do. Refer to The In and Out Stock Trading Strategy for details.

Nonetheless, you could aim even higher using TQQQ as described in the One Percent Per Week series of articles. This strategy could generate a 50%+ CAGR. Any chart of TQQQ will show it is highly volatile.

However, using TQQQ would compensate you for what should be an emotional roller coaster ride. TQQQ is 3 times more volatile than QQQ by construction. Market swings should be 3 times larger.

Since TQQQ is based on QQQ, for the same reasons as QQQ, TQQQ will not go bankrupt.

However, your long-term expectations have changed. Now, your net CAGR could be around 40%+: F(t) = $1,000,000 ∙ (1 + 0.40)³⁰ = $24,201,432,355. And this is after having paid out your loan: $1,000,000 ∙ (1 + 0.10)³⁰ = $17,449,402. It does raise the question of whether taking that loan was worth it.

Trading TQQQ involves a little more work than making a single decision.

The TQQQ program will force you to be there at critical times, like the market's open every Monday. Your machine only needs to be connected to your broker's account. The program uses limit orders for most of its operations. The only market order is the one on Friday's close, which is also automated. Nonetheless, you could always override the program if you wanted to. It is your machine, your trading account, and it will be your program. Regardless, your trading account returns to cash every Friday at the close.

Note that ten years on TQQQ with its expected average return gives: F(t) = $1,000,000 ∙ (1 + 0.40)¹⁰ = $28,925,465. It would already give you enough to retire on. And your fund could continue to grow at a 35% growth rate: F(t) = $28,925,465 ∙ (1 + 0.35)²⁰ = $11,693,801,747.

Your first 5% withdrawal after the first ten years would start at $28,925,465 ∙ 0.05 = $1,446,273. Your withdrawals would also increase at a 35% rate. Therefore, ten years later, your withdrawal would be at: $1,446,273 ∙ (1 + 0.35)¹⁰ = $29,079,574. And ten years later, after being at it for 30 years, you could withdraw for the year: $29,079,574 ∙ (1 + 0.35)¹⁰ = $292,345,039 while your fund would have grown to $11,693,801,747.

That is what is at stake. And it is your decision to make.

A single trading/investment decision could change your life. It emphasizes your ability to gather or borrow that initial capital since, without the money, none of those equations will exceed zero.

The above results are based on having selected the TQQQ trading program as presented in the article: There Is Always A Better Retirement Fund - Part II.

My conclusion would be: study the above-cited program and make it yours. Find ways to improve on it. It could again be a one-decision thing: do you have the money and the will to carry it out? Or can you borrow that money?

On paper, this all sounds so easy. But will it be?

TQQQ is a 3x-leveraged ETF mimicking the price movements of QQQ, which is mimicking the 100 stocks part of the NDX index, composed of the top 100 highest-valued stocks on NASDAQ. That is to say, it will be a bumpy ride.

A 3x-leverage portfolio will have almost, by definition, 3x times more volatility than the index it mimics. We all would readily accept the 3x leverage on the upside; we are all for more profits.

However, the 3x-leverage on the downside becomes critical. A 20% drop in QQQ is expected to be about a 60% drop in TQQQ. Those drops are money too. Methods to alleviate those drawdowns are needed.

Do not go in blind; do not use the One Percent Per Week program as is. Make the necessary modifications and add protective measures to alleviate the impact of those drawdowns. Otherwise, be prepared for a really bumpy ride. Nonetheless, should you wish, you could still push the TQQQ program to do more and raise its performance level even higher.

Some might think this should be easy. You have a free program, as presented in the first two parts of the One Percent Per Week articles, which you can easily modify. And all you have to do is let the program run its course for years on end. If need be, dedicate a machine to it, give it a battery backup, and let the program run.

As a side note, the trading rules are so simple that you could even do it by hand on your cellphone from anywhere in the world.

A better course of action would be to learn why and how this program makes its money and then find ways to increase its overall long-term return while at the same time making sure you reduce the overall volatility.

Losing money while far ahead in your profits is not the same as losing part of your original capital. As you move along, a 10% drop in the early days will not be the same as a 10% decline later on, as your overall portfolio is intended to grow at a higher clip than market averages.

Chart #1: Expected Returns - Log Scale

(Click here to enlarge)

For instance, a 20% drop in TQQQ, in the beginning, might be $1,000,000 ∙ 20% = $200,000 while at the end of 30 years, that 20% drop could amount to $11,693,801,747 ∙ 20% = $2,338,760,349. But that might be 30 years from now, so you have time to find ways to remedy the situation before it occurs.

Caution is indeed required. You should make sure that what you implement works for you and that you have the determination to carry it out. Understanding what you intend to do is key. It will be your ballgame, after all.

It boils down to which line on the above chart, or the table below, you will choose.

30-year expectations

(Click here to enlarge)

Chart #2: Expected Returns - Ordinary Scale

(Click here to enlarge)

All the above return estimates are expectations. None are guaranteed to happen. However, some have long histories, such as SPY and BRK.A. Even there, the future might be different from past results.

What should happen is that in 30 years, the end point of those eight lines in the above charts might be close to what is shown and in the same order. All 8 lines will be regression lines over the fluctuating and chaotic paths of those returns. All of them are simple linear regressions, giving a starting and ending point. Once you have reached that 30-year milestone, the path taken by any of those 8 lines will not matter anymore. You will have reached destination, no matter the ending value.

Since QQQ has had an average ~15% return over the last 25 years, we should expect its 3x-leverage version (TQQQ) to reach a ~45% CAGR. And if you improve on the strategy, you could get even higher performance levels. See, for example, the simulation results in Figure #2 of Welcome To YOUR Stupendous Retirement Fund where the CAGR reached 57.58% compounded over 14.4 years.

For a different look at Chart #1. Look at Chart #2 above, which uses an ordinary scale.

There are still 8 lines in Chart #2, but only the highest 2 or 3 might matter. You have Medallion fund that has had a net 39% CAGR over the last 30 years. You could do, on your own, even better.

All 8 of the above scenarios and more are available and achievable. Based on the table above, none of those strategies require much work. The first four in the table are single-decision procedures. Whereas the last four are programs that are freely available on the web. You can find links to each one of those programs in my recent articles. Use those programs, modify them as described in those articles, and ensure you know what you will do.

It all remains your choice to make. The big word missing in the above, whether in Charts #1 and #2 or in the above table, is that each scenario is equally feasible. They all display the same data. Which regression line will you pick?

You will need confidence to carry out any of the scenarios to its conclusion. That will take time; in the above scenarios, some 30 years. For any of the lines on the above chart, its equation is F(t) = F₀ ∙ (1 + g_avg)^t. Note that all those lines, except for the savings account, will have ups and downs. You will only know the actual growth rate at the end of the time series. It could land on any displayed numbers, including any in between. However, year by year, you will see your portfolio grow. Forecasting long-term is not a precise endeavor.

The higher you strive, the more volatility there will be. You can expect that the market will make you pay for every penny you make.

To me, it is simple: do your homework. The stakes are high, the potential is there, and the question is: will you grab your share?

Related Papers and Articles:

Stock Trading Strategy Alpha Generation

There Is Always A Better Retirement Fund - Part II

There Is Always A Better Retirement Fund

Welcome To YOUR Stupendous Retirement Fund

The One Percent a Week Stock Trading Program - Part VIII

The One Percent a Week Stock Trading Program - Part VII

The One Percent a Week Stock Trading Program - Part VI

The One Percent a Week Stock Trading Program - Part V

The One Percent a Week Stock Trading Program - Part IV