It was only a couple of weeks ago that I wrote an article about whether or not it was worth investing in leveraged ETFs. Since then the market has been pretty choppy and I thought it would be good to write a quick follow-up about what has happened so you could see first hand what you might have to go through. I know I mentioned in the article in the post how the fund had taken a huge dive, but I was strong and added more. It’s tough to do though.
The NASDAQ Decline
On February 16 the NASDAQ closed at 14,047.50. As I’m writing this post today it’s at 12,772.39. The market is still open so it may close higher or lower, but this is for illustrations only anyway so who cares, right? this represents a 1,275.11 drop which is a 9.08% decline. It doesn’t sound too bad. The market goes up and down. There will always be fluctuations in the market.
Leverage Multiplies the Market Changes
Here’s what happens when you invest in a leveraged ETF though. On the same day, February 16, my NASDAQ 100 leveraged ETF, TQQQ, closed at $109.19. Things were looking good. Then as is supposed to happen as the market dropped the leveraged ETF dropped more. This is a 3x leverage, which means that its goal is to earn 3 times what the NASDAQ100 Index earns. When it goes up this is good, when it goes down, it goes down really fast. As I’m writing this today it’s down to $77.69. Ouch! That’s a $31.50 drop per share! This equates to a drop of 28.85% in just a couple of weeks. If you were to look up the definition of a bear market you’d see that a 20% decline is one of the signals. Not that a single security on its own makes a bear market, but with stuff like that in your head it can be hard to stay the course.
What did I do?
As the market started to go down, as always, my thought was, “Hey this isn’t part of my plan, it’s supposed to go up and I’ll make a lot of money!” They if you are like me and trying to get control of the emotional thought in your head you start to tell yourself something more like, “Calm down. This is what happens with the market. You knew this going in, and you knew that a leveraged ETF would magnify any volatility or changes in the returns.” Then you move on to the plan. This is a long-term plan so you have to stick with it and the mindset change from “the sky is falling” to “it’s on sale” starts to occur.
As this process quickly went through my mind I thought I needed to take action to solidify the thought. Of course, you know what’s coming next. I bought some more. Keep in mind this was before the 22% decline, it was on the way down. I bought 10 shares. Ever heard that comparison of buying a stock on the way down and how it’s like trying to catch a falling knife? I have to admit after that additional 10 share purchase the thought crossed my mind, “What are you doing!” For a moment after I bought the new shares the price went up and that was it, back to the downside. This was only 2 days after the 16th so I purchased at 103.25, which at the time was only 5.4% from the $109.19 price. It was on sale, right?
So here we go again. The price continued to drop. On February 22, another 4 days later the price was down some more. Of course! It was on sale even more so I just had to buy some! This time I purchased at $98.90 another 4% or so down. Again, on sale right?
It’s not over yet, a day later it’s down some more. You can probably guess where I’m going with this one. The third time is a charm, right. For sure this is the end of the market pullback and everything will go up from here. Market psychology. I’m the smart one right? Wrong! However, I am buying at discounts to the prior purchase prices and I still believe that the market will eventually go up. It may be a few days, months, or even years, but history shows that eventually, it will rebound. After all, we are not in a depression, or a recession, or even a bear market at this point. At this point, I bought another 10 shares. This round the purchase price was at $93.96 and it’s not over yet. By the way at this point, buying at $93.96 I’m getting it on sale at a 13.9% discount to the first-mentioned price of $109.19.
Three strikes and you’re out. Well, not this time. Each time I made a purchase the price was lower. Again the price continues to drift lower so I made one more purchase. This time I waited a few more days until March 3. Once again I invested a little more, 10 shares at $88.58, and as before I’m getting that feeling of catching a falling knife. As it stands now, I’ve invested in 40 shares at various prices as the decline continues.
Was it the right decision?
Who knows? It may be that I could have waited and bought it at an even lower price than it is hitting today, but the opposite could be said the same. I could still be sitting around on some cash that needed to be invested and the ETF could have increased. One is currently an unrealized loss and the other is an opportunity cost. No telling which is actually the correct decision, because you can’t see into the future. For me, the correct decision was to deploy the cash that I had set aside for the investment and do the same when the time comes again. If there’s one thing I’ve learned it’s that as soon as I think I’m smarter than the market I am taught a lesson that proves I’m not.
YMI Doing This?
A couple of reasons here. I wanted to show that leveraging and investing in Leveraged ETFs is not always as good as the chart shows, even if the end result could be great. There will be downtimes and there will be times that make you want to throw in the towel and change the plan, but that’s when you’ve got to take a step back and see where you are, review your plan and figure out how to stick with it.