A few months ago I started converting some of my target date Fidelity 401k funds to cash. I'm sitting on the most cash I have ever had and I will keep every penny in my 401k as I am mid career. I've been doing a ton of research on portfolio strategies and have some thoughts I want to crowdsource.
Lower Risk path: As oppose to holding FFFGX and eating the 0.75% expense ratio for another 2 decades, my backtesting says I can outperform the mutual fund by holding the following ETFs:
allocations = {
'AGG': 0.1, # Fixed-income ETF: iShares Core U.S. Aggregate Bond ETF
'SPY': 0.25, # S&P 500 ETF
'QQQ': 0.2, # NASDAQ 100 ETF
'IWM': 025, # Russell 2000 ETF
'EFA': 0.2 # MSCI EAFE ETF
}
I've got some ideas about selling covered calls against these positions to generate some yield to reinvest in the core holdings. Theres obviously potential assignment risk on those calls that will erode my underlying shares. I'm monitoring what strikes tend to not get called away (i.e. expiration timeframe, OTM %, etc). On a ten year timeframe I am modeling CAGR of \~11% for the strategy vs. \~9% in the fidelity fund. No brainer for me.
Higher Risk path: Essentially the same allocations but utilize leveraged ETFs instead. There are Proshares 2x funds for all of these underlying positions. Entry timing will be a very big consideration for long term success.
Discussion: I think the market has some more downside given the tariff junk and fading consumer sentiment. I have no clue how far we can go down. I keep an eye on the Shiller CAPE index and my educated guess is that SPY goes to $500. Extreme case would be another 25% down to $400 so that the CAPE index can get back to long running averaged. If SPY gets to $500 I'll begin entering in the aforementioned lower risk allocations. There is a greedy part of me that wants to enter the 2x ETFs with justification that the market can't go much lower. At $500, SPY will have shed nearly 20% from the peak. $400 would be \~35% down from peak. I feel like if we get all the way down to $400 (I'm not saying we ever will) it'd be a no-brainer case for using the leveraged funds.
What's the general feeling on using leveraged ETFs in retirement accounts? Is this too close to gambling for folks here or is there a reasonable entrance ramp assuming the market meets downside targets?
I'd like people's opinions here.