Want to Ride the Rally? Here’s the Ultimate ‘Go Big or Go Home’ Strategy for Your Stock Portfolio.

My hardline stance as an investor is always to avoid big losses. But there’s a corollary to that that can sometimes get lost. Once I’ve managed risk in my portfolio, my next objective is to “take big shots with small amounts of money.” 

For me, that often leads to option strategies. Not the collars I write about here frequently, as that’s another form of risk management. I’m talking about the thing that frankly, back in my days as an investment advisor, my clients probably saw as my biggest deficiency. “Rob will keep you from giving back a big chunk of what you’ve accumulated. But he doesn’t have a fastball investment.” High-octane, high-beta strategies just weren’t in my golf bag. 

That was then, this is now. And I’ve seen the ETF product line rapidly expand. While leveraged ETFs have many detractors, and 3x funds (bull and bear) have been equated to gambling devices, I disagree. At least, if two things are already in place:

1. You’ve managed risk across the rest of your portfolio to avoid losing “too much” money. I achieve this using a combination of a zero-coupon bond ladder, my ROAR 10 ETF portfolio I’ve discussed here, and a set of smaller ETF portfolios and trading accounts. Yes, and an option collar or two or three, thrown in opportunistically.
2. You have determined that a small portion of the portfolio could be allocated to try to pounce on a renewal of the uber-bullish S&P 500-led bull market in stocks. Oh, it could be a big portion of your portfolio. But then, don’t call yourself a risk manager. Everyone makes their own choices on that spectrum. 

As part of the “research lab” I run that includes portfolio models I create to try to fill gaps I perceive in the traditional, mass offerings, I decided to create a true “go for it” model. Albeit with a hedge.

I used to refer to small, flyer investments as “lottery tickets,” since the investment was small, success was unlikely, but if it did come through, the gains would be other-worldly. But that dealt with things like deep out of the money call or put options on stocks or ETFs. Defined worst-case scenarios with massive upside potential. And while I still do that regularly, that is not what I’m referring to here. 

This is a portfolio I refer to as “Go Big Or Go Home.” You can consider this an actual portfolio, since it is available as a plug-and-play. But I’m highlighting it here more for the STRUCTURE. In other words, while I combined just two ETFs and a cash position, the same concept can be attempted and managed actively using any pair of ETFs. 

Here’s what I mean by structure. This portfolio model, and the backtested results above back to the start of 2020, are simply built using the following set of tools:

• A 3X leveraged long S&P 500 ETF (SPXL) = The Offense
• A 3X inverse leveraged Small Cap ETF (TZA) = The Defense
• An ETF for any uninvested cash, which owns T-bills (BIL)
• A decision system that dynamically allocates between the offense and defense ETFs, with BIL filling any gaps left by temporarily inconclusive technical signals. For me, it is the ROAR system I created. But it can be anything an investor decides works for them.

I’ll note that my personal bias is reflected here in another way. The S&P 500 Index ($SPX) is the base asset for the “long” side, and the iShares Russell 2000 ETF (IWM), which tracks small-cap stocks, is the base asset for the “short side.” Those are what essentially is levered up 3 times by the ETFs I chose for this model. I simply believe that in the long term, small-caps will continue to underperform large-caps. 

Long-short investing includes deciding where that bit of “arbitrage” will be. In my case, when the market is good, I want S&P 500, and when it is bad, I want to short small-caps. Why? Because I think I’ll get the most bang for my buck in dividing market trends in that way. 

But again, an investor can decide just the opposite. Long Nasdaq 100, short financial stocks, long small-caps and short S&P 500, or just about anything else. Understanding the concept is the key.

Current Allocation

ROAR Scores adjust when the underlying technical conditions do, but this is as of Tuesday mid-day. We see that the long (SPXL) is at 30% of the portfolio, and the short (TZA) is 10%. So “net long” about 20%, but with 3X leverage. Essentially, 60% net long, with 60% in cash (BIL) as a buffer, since neither of the other 2 ETFs have strong enough signals to be higher than those current allocations suggest.

Here’s how this model has done in backtested form, for the past 3 years. This has been a period of relative “normalcy” compared to the madness of 2020 (pandemic) and 2022 (twin killings of stock and bond assets for the first time since the 1970s).

This is where “Go Big Or Go Home” is at its best. An upward-biased market, where dips are soon bought. Its maximum drawdown was about that of SPY alone, but its upside was 28% a year versus 18% for SPY. That amounted to 46% additional return with the same risk. 

However, when we go all the way back to Jan. 1, 2020, we see the “go home” part of this strategy. It was cut nearly in half during early 2020, in a matter of just 5 weeks, as Covid-19 struck. That was 13% more red ink than SPY. 

However, this last chart below shows that the challenging 2020 was followed by the type of up year I’m unlikely to have in my broader portfolio, ever. That’s 2021, when a 55% comeback showed just what some leverage can do when conditions return to being friendly.

Perspective on ‘Go Big Or Go Home’ Investing

This article is not about a specific model portfolio, as much as it is about asking yourself some very tough questions. About return sought, and the level of risk you’re willing to put up with. For me, something like this is at most a 5%-10% overall portfolio allocation, if used at all. If I were 30 (less than half my age), perhaps I’d approach it differently. 

Again, this is the “big shots with small amount of money” segment for most portfolios. But it shows what is possible when you first take care of the risk management priorities, and free yourself up to embrace volatile markets with money better thought of as “I can afford to lose a lot of this and still be glad I tried.”

Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob's written research, check out ETFYourself.com.