Trade-offs

Calculated with · 50/50 · quarterly

In favour

6 points

The rule can be stated completely in a few sentences.
No ongoing assessment of market conditions is required.
The points at which action is needed are known in advance.
Two building blocks are enough; futures and other derivatives, that is contracts on an underlying, are not traded by you.
Rebalancing systematically sells whichever part has risen.
Published analyses make it possible to recompute the rule independently.

10 points

Leverage works in both directions, and interim losses can be very large.
Leveraged products are path dependent, so their outcome hangs on the way and not only on start and end; choppy sideways markets erode substance.
The hoped-for counter-movement is a phenomenon of particular decades. In other phases both sides moved in the same direction, above all under rising inflation and rising rates.
The risk cannot be lowered by picking a calmer second leg without changing the strategy.
Many backtests sit largely within a period of falling interest rates, which is a tailwind for the bond block.
Backtests built on synthetic series tend to flatter.
The financing cost of leverage rises with short-term interest rates.
In Europe there is no exact counterpart for the bond block; the available products differ in leverage or maturity band.
Every rebalancing triggers tax wherever sales are taxable.
Some European products are debt securities, which adds the issuer credit risk, that is the risk that the issuer of the paper becomes insolvent.