I am thinking of picking up about 2000-3000 shares in FAS. At these levels near $3.75, my downside risk is not really something I need to be worried about with such low amounts of capital being committed. Long term, (5-10 years) when the financials do eventually come back (think previous 52 week high at some point) I will have done well for myself banking nearly $100K. If you are in your 20s like me and have some IRA money to throw around, what is there to not like about this scenario? What is there to lose? This would represent about 25% IRA money, rest is sitting in cash. Thoughts?
Just an FYI--FAS only tracks the financials on a daily basis, so your returns won't be 3x whatever the financials do.
Right, I understand that. I am basically saying I buy 3,000 shares now at $3.75 for $11,250. Over the next few years it goes back to levels below it even was at prior highs of around $52, say $40. That would be $120,000 for a $108k gain. This is a time where I feel it could pay to be speculative, just as my grandparents made a fortune investing long term at grossly underpriced companies in the 1950s and 60s holding them until the 1980s when they retired. The difference here is that we know that at some point financials will come back. Wall Street will reinvent itself with the new "flavor of the month". This is far less speculative than investing in a startup company or a McDonalds in my grandparents time as an example. I can sit out any short term pain since I don't need the cash. This is a set it and forget it type investment. As I am only a short termer I am basically looking for fellow ETers to poke holes in my reasoning and challenge me so I can see any flaws in this thinking.
Have you considered buying $11,250 dollars worth of a handful of financials instead of buying the index? $1000 worth of JPM, WFC, C, BAC, GS, USB, MS, HBC, AXP, BK, PRU
Interesting point to consider. I am still not convinced that C or BAC are safe from takeover but then again I could afford to lose on those if the others gained.
Dude, you say you understand the daily negative compounding risk, but then you say you want to go ahead and do the trade -- very long term. You contradict yourself and I suspect you don not really understand how the daily negative compounding will gnaw away at you, unless you believe FAS will go straight up with no down days forever, of course. Do the math on a spreadsheet with regular daily ups and a couple 3% to 10% declines.
I did the same thing, bought some FAS a couple days ago in my IRA. The thing is, if you can get in at the bottom, then it really could do 3X the index over the long term. Here's an example of UMPIX, which tracks the S&P midcap 400 at 2X. It really did double that index from 2003 to 2007: http://finance.yahoo.com/echarts?s=...e=ohlc;crosshair=on;ohlcvalues=1;logscale=off
FAS, FAZ and all the 3x ETFs are only good for trading, they are useless for investing. The Direxion website clearly warns "Because Direxion Share ETFs seek daily investment goals, the Funds are not appropriate for "Buy and Hold" strategies, especially in volatile markets. Please read the prospectus and visit our Education Center before investing." Anyone who understands the compounding of large daily percentage gains and losses clearly sees the danger in holding longer term positions in leveraged ETFs.