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Investing Mistakes to Avoid: #6 3X QQQ

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If you live in New England, you know how unpredictable the weather has been this summer. Just the other day, we were cruising back from lunch in Edgartown, MA, through Vineyard Sound and, before reaching Woods Hole, were engulfed in a fog bank. Your Survival Guy has radar, but even with that, I worry about the speed and actions of other boaters I can’t control. I throttled back, making our marks slowly, and in less than 20 minutes, we were in clear air moving through the Hole. It happens that fast.

Which leads me to my next investing mistake to avoid: Don’t be in a rush to make money. Time is your friend. It’s when investors are in a rush, meaning using leverage, that they eliminate their most valued partner in investment success, the ability to be a long-term investor. Because when leverage is involved, you might be right about the direction of markets but get hung up on the rocks because the timing was wrong. Markets don’t care about your lunch schedule.

In my title for mistakes to avoid #6, 3X QQQ, I’m using a simple example to illustrate the use of leverage to amplify returns (or losses). Two of the more active volume ETFs are Pro Shares UltraPro QQQ and ProShares UltraPro Short QQQ. They seek investment results that correspond to three times the daily performance of the Nadaq-100 index (the inverse for the Short QQQ) using derivatives.

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With three times the return of the Nasdaq-100, an investor can be wiped out completely in Pro Shares UtraPro QQQ with a daily loss of more than 33%. But here’s the other math to worry about. The funds mirror returns for a single day. In other words, here’s how returns would look if Nasdaq-100 was up 10% one day and down 10% the next over ten trading sessions:

You can see how easily money can be washed away.

Markets don’t necessarily work in lockstep like the above sequence, but what this helps illustrate are two things: 1) the arithmetic of losses, and 2)  the potential devastation of leverage. You may run out of money before the markets or the fog lifts. For me, slow and steady wins the race.

Action Line: I treat each dollar like it’s the last one I’ll ever make. I don’t use leverage. Ever. When you’re ready to talk, let’s.

Read every one of the Investing Mistakes to Avoid here.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.
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