How highly leveraged investing could wipe out outsized 8 times compounded past gains after a typical 45% crash in technology sector


Highly leveraged ETF TQQQ performance has been mind boggling (almost doubling each year) for 2019, 2020 and 2021:

Source: Morningstar Performance Tab 

Fantastic 8 times compounded gain for anyone invested in it during these 3 years. However, it takes one single typical crash of 45% in technology asset class to wipe out all this outsized gain. 

For example, down the lane, if we do witness recession in 2022, perhaps we could see typical median broad Total Stock crash of 35% YTD drop. Technology heavy QQQ is likely to decline by 45% YTD. In that case, triple leveraged TQQQ is likely to lose 90% YTD.

What is performance number for above typical crash scenario? 

Initial 10K invested in TQQQ in beginning of 2019 would be worth 80K by end of 2021. Fabulous return so far. However, above YTD 90% drop for 2022 would reduce that 80K to just 8K. In essence, one is in net loss of 20% of original 10K investment, in spite of 3 years of yearly doubling. 

That's ugly face of highly leveraged investing. One typical stock market crash (which usually happens every five years) could wipe out years of outsized gain and potentially result into net loss. 

Lather, rinse, repeat for every typical crash cycle can keep wiping gains of previous cycle. On the other hand, try to cut your gains and you lose yearly doubling of years such as 2019, 2020 and 2021. 

Best is just staying away from such highly leveraged gambling.

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