00538 Flexible Rebalancing 2.0: Fifteen Years of Cash Without Depletion, A Safer Upgrade with More Wins and Fewer Losses

I. Theme of the Session

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This session delves into the “Flexible Smart Rebalancing” optimization strategy. Its core idea is to add a “cash years” criterion to the traditional smart rebalancing framework. When cash reserves fall below a preset number of years (e.g., 15 years), market downturns will no longer deplete cash. Instead, the underlying fund (e.g., QQQ) will be used to buy more of the leveraged fund to protect cash flow and enhance the portfolio’s security. Concurrently, for retirees with higher cash flow needs, an alternative solution of allocating to high-dividend ETFs (such as JEPQ) is proposed.

II. Briefing Content

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Opening Reminders & Basic Principles

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• Daylight Saving Time Ends: Starting next week, the Clubhouse session in the US will be one hour earlier, moving to 6:00 AM Pacific Time on Saturdays. The time in Taiwan remains unchanged (Saturday, 10:00 PM).
• Scam Prevention: A reminder to all students to be wary of a scam account named “powwill,” which impersonates Teacher James to send private messages, inviting students to join groups or offering to manage their investments. Teacher James emphasizes that he will never initiate private messages.
• Channel’s Purpose: CLEC is a purely sharing platform and does not engage in any profit-making activities; the YouTube channel has not enabled monetization. All shared content is for reference only and does not constitute professional investment or tax advice. Investment carries extremely high risks and should be approached with caution.

Detailed Explanation of the Flexible Smart Rebalancing Strategy

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• Strategy Background: This strategy was optimized and back-tested by student Peng, based on Teacher James’s smart rebalancing concept, with the goal of increasing the maintenance rate (security).
• Core Mechanism: It introduces a customizable “cash years” variable (e.g., 15 years) as a threshold for switching strategies.
  1. When Cash Level is Below 15 Years:
     • During a Market Upturn: Profits from the leveraged fund are moved into cash, with the goal of replenishing cash reserves to over 15 years as quickly as possible. Consider transferring 30%, 40%, or 50% of the profitable portion to accelerate cash accumulation.
     • During a Market Downturn: Do not use cash. Instead, sell the underlying fund (e.g., QQQ) to buy the leveraged fund (e.g., TQQQ) to maintain the Beta value while protecting precious cash reserves.
  2. When Cash Level is Above 15 Years:
     • The strategy reverts to traditional smart rebalancing. During a market downturn, cash can be used to buy more of the leveraged fund.
• Strategy Version Evolution (1.0 vs. 2.0):
  • Version 1.0: The core is to reduce downside risk. During upturns, profits from the leveraged fund are converted to cash.
  • Version 2.0: With sufficient cash (above the threshold), it increases upside potential. During upturns, profits from the leveraged fund can be moved into the underlying fund (QQQ) instead of cash. This slows down the decrease in Beta, allowing for the capture of more upside opportunities.
• Back-testing Conclusion: Data shows that under different Beta settings, the “Flexible Rebalancing” strategy, especially when using the appropriate version for different Beta values, generally provides a higher minimum maintenance rate than traditional smart rebalancing, meaning higher security.

Application of Beta, Withdrawal Rate, and High-Dividend ETFs

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• Relationship Between Beta and Withdrawal Rate: The recommended annual withdrawal rate varies with the portfolio’s volatility (Beta):
  • Beta 1.0: Recommended withdrawal rate 2.0%
  • Beta 0.9: Recommended withdrawal rate 2.2%
  • Beta 0.8: Recommended withdrawal rate 2.4%
  • Beta 0.7: Recommended withdrawal rate 2.8%
• Solution for High Withdrawal Rates: When the required withdrawal rate exceeds 3%, traditional asset allocation becomes riskier. It is recommended to introduce high-dividend assets to supplement cash flow.
• Introduction to High-Dividend ETFs (JEPQ & JEPI):
  • JEPQ: Annualized dividend yield of about 10%. Approximately 80% of its assets are in QQQ, with the other 20% generating cash flow by selling covered calls. Its Beta is about 0.78, making it less volatile than QQQ and suitable for retirees needing high cash flow.
  • JEPI: Annualized dividend yield of about 8.37%. It operates based on SPY and has a lower Beta of about 0.57.
  • Target Audience: These ETFs are primarily suitable for investors who are already retired, have insufficient principal, and are highly dependent on stable cash flow. They are not recommended for young investors still in the asset accumulation phase, as their long-term capital appreciation potential is far lower than QQQ.

Investment Philosophy and Summary

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• Core Principles: Even if you don’t understand the complex strategy details, grasp these key principles:
  1. Cash is King: If using a stock pledge loan, maintain a cash position of at least 30%.
  2. 15-Year Cash Goal: Strive to maintain cash reserves equivalent to at least 15 years of living expenses as an important safety buffer.
  3. Beta Control: Keep the overall portfolio Beta below 1.0 to navigate market fluctuations smoothly.
• Assets and Inflation: Stocks are real assets, and their intrinsic value is not eroded by inflation. When currency depreciates, the price of assets (stock prices) will rise to reflect their value. Therefore, do not sell quality assets (like QQQ) due to fears of inflation or short-term market volatility. Selling at any time is a mistake.

III. Q&A Session

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Peng

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• Sharing:
  1. Inspiration for Flexible Rebalancing 1.0: It originated from Teacher James’s mention that when cash is less than 15 years, one should not use cash to buy leveraged funds during a down year. Based on this, he conducted quantitative back-testing and tested different cash-year thresholds (13, 14, 15, 16 years) and the effect of transferring different percentages (30%, 40%, 50%) of profits to cash during upturns.
  2. Inspiration for Flexible Rebalancing 2.0: Inspired by a strategy shared by student Lin. He pondered whether, when the cash position is sufficient, profits from the leveraged fund could be moved to the underlying fund (instead of cash) to slow the decline in Beta, thereby capturing more future upside potential.
  3. Conclusion: Version 1.0 aims to “reduce downside risk,” while Version 2.0 builds on this to “increase upside potential.” He emphasized that the current back-testing period is limited and this is still his personal exploration, not to be taken as a final conclusion. However, the general direction is that a higher cash position leads to a higher maintenance rate.

Haiwaizhong

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• Question: Why do you recommend withdrawing 2% annually instead of borrowing the full 20% of the pledge limit from the start?
  • Teacher James’s Reply: This is a critical risk control issue. If you borrow 20% at once and the market experiences a major crash like in 2000 (an 85% drop), your assets would fall from $1 million to $150,000, but your debt would still be $200,000. you would go bankrupt immediately. By withdrawing 2% annually, even if the market declines for three or four consecutive years, you would have only used 8% of your total assets, and your assets would still be far greater than your liabilities, allowing you to survive the crisis safely.
• Sharing: He observed that QQQ’s annual return (23.29%) has surpassed VT’s (19.92%), refuting an influencer’s previous claim that VT would crush QQQ.
  • Teacher James’s Comment: Ignore the outside noise; time will prove everything.

Lin

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• Sharing: Two things are especially important in investing: first, clarifying your investment Purpose, and second, setting a matching Target. The most dangerous situation is a mismatch between purpose and target. For example, investing with a mindset of entertainment (gambling) but expecting a stable cash flow or high returns will inevitably lead to disaster. Many friends around her made this mistake by engaging in all sorts of frantic trading during a bull market.
  • Teacher James’s Comment: Very well said. It’s like someone who does drugs and stays up all night but expects to be healthy—an impossible task. The actions of most people are contrary to their ultimate goals, but they don’t realize it themselves. This is a lifelong tragedy.

Lu

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• Sharing: After following the teacher for over a year, she feels very much at ease. The cash strategy mentioned later by the teacher also coincides with Charlie Munger’s philosophy of holding cash. Cash may seem like a drag on performance, but it can bring huge opportunities or provide security at critical moments. She shared her personal experience to encourage new students, saying that the teacher has already considered various risks for everyone. As long as you listen carefully and execute, you will surely gain understanding.

H. Chen

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• Question: After I retire, my annual Social Security and pension income will be about $100,000. In this case, is it sufficient for me to set aside a 10-year cash reserve?
  • Teacher James’s Reply: Your situation is excellent. Since your basic living expenses are covered by this $100,000 stable cash flow, you don’t need to reserve that many years of cash. Depending on your comfort level, you can keep, for instance, 5 years of cash or 10% of your total assets in cash as a backup. The rest of your funds can be confidently invested in QQQ and leveraged funds.

Wang

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• Question 1: If I buy the Hong Kong-listed version of the QQQ ETF (e.g., 3086) through a Hong Kong brokerage, will I be subject to US estate tax?
  • Teacher James’s Reply: No. As long as you purchase an ETF listed locally in Hong Kong, it will not involve US estate tax. Only directly purchasing the US-listed QQQ would.
• Question 2: For index ETFs purchased in Hong Kong or Mainland China, should I also follow the principle of “buy and hold, never sell”?
  • Teacher James’s Reply: Yes, keep buying and don’t sell.
• Question 3: Are there any leveraged funds available for purchase in Mainland China?
  • Teacher James’s Reply: No, not in the mainland. Hong Kong has them, such as the CSOP NASDAQ-100 Index Daily (2x) Leveraged Product (7266) and the ChinaAMC NASDAQ 100 Index Daily (2x) Leveraged Product (7261).

Doris

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• Question 1: Most of her funds are in a US retirement account (a Rollover IRA from a 401k) and she was told she cannot use them for a stock pledge loan. This might prevent her from retiring early. How should she handle this?
  • Teacher James’s Reply: This is a common trap. He does not recommend over-contributing to retirement accounts (like the Mega Backdoor Roth). The remedy now is: immediately stop contributing more money to the retirement account and focus all your efforts on building a personal brokerage account. At the same time, you should start converting funds from your Traditional IRA to a Roth IRA annually as soon as possible. Within the IRA, you can also allocate: put a small amount in a Roth IRA to buy TQQQ, so the high-growth portion is tax-free; keep the majority in the Traditional IRA holding QQQ or cash, which will reduce the tax burden during conversion.
• Question 2: Are JEPQ and JEPI meant to be replacements for QQQ?
  • Teacher James’s Reply: Not replacements. They are tools for a specific group of people (retired, insufficient principal, need high cash flow). Those still in the asset accumulation phase should not touch them. The funding allocation order for retirees should be: 1. Meet cash flow needs (JEPQ), 2. Set aside an emergency fund, 3. Only if there is money left over, consider investing in QQQ for growth.

Helen Wong

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• Sharing: She bought QQQ in 2021 after listening to the teacher’s class but sold in a panic during the 2022 market downturn. This year, she rebuilt her confidence, consolidated her assets, and followed the teacher’s method. She is now up over 30% and feels more confident about her future retirement.
• Question 1: In the event of future hyperinflation, which is a better store of value, real estate or stocks? Can the stock market withstand the test?
  • Teacher James’s Reply: Stocks are assets. Inflation means money is worthless, but the value of the asset remains. At that time, the price of the asset (stock price) will rise to reflect its real value. Short-term market drops are due to human fear, not value destruction.
• Question 2: Is the 10% dividend from JEPQ fixed? If the principal drops from $500,000 to $300,000, will the dividend also decrease proportionally?
  • Teacher James’s Reply: Its dividend amount is relatively stable; it does not fluctuate strictly as a percentage of the principal. It’s more like an annuity, designed to provide a steady stream of cash flow. So even if the market value drops, the dividend amount you receive will not decrease proportionally.

L

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• Question: Her family members previously bought QQQ and leveraged funds, but sold everything out of fear after making only fifty or sixty thousand dollars. Now they only dare to buy money market funds (865B) and have missed out on significant subsequent gains. How can she persuade them?
  • Teacher James’s Reply: You can’t save them; this is their “fate.” Not everyone can become wealthy; 99.99% of people are destined to be poor. For those who won’t listen, you should “let go.” Don’t worry about them, just manage your own investments well.

Wanfeng

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• Question: I’m curious why the teacher mentioned a new investment vehicle like JEPQ today.
  • Teacher James’s Reply: It was because of a specific case: a 72-year-old student with only $600,000 in principal who needs $40,000 a year for living expenses. To help solve his problem, I researched high-dividend products and found JEPQ and JEPI to be relatively stable options. This is because they are not purely derivatives; they hold a large amount of real assets (80% index components), so they can be considered. This is to solve the cash flow problem for seniors, not a recommendation for the average investor.

Haoqing

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• Sharing: He shared the story of a 78-year-old relative in his family who is in financial difficulty due to kidney failure, requiring dialysis three times a week. He advised the relative to sell a piece of ancestral land that generated no cash flow and invest the funds into Taiwan’s high-dividend ETF 0056. This would generate nearly 600,000 TWD in annual cash flow (50,000 TWD per month), completely solving her living expenses and allowing her to live with more dignity. He believes that the form of an asset can be changed; converting land into a stock asset that continuously generates cash flow can also be passed down to future generations.
  • Teacher James’s Comment: There is much suffering in the world, but the number of people we can help is limited. You gave excellent advice, but if she is unwilling to sell the land, that is her choice. We can only help those who are willing to be helped. At the same time, he also reminded everyone to protect their kidney health, drink more water, and stay away from junk food and sugary drinks.

IV. Insightful Quotes

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You think what you’re doing is moving you towards your goal, but in reality, you’re just moving further away from it, and you still think you’re heading towards your goal. This is the most frightening thing. – Lin

This quote profoundly points out the disconnect between the actions and goals of many investors. They engage in speculative, trend-chasing, and other entertainment-like operations, yet expect to achieve long-term, stable financial objectives. Ultimately, they often end up going in the opposite direction, wasting precious time and capital.

Stocks are assets… How much they sell for is determined by you, the asset owner… As long as you sell (QQQ), you are wrong. Selling at any time is wrong because you are selling too low. – Teacher James

In response to concerns about inflation, Teacher James emphasized the nature of quality stocks as real assets. Their long-term value will continuously grow, and short-term price fluctuations should not affect the determination to hold. Selling quality assets is equivalent to giving away huge future potential at a low price.

You can’t save the poor… 99.99% of people are fated to be poor, it can’t be helped. So you should just… let go. – Teacher James

While this statement may sound blunt, it reflects a reality in investment education: we can only influence those who are willing to accept and change. For family or friends who are stubborn and dominated by fear, it is better to let go and focus on one’s own growth than to persuade them in vain.

When people get old, if you don’t have money, others might see you as a kind of ’lower-class elderly’. – Haoqing

This point raised by Haoqing in his sharing very realistically highlights the importance of financial independence in old age. Having a stable cash flow is not just for survival, but for maintaining dignity, avoiding dependency on others, and being at their mercy in one’s later years.

V. Conclusion

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This session provided a significant optimization to the smart rebalancing strategy from a more refined and secure perspective, introducing the concept of “Flexible Rebalancing.” The core idea is to protect cash as a lifeline, preferring to exchange underlying assets for leveraged assets rather than easily tapping into cash reserves when they are insufficient. At the same time, the course demonstrated strong practicality by offering concrete and viable solutions, such as allocating to high-dividend products like JEPQ, for groups facing real-life difficulties (like insufficient retirement funds). Overall, this session not only deepened the theory of asset allocation but also closely integrated the practical financial needs of different life stages, once again emphasizing the core investment principles of long-term holding, risk control, and cash is king.