Smart Rebalancing: Advanced Rebalancing When You Use Leveraged Funds

In 30 seconds: An advanced rebalancing rule for investors who deliberately hold a 2× leveraged fund (e.g. QLD / 00670L). Two rules: in an up year, move 30% (or 50%) of the leveraged fund’s yearly gain into a money-market / short-bond fund; in a down year, move 2% of total assets from cash back into the leveraged fund. Its value: you can rebalance without adding new money.¹

⚠️ Read this first: CLEC’s default allocation uses no leveraged funds and no smart rebalancing (see Cash Is Air) — “simple is the correct solution.” This page applies only if you already understand and voluntarily accept leverage risk and hold a leveraged fund.

The two rules

Up year (this year’s QQQ / 00662 year-end price > year-start): move 30% (more conservative / volatility slowly grows) or 50% (volatility unchanged) of the leveraged fund’s gain into the money-market fund (00865B).
Down year (year-end < year-start): move 2% of the original total assets (a fixed amount) from the money-market fund into the leveraged fund.

Key detail: the down-year 2% is a fixed amount based on the initial total. If you started with NT$10M, 2% is NT$200k — and it stays NT$200k whether assets later become 5M or 30M.¹

Computing the yearly gain: leveraged fund’s year-end value − year-start value − new money added this year. Record cumulative realized gains so next year you can compute “how much was earned this year.”¹

Example without new money

Start with NT$1M: 400k QQQ / 300k QLD / 300k money market.¹

Year 1 (up) → 45 / 36 / 31. QLD gained 6, 30% = 2 → sell 2 of QLD, buy money market:

450k QQQ | 340k QLD | 330k money market

Year 2 (down) → 40.5 / 28.8 / 34. Down-year amount = original 1M × 2% = 20k → sell 20k money market into QLD:

405k QQQ | 308k QLD | 320k money market

Repeat each year — trim the peak in up years, add to leverage on dips in down years — all without new money.¹

Flexible Rebalancing 2.0: when cash is under 15 years, don’t spend it

00538 introduces Flexible Rebalancing 2.0, a variant of smart rebalancing — the core idea is unchanged; it only switches where the down-year top-up to the leveraged fund comes from, based on whether your cash position covers 15 years. The intent: when cash is under 15 years, in a down year don’t consume cash to top up leverage — use the base fund (QQQ) instead, so that “cash isn’t drawn down over 15 years.”²

Cash position	Up year	Down year (top up one year of expenses to leverage)
Under 15 years	Move a set % of the leveraged position to cash (variable 2)	From the base fund (QQQ) (variable 3) ← cash untouched
Over 15 years	Move a set % of the leveraged position to cash (variable 4)	From cash (variable 5) ← i.e. traditional smart rebalancing

Precondition for down-year rebalancing: only rebalance in a down year if at the peak you held more than 15 years of cash. E.g. with 18 years of expenses at the peak, you have 3 years of downturns you can rebalance through (18 − 15). If you’ve fallen from the peak with under 15 years of cash, avoid down-year rebalancing — rebalancing when cash is short is risky.²
Why it’s worth it: backtesting “with flexible rebalancing vs. plain smart rebalancing” comes out winning more than losing, and even when it loses, the minimum maintenance rate is still higher — for anyone using pledged loans, that’s an extra layer of maintenance-rate protection.²
The cost: more parameters (several “variables” to set yourself), but the core is still smart rebalancing — you just get to choose the top-up method by how much cash you hold. This shares the “don’t draw down the cash flow” safety logic with 十五年現金流 and 現金是空氣.

Can a leveraged ETF be liquidated? (Taiwan’s 00670L)

A member worried: Taiwan’s rules allow liquidation when NAV falls below NT$2 — if QQQ keeps falling, could 00670L be wound up like an ETF he once owned? James’s breakdown:³

The regulatory risk is real: the US allows a reverse split (at NT$1, two shares become one at NT$2); if Taiwan can’t do that, NAV below NT$2 may trigger liquidation.
But in practice it’s negligible: Taiwan’s liquidated cases were crude-oil 2× funds and VIX products — “VIX isn’t really an index, of course it gets liquidated.” A 2× broad-market index falling that far is very unlikely.
And even at zero, you’ve already taken money out: this is exactly what smart rebalancing buys you — “say you started with NT$100k and it went up 10× over ten years; taking 30% out each year, you’ve already pulled out roughly NT$300k of cash. Even if the original NT$100k eventually went to zero, you’d still have NT$300k” — 3× over ten years. “Do our smart rebalancing properly and your leveraged fund is not a problem.”

His warning in the same passage: don’t follow the outside “50% 2× + 50% cash” recipe — “it’s plausible-sounding, looks right, but executing it goes wrong.” Use a 433 or 424 allocation, and rebalance smartly. “We won’t earn the most; we just want to stay alive and earn steadily.”³

Three conditions for dollar-cost-averaging into leveraged funds

Asked “can I DCA into QLD/TQQQ,” James didn’t say yes or no — he asked a precondition back: will this cash flow ever stop? His conditions:⁴

The cash flow never stops, and you never need that money. E.g. buy with QQQ’s ~0.4% dividend (US$1M of QQQ throws off ~US$4,500/yr, a bit over US$1,000 a quarter), never selling principal, so the dividend never stops; or set aside a fixed 5–10% of a pension each month.
You’ll keep buying after a 99% drawdown. “Is a 99% fall scary? For someone with no money left to buy, terrifying. For someone putting in US$100 a month, not scary — at US$1 a share, US$100 buys 100 shares.”
You can feel nothing about the price: “If you have feelings about TQQQ’s or QQQ’s price, then you can’t do it. Treat that money as not-money and never look at it after you buy.”

The alternative for those who don’t want to DCA: put 10% of assets into the leveraged fund and forget it. Neither path is required — the default allocation holds no leverage at all.⁴

What about FX losses when rebalancing? — ignore the exchange rate

A member living in Taiwan and spending TWD in retirement asked: 00670L is currency-hedged and 00865B isn’t, so won’t rebalancing between them get eaten by FX swings? Should the cash sleeve move to TWD time deposits instead?⁵

James’s answer is to ignore FX entirely:⁵

“You just saw the TWD appreciate this year — it didn’t appreciate in the past. You can’t let one year’s event decide a lifetime.”
You accumulated at many different exchange rates, and you’ll rebalance in the withdrawal phase at many different rates too — over time they offset.
“Ignore the existence of the exchange rate, it doesn’t matter. Just do what you should do.”

Relationship to other pages

The default, unleveraged allocation and retirement withdrawal tiers are in Cash Is Air.
If you use pledged loans, CLEC recommends plain mechanical rebalancing (reset ratios to the originals each year), not this smart method.

⚠️ A 2× leveraged fund drops far more than the underlying in a crash and suffers volatility decay. This faithfully summarizes CLEC’s advanced strategy for education only — not investment advice; tickers (QLD/00670L/00865B) and tax rules vary by region.

CLEC James, “Smart Rebalancing”; see also CLEC feature “Flexible Rebalancing 2.0,” 2025-11-02. Converted source: raw/docs/教學資料/【聰明再平衡法：】 .docx. ↩ ↩² ↩³ ↩⁴ ↩⁵
CLEC James, long session / deck 00538 “Flexible Rebalancing 2.0: Cash Undiminished Over 15 Years, a Win-More-Than-Lose Safety Upgrade,” 2025-11-01. Rules and the “cash undiminished over 15 years” intent from the deck raw/docs/簡報資料/00538… (down-year top-up source switches on whether cash covers 15 years; wins more than loses, higher minimum maintenance rate). ↩ ↩² ↩³
CLEC James and a Taiwanese member, chat room 0001 “Investing in VTI, VT, SPY will also make you poor…,” 2025-07-31, can 00670L be liquidated (Taiwan’s NT$2 rule / reverse splits / crude-oil 2× and VIX as the real cases / the cash already withdrawn via rebalancing) @1:21:30–1:26:30. Transcript: raw/transcripts/閒聊/0001…. ↩ ↩²
Same session, the three conditions for DCA-ing into QLD/TQQQ (cash flow never stops / keep buying after a 99% drop / no feelings about price / or use 10% of assets) @43:00–48:30. ↩ ↩²
Same session, a Taiwanese member on FX losses when rebalancing (00670L hedged, 00865B not) @1:35:30–1:37:00. ↩ ↩²