Young investor with stable income - leveraged investments?

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Young investor with stable income - leveraged investments?

Postby boggler » Thu Feb 14, 2013 6:36 pm

Hi,

I'm in my 20s and have a moderate-size portfolio to invest for the long term. I don't anticipate needing any of the funds for a long time and have stable income. Currently, I'm simply invested 100% in VT, and was planning to hold that for ~40 years. (I didn't figure that I need bonds at this point.) My investment horizon is long and I am actually willing to take on more risk in exchange for greater return. Is there a way to do this? I looked at leveraged ETFs, but those clearly are not meant for the long term. Are there any higher-risk, higher-return investments that fit my needs?
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Re: Young investor with stable income - leveraged investment

Postby BBL » Thu Feb 14, 2013 6:49 pm

You could go 95% RZV and 5% long rolling one month OTM VIX calls. Roll the calls the day before expiration each month and rebalance as needed each month. This would give you more expected return and decent downside protection.

^^^^ I'm not serious - don't do that.

100% VT and then trying to add leverage? Hmmm. I would want to discourage you more than anything else. Once you add leverage you are giving yourself a path to total failure.

You could cut your equity back from 100% and tilt to size and value and get a more efficient portfolio with similar expected return.

Either way - leverage in most forms that you might access it is usually a bad idea. Please consider other options....
To win without risk is to triumph without glory. Pierre Corneille
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Re: Young investor with stable income - leveraged investment

Postby retiredjg » Thu Feb 14, 2013 6:54 pm

Welcome to the forum!

This thread may broaden your understanding of the function of holding some bonds in a portfolio. viewtopic.php?p=538014
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Re: Young investor with stable income - leveraged investment

Postby fishndoc » Thu Feb 14, 2013 7:06 pm

Anyone who considers using leverage for their portfolio should spend the time to read thru what I think is the classic thread on this forum:
http://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0
" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle
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Re: Young investor with stable income - leveraged investment

Postby letsgobobby » Thu Feb 14, 2013 7:16 pm

fishndoc wrote:Anyone who considers using leverage for their portfolio should spend the time to read thru what I think is the classic thread on this forum:
http://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

+1

I might go a step further and call that thread the most important story for any potential investor to read, anywhere. An obviously very bright and well-educated and financially sophisticated person implements a strategy that beats the market. Except risk shows up like the grim reaper and kicks. his. arse.
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Re: Young investor with stable income - leveraged investment

Postby boggler » Sat Feb 16, 2013 2:08 pm

fishndoc wrote:Anyone who considers using leverage for their portfolio should spend the time to read thru what I think is the classic thread on this forum:
http://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0


Wow - that is quite a story. There are a few points in that story that differ from my situation, though:

- I'd like to avoid borrowing any money at all if possible. Is it possible to invest in a long-term leveraged way without debt?
- If I do have to borrow, I could probably take out a student loan (as I'm still in school), which should prevent the chance of a margin call if the stock market drops for a period of time.
- I'm not comfortable doing anything "complex" to achieve this scenario. I know very little about options and would love a method that is akin to just buying an index fund. Basically I wish Vanguard offered a leveraged world stock index fund, but I don't know enough about finance to know whether this is possible.

And regarding bonds, the most compelling argument I saw was that adding 20% bonds to the portfolio will significantly reduce risk while only slightly reducing return. However, my question is the converse: If your goal is to maximize return while not "overpaying" in risk, what's the best way to do this? (I wonder if you could leverage a diversified stock/bond portfolio, but maybe this doesn't make sense.)
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Re: Young investor with stable income - leveraged investment

Postby boggler » Wed Feb 20, 2013 12:10 am

boggler wrote:
fishndoc wrote:Anyone who considers using leverage for their portfolio should spend the time to read thru what I think is the classic thread on this forum:
http://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0


Wow - that is quite a story. There are a few points in that story that differ from my situation, though:

- I'd like to avoid borrowing any money at all if possible. Is it possible to invest in a long-term leveraged way without debt?
- If I do have to borrow, I could probably take out a student loan (as I'm still in school), which should prevent the chance of a margin call if the stock market drops for a period of time.
- I'm not comfortable doing anything "complex" to achieve this scenario. I know very little about options and would love a method that is akin to just buying an index fund. Basically I wish Vanguard offered a leveraged world stock index fund, but I don't know enough about finance to know whether this is possible.

And regarding bonds, the most compelling argument I saw was that adding 20% bonds to the portfolio will significantly reduce risk while only slightly reducing return. However, my question is the converse: If your goal is to maximize return while not "overpaying" in risk, what's the best way to do this? (I wonder if you could leverage a diversified stock/bond portfolio, but maybe this doesn't make sense.)


I'd love to have the advice any Bogleheads have to offer given the above situation. How might I achieve leverage in a diversified way? Do you still think it's a bad idea?
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Re: Young investor with stable income - leveraged investment

Postby momar » Wed Feb 20, 2013 12:14 am

When you want to buy a house, take out a mortgage instead of paying cash.
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Re: Young investor with stable income - leveraged investment

Postby nydad » Wed Feb 20, 2013 12:52 am

- I'd like to avoid borrowing any money at all if possible. Is it possible to invest in a long-term leveraged way without debt?

I'm not sure you're using the word leverage in the way it is normally used in investing. Leverage normally means to borrow money to invest more - but it can also be used to describe use of derivatives like options. As you noted, I believe leveraged ETFs are mainly targeted for short-term traders.

It sounds like you're really asking for more risk/reward, right - but without borrowing.

If that's the case, I'd suggest one of the following:
1) emerging and frontier markets - see if you can find a low-cost ETF, or an actively managed ETF in a particular country that has a decent track record. Vietnam has been soaring recently. What's the next country to take off? Are you that clever?
2) small cap, small cap value or microcap ETFs - many choices here
3) Individual stocks. Check out this graph:
http://quote.morningstar.com/fund/chart.aspx?t=VFINX&region=USA&culture=en-US&statePara=%7Bsecurities%3A%5B%7Bn%3A%22Vanguard%20500%20Index%20Inv%22%2Cids%3A%22FOUSA00FS1%7C0P00002SZH%7CCU%24%24%24%24%24USD%7C1%7C1%7CFO%7C1976-8-31%7C%7C%7Cfalse%7CUSA%7C18%22%7D%2C%7Bn%3A%22Apple%20Inc%22%2Cids%3A%220P000000GY%7C0P000000GY%7CCU%24%24%24%24%24USD%7C1%7C1%7CST%7C1980-12-12%7C%7C%7Cfalse%7CUSA%7C3%22%7D%5D%2CchartType%3A%22GrowthChart%22%2Crange%3A%221980-9-30%7C2012-12-31%22%2Cperiod%3A9%2Cregion%3A%22USA%22%2Ctc%3A%22USD%22%2CisD%3A%220%22%2CisR%3A%220%22%2CrM%3A3%2Cscale%3A%221%22%2CbMenu%3A%22%22%2Csma%3A%220%2C0%2C0%22%7D This shows Apple vs. Vanguard 500 index fund from 1980 till today. $10,000 invested in ~1980 with VFINX would give you around $250k, but you'd have over $1.8M if you'd invested in Apple. However, if you look at the graph, the 500 index beat apple until 2006. That's 26 years of underperformance in a single stock against an index - and then the stock blows past. Who knows what will happen over the next 30 years? The largest risk/return in the market is thus available IMHO through single stock selection. The problem is, very few people know how to do this really well, which is why most of us invest in index funds instead. A bit boring - you'll never get 50% return year after year with an index fund, but if you want to roll the dice, put 5% in a few stocks and gamble a bit.
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Re: Young investor with stable income - leveraged investment

Postby FinancialDave » Wed Feb 20, 2013 12:57 am

momar wrote:When you want to buy a house, take out a mortgage instead of paying cash.


This is actually the ONLY way I think you should use leverage!

I agree no bonds are necessary. I am not even using them in retirement and have never used them and have done just fine! Certainly in the coming future (5-10 years) I see them only hurting your returns.

I DEFINITELY DO NOT recommend any kind of leverage products. Stick with a 100% equity broad market index like VTSAX - I have seen very little other portfolios that have beaten this over 20+ years. Sure there may be a case to diversify into some international, I'm just not sure it is going to improve your returns.

Feel free to put a core VT or VTSAX in your portfolio, once you get above $100k you could put some other things around the outside, but I suspect they won't really improve your total return much, except maybe in some short term time frames, as AA's meander around.

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