Leverage Your Way To A Richer Retirement
Leverage Your Way To A Richer Retirement
I saw this article in Forbes and can't quite make out what it all means. But I think there might be actionable stuff here, worthy of a post and discussion:
http://www.forbes.com/sites/danielfishe ... etirement/
Here is the secret sauce:
"As a rule of thumb, it costs about $25 today to lock in a real return of $1 a year for 30 years, or about $1.5 million in TIPS to ensure $5,000 a month over that period, assuming you are drawing from interest and principal.
Another approach to setting up this “floor” would be to buy an immediate annuity that pays out $5,000 a month until you die. ImmediateAnnuities.com says it would cost a 65-year-old male $846,000, but it comes with some serious drawbacks: The cash flow and the principal disappear the day you die, there’s no protection against inflation, and the money is inaccessible for emergencies.
Both are wasteful, according to economists, in that they squander potential retirement savings in the quest for guaranteed income. The high-risk, leveraged-equity component of Scott’s rule seeks to eliminate that waste and substantially increase the amount of money retirees can withdraw and spend while still maintaining a floor. If the market rises, you simply shift the excess above 15% into the risk-free portfolio annually; if it falls, you simply watch it go down and hope it recovers."
http://www.forbes.com/sites/danielfishe ... etirement/
Here is the secret sauce:
"As a rule of thumb, it costs about $25 today to lock in a real return of $1 a year for 30 years, or about $1.5 million in TIPS to ensure $5,000 a month over that period, assuming you are drawing from interest and principal.
Another approach to setting up this “floor” would be to buy an immediate annuity that pays out $5,000 a month until you die. ImmediateAnnuities.com says it would cost a 65-year-old male $846,000, but it comes with some serious drawbacks: The cash flow and the principal disappear the day you die, there’s no protection against inflation, and the money is inaccessible for emergencies.
Both are wasteful, according to economists, in that they squander potential retirement savings in the quest for guaranteed income. The high-risk, leveraged-equity component of Scott’s rule seeks to eliminate that waste and substantially increase the amount of money retirees can withdraw and spend while still maintaining a floor. If the market rises, you simply shift the excess above 15% into the risk-free portfolio annually; if it falls, you simply watch it go down and hope it recovers."
Re: Leverage Your Way To A Richer Retirement
Like many of the number crunchers working at Financial Engines, Scott, 46, was hired fresh out of Stanford’s doctoral program after studying economics, writing his thesis on the distribution of tax benefits to employees from investing in 401(k)s. His floor-leverage rule is an improvement over the 4% rule, he says, because it locks in a specific level of income that can ratchet up, permanently, if the stock market rises.
What's that? If? IF? This is what you get when you give a new grad a theoretical problem. Good thing you put in that floor because you might be sleeping on it.
Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Leverage Your Way To A Richer Retirement
Okay I read the article. And maybe it's pure genius. That I'm too dumb to understand.
But it seems to me that anytime you gear up your financial leverage in an attempt to juice your returns, you bear tons of extra risk. So that sort of turns me off on this sort of financial engineering.
Finally, the arguments for not taking a DIY approach to annuitizing your or my nestegg seem a little too theoretical. For example, leaving a bit of extra money (even a good bit of extra money) to my kids because I don't completely draw down my IRAs etc seems like a risk I don't need to worry about.
And further more, I don't think I'm at much risk of cluelessly grinding down my savings... If during retirement I experience back-to-back bad years, a lost decade, etc., I'm pretty sure I'll dial back (significantly) my spending.
One other thing--and hopefully this won't get me into trouble... but using leverage doesn't really seem according to the data I've looked at to be a practical way to build and keep your wealth. A couple of weeks ago, e.g., I did a blog post on way that the one percent looks according to the IRS, looking for actionable insights to share (here's post: small wealth tactics of one percent) and it sure looks to me as if the one percent often are not using much leverage.
Rather, the one percent (and I think most bogleheads are if they want to be either one percenters or on their way to becoming one percenters) hold lots of cash, carry little debt, and use management-intensive investments like small businesses and direct real estate investment.
But it seems to me that anytime you gear up your financial leverage in an attempt to juice your returns, you bear tons of extra risk. So that sort of turns me off on this sort of financial engineering.
Finally, the arguments for not taking a DIY approach to annuitizing your or my nestegg seem a little too theoretical. For example, leaving a bit of extra money (even a good bit of extra money) to my kids because I don't completely draw down my IRAs etc seems like a risk I don't need to worry about.
And further more, I don't think I'm at much risk of cluelessly grinding down my savings... If during retirement I experience back-to-back bad years, a lost decade, etc., I'm pretty sure I'll dial back (significantly) my spending.
One other thing--and hopefully this won't get me into trouble... but using leverage doesn't really seem according to the data I've looked at to be a practical way to build and keep your wealth. A couple of weeks ago, e.g., I did a blog post on way that the one percent looks according to the IRS, looking for actionable insights to share (here's post: small wealth tactics of one percent) and it sure looks to me as if the one percent often are not using much leverage.
Rather, the one percent (and I think most bogleheads are if they want to be either one percenters or on their way to becoming one percenters) hold lots of cash, carry little debt, and use management-intensive investments like small businesses and direct real estate investment.
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Re: Leverage Your Way To A Richer Retirement
"If the market rises, you simply shift the excess above 15% into the risk-free portfolio annually; if it falls, you simply watch it go down and hope it recovers."
I guess the writer of that article never heard of the old saying that hope is not a plan.
I guess the writer of that article never heard of the old saying that hope is not a plan.
In theory, theory and practice are identical. In practice, they often differ.
Re: Leverage Your Way To A Richer Retirement
Well that doesn't sound very good.Persuading old-timers to embrace high leverage won’t be easy. Exchange-traded funds like the ProShares UltraPro S&P 500, which offers three times the daily return of the Standard & Poor’s 500 Index, have a bad reputation among individual investors and most advisors. Such funds tend to diverge rapidly from their underlying indexes because of the compounding effects of day-to-day repricing and volatility. An investor who puts $10,000 into a triple-long index fund whose underlying index drops 10% the first day and rises 10% the next will end up with $9,100 at the beginning of the third day, while a straight index buyer will have $9,900. Over a year this difference can become significant.
OTOH:
Oh I get it now, maybe just do this in years where you know the market will rise. No problem.Still, Scott and Watson’s analysis shows that buying and holding leveraged equity investments can deliver outsize increases to income if the market rises over the year.
- Cut-Throat
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Re: Leverage Your Way To A Richer Retirement
Sounds kind of like the Vegas Roulette Plan. Bet on RED only, if you lose double it until you win. Place original bet when you win, repeat until you're a Millionaire.
- Clearly_Irrational
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Re: Leverage Your Way To A Richer Retirement
When I was MUCH younger I did computer simulations of this on my old Commodore 64. As it turns out you can run into ridiculously unlikely strings of bad luck that will wipe you out unless you have infinite money to start with. The bad luck strings occurred much more often than I expected intuitively based on the raw odds. It convinced me that at the very least by the time you had enough capital to have a reasonable chance of making it work the winnings would be irrelevant to your financial situation and that more likely it just wasn't a good plan for anyone.Cut-Throat wrote:Sounds kind of like the Vegas Roulette Plan. Bet on RED only, if you lose double it until you win. Place original bet when you win, repeat until you're a Millionaire.
Re: Leverage Your Way To A Richer Retirement
The leveraged products mentioned in the article (and the article even acknowledges this somewhat) don't behave the way you'd expect. If the S&P rises in a year, the triple S&P need not. Basically, unless the rise is in a straight line with no volatility (how frequently does that happen?) the leveraged product will rise a lot less, even putting aside high fees.
A much safer way to implement something like this is with a Swedroe-style portfolio: high fixed-interest allocation with heavily tilted equity (e.g. towards Small-Value, International Small-Value, Emerging Markets Small-Value if you have access to them).
A much safer way to implement something like this is with a Swedroe-style portfolio: high fixed-interest allocation with heavily tilted equity (e.g. towards Small-Value, International Small-Value, Emerging Markets Small-Value if you have access to them).
Re: Leverage Your Way To A Richer Retirement
I'm calling this article another example of Definition of 'Financial Porn'.
Leveraged ETF's? You gotta be kidding: Inverse and leveraged ETFs
Leveraged ETF's? You gotta be kidding: Inverse and leveraged ETFs
Re: Leverage Your Way To A Richer Retirement
There you go:
http://chart.finance.yahoo.com/z?s=UPRO ... ®ion=US
This is a 5-year chart, not a 5-day one.
L.
http://chart.finance.yahoo.com/z?s=UPRO ... ®ion=US
This is a 5-year chart, not a 5-day one.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Re: Leverage Your Way To A Richer Retirement
Fortuitous timing. Domestic stocks have gone almost straight up since March 2009. UPRO's inception date: 6/23/09.
As Mr. T would say: "I pity the fool who uses that leveraged jibber jabber in a bear market."
Plenty of prior threads on why these leveraged funds are hazardous to your investing health. Even the fund providers themselves say those things are not for long-term investing.
As Mr. T would say: "I pity the fool who uses that leveraged jibber jabber in a bear market."
Plenty of prior threads on why these leveraged funds are hazardous to your investing health. Even the fund providers themselves say those things are not for long-term investing.
Don't assume I know what I'm talking about.
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Re: Leverage Your Way To A Richer Retirement
Can you provide a chart from the mid 90's until now is more relevant, I'd be interested to see the result with two bear markets. Either way, it's not for me, I hate leverage or debt.Leeraar wrote:There you go:
http://chart.finance.yahoo.com/z?s=UPRO ... ®ion=US
This is a 5-year chart, not a 5-day one.
L.
Re: Leverage Your Way To A Richer Retirement
IMO the actionable and relevant part of this is not the exact strategy (and obviously just because something backtests doesn't make it optimal) but as yet another datapoint based on systematic analysis that "conservative" seeming strategies can be anything but, unless you have over-saved substantially vs. desired spending.
Of course many Bogleheads are dyed-in-the-wool over-savers/under-spenders, and many folks have bequest motives, so an "inefficient" strategy - that is 99% safe but very likely to leave a large amount of money behind when you're dead - can be OK. But seeking to find a "sweet spot" that allows the vast majority of people who don't want to or can't over-save to still be efficient at maximizing spending during decumulation seems worthy. And we already have Taleb / Larry Swedroe type portfolios that combine a majority of safe assets with a slice of something much more volatile (in the Larry Portfolio, small-cap value) so the idea that the ""something much more volatile" could usefully employ leverage doesn't seem totally crazy. And after all many folks are leveraged up in one of the largest slices of their net worth, their home... at the time of purchase, quintuple-leveraged or higher. Scott only proposes triple-leverage, and only for 15% of investable assets.
Of course many Bogleheads are dyed-in-the-wool over-savers/under-spenders, and many folks have bequest motives, so an "inefficient" strategy - that is 99% safe but very likely to leave a large amount of money behind when you're dead - can be OK. But seeking to find a "sweet spot" that allows the vast majority of people who don't want to or can't over-save to still be efficient at maximizing spending during decumulation seems worthy. And we already have Taleb / Larry Swedroe type portfolios that combine a majority of safe assets with a slice of something much more volatile (in the Larry Portfolio, small-cap value) so the idea that the ""something much more volatile" could usefully employ leverage doesn't seem totally crazy. And after all many folks are leveraged up in one of the largest slices of their net worth, their home... at the time of purchase, quintuple-leveraged or higher. Scott only proposes triple-leverage, and only for 15% of investable assets.
Last edited by freebeer on Fri Feb 14, 2014 9:10 am, edited 1 time in total.
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Re: Leverage Your Way To A Richer Retirement
That's a potentially dangerous recommendation. Just ask FINRA. Here's one of the notices I got from them regarding LETFs:
"Due to the effects of compounding, their performance
over longer periods of time can differ significantly fromtheir stated daily
objective. Therefore, inverse and leveraged ETFs that are reset daily
typically are unsuitable for retail investors who plan to hold them for
longer than one trading session, particularly in volatile markets"
http://www.finra.org/web/groups/industr ... 118952.pdf
"Due to the effects of compounding, their performance
over longer periods of time can differ significantly fromtheir stated daily
objective. Therefore, inverse and leveraged ETFs that are reset daily
typically are unsuitable for retail investors who plan to hold them for
longer than one trading session, particularly in volatile markets"
http://www.finra.org/web/groups/industr ... 118952.pdf
Re: Leverage Your Way To A Richer Retirement
This is the maximum duration chart that Yahoo will generate.CdnAppraiser wrote:Can you provide a chart from the mid 90's until now is more relevant, I'd be interested to see the result with two bear markets. Either way, it's not for me, I hate leverage or debt.
Please note that I would never advocate doing this.
Keith
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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Re: Leverage Your Way To A Richer Retirement
LETFs is the attention-grabber in the Forbes article, but the approach that is suggested by Scott is really just another variation on standard asset allocation thinking.
In my asset allocation world, "bonds" means a mix of high-grade debt and "stocks" means broad index funds. Not everybody takes the same approach, but I think it's pretty typical, whether someone is talking about an AA of 90/10 or 40/60.
Instead of that approach, Scott is suggesting 85/15, with say, 85% in TIPS and 15% in LETFs. The bond side is safer than my bond allocation (that's the floor), while the stock side is much riskier. The leverage component is just another way to achieve higher risk/return, as a relatively small component of the overall mix.
To me, this would only make sense if LETFs or TIPS were severely underpriced. There is no reason to think that either investment is underpriced in terms of total expected return (unless you compare TIPS to an inflation-protected annuity; and I am not considering an annuity), so I am happy to stick with my current approach.
In my asset allocation world, "bonds" means a mix of high-grade debt and "stocks" means broad index funds. Not everybody takes the same approach, but I think it's pretty typical, whether someone is talking about an AA of 90/10 or 40/60.
Instead of that approach, Scott is suggesting 85/15, with say, 85% in TIPS and 15% in LETFs. The bond side is safer than my bond allocation (that's the floor), while the stock side is much riskier. The leverage component is just another way to achieve higher risk/return, as a relatively small component of the overall mix.
To me, this would only make sense if LETFs or TIPS were severely underpriced. There is no reason to think that either investment is underpriced in terms of total expected return (unless you compare TIPS to an inflation-protected annuity; and I am not considering an annuity), so I am happy to stick with my current approach.
Re: Leverage Your Way To A Richer Retirement
Following up on the prior post, would this actually be a synthetic 35/65 portfolio? 85 parts bonds and effectively 45 parts equity for a total of 130. Then take the 85 bond parts into 130 and you get 65% bonds (and 35% equity). ?? Or am I missing something (besides some natural "decay" for the interest required internally in the ETF to do the leverage)
Last edited by Leesbro63 on Fri Feb 14, 2014 10:13 am, edited 1 time in total.
Re: Leverage Your Way To A Richer Retirement
Thats the problem with Martingale strategies. Not to mention you run into house limits at some point. It doesn't help that the game is stacked against you.
On one hand he is just recommending an 15/85 asset allocation where you only rebalance one way (from stocks to bonds) AND where you can retire on the 85% and don't mind losing the 15%. Personally I think the criticism of the 4% rule is a big misplaced. No one is saying that if you retire and stocks go on a 20 year bull market that you don't up your standard of living. What the rule does say is that you shouldn't count on that. When your 5 years into retirement, you can examine the situation and see what world your in. Most of the time it will one where sticking to 4%+ inflation makes sense. In others you can up your spending and in yet others cutting costs makes sense. Retiring on Jan 1, 2000 for example might have been that 1:100 event (3 down years) where failure is expected. You would have to be foolish not to adapt.
On one hand he is just recommending an 15/85 asset allocation where you only rebalance one way (from stocks to bonds) AND where you can retire on the 85% and don't mind losing the 15%. Personally I think the criticism of the 4% rule is a big misplaced. No one is saying that if you retire and stocks go on a 20 year bull market that you don't up your standard of living. What the rule does say is that you shouldn't count on that. When your 5 years into retirement, you can examine the situation and see what world your in. Most of the time it will one where sticking to 4%+ inflation makes sense. In others you can up your spending and in yet others cutting costs makes sense. Retiring on Jan 1, 2000 for example might have been that 1:100 event (3 down years) where failure is expected. You would have to be foolish not to adapt.
Clearly_Irrational wrote:When I was MUCH younger I did computer simulations of this on my old Commodore 64. As it turns out you can run into ridiculously unlikely strings of bad luck that will wipe you out unless you have infinite money to start with. The bad luck strings occurred much more often than I expected intuitively based on the raw odds. It convinced me that at the very least by the time you had enough capital to have a reasonable chance of making it work the winnings would be irrelevant to your financial situation and that more likely it just wasn't a good plan for anyone.Cut-Throat wrote:Sounds kind of like the Vegas Roulette Plan. Bet on RED only, if you lose double it until you win. Place original bet when you win, repeat until you're a Millionaire.
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Re: Leverage Your Way To A Richer Retirement
I like this, SeattleCPA.Rather, the one percent (and I think most bogleheads are if they want to be either one percenters or on their way to becoming one percenters) hold lots of cash, carry little debt, and use management-intensive investments like small businesses and direct real estate investment.
364
Re: Leverage Your Way To A Richer Retirement
Conversely if the stock market booms and the money in your nest egg doubles to $2 million, the rule stipulates that you don’t veer from the original 4% amount. You could find yourself spending only 2% of your actual portfolio
This is not correct.
You must believe this if you are using the LETF as well. On one had he's comparing to a portfolio without a floor, and on the other hand comparing to one that does have a floor.“You have to say, ‘Even if my portfolio doubles I still shouldn’t spend any more,’ and if the market crashes, you have to believe it will come back.”
Absolute nonsense. You can put a floor in and still not use leverage for the rest. Using leverage in this situation is no different from using it in any other situation. The plan also requires about 1.72M to begin a 40k withdrawal. If you have that much, you can start withdrawals of 40k with much less than 4%.The floor is a base level of income you want to receive until you die. Leverage is how you boost your income
Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Re: Leverage Your Way To A Richer Retirement
In a very broad sense I see 85% in TIPS, 15% in 3x stock as being little different to 15% 3x stock, 30% bonds - that combined replicates 45% stocks, together with the remainder 55% in TIPS i.e. close to a 50/50 stock/bond overall asset allocation (45/55).
Mixed in with some asymmetric rebalancing - only ever rebalancing out of stocks into bonds after stocks had performed relatively well (not rebalancing out of bonds into stocks after stocks had performed relatively poorly).
Which generally wouldn't be any better than another who simply opted to 50/50 with asymmetric rebalancing. Or who perhaps opted to 30/70 spicier stocks/bonds (Small Cap Value perhaps) with asymmetric rebalancing.
Mixed in with some asymmetric rebalancing - only ever rebalancing out of stocks into bonds after stocks had performed relatively well (not rebalancing out of bonds into stocks after stocks had performed relatively poorly).
Which generally wouldn't be any better than another who simply opted to 50/50 with asymmetric rebalancing. Or who perhaps opted to 30/70 spicier stocks/bonds (Small Cap Value perhaps) with asymmetric rebalancing.
Re: Leverage Your Way To A Richer Retirement
You can do much of what Scott is suggesting more simply and safely. You are retired and part of your portfolio is in stocks. You expect stocks to have a real arithmetic annual real return of 7%. When stocks have years well above 7%, like last year, take the above 7% extra gain (above expectations) and purchase a life annuity with it. That way you lock in and spread the good fortune of one year of great equity returns over the rest of your life.
BobK
BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). |
The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
Re: Leverage Your Way To A Richer Retirement
freebeer wrote:IMO the actionable and relevant part of this is not the exact strategy (and obviously just because something backtests doesn't make it optimal) but as yet another datapoint based on systematic analysis that "conservative" seeming strategies can be anything but, unless you have over-saved substantially vs. desired spending.
Of course many Bogleheads are dyed-in-the-wool over-savers/under-spenders, and many folks have bequest motives, so an "inefficient" strategy - that is 99% safe but very likely to leave a large amount of money behind when you're dead - can be OK. But seeking to find a "sweet spot" that allows the vast majority of people who don't want to or can't over-save to still be efficient at maximizing spending during decumulation seems worthy. And we already have Taleb / Larry Swedroe type portfolios that combine a majority of safe assets with a slice of something much more volatile (in the Larry Portfolio, small-cap value) so the idea that the ""something much more volatile" could usefully employ leverage doesn't seem totally crazy. And after all many folks are leveraged up in one of the largest slices of their net worth, their home... at the time of purchase, quintuple-leveraged or higher. Scott only proposes triple-leverage, and only for 15% of investable assets.
I agree. Without getting into the full technical details, on the surface I don't find what is written here completely objectionable. I can't dismiss the possibility that there might be ways to improve the efficiency of potential outcomes. I think when he refers to efficiency, he includes the potential for inheritance amounts above what might be necessary or desired and downside scenarios that might compromise consumption. The extreme example of an immediate annuity is given, where the downside scenarios are essentially emliminated, but in exchange for a depletion of inheritance beyond what most might want to target (essentially to 0). So this seems to try building a better mouse trap where some of the extreme upside scenarios (deemed inefficient) are given up in exchange for less downside risk. It is important to keep in mind that the summarized strategy involves an 85% allocation to bonds. So while it easy to take pot shots at hoping equities subsequently rise if they go down, one has to keep in ind it is only for 15% of the portfolio. Oh and by the way, the hope that equities rise after declining is exactly what other strategies entail that provide for much larger portions of the portfolio allocated to equities than the 15 % proposed here.
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Re: Leverage Your Way To A Richer Retirement
From the article:
From the updated Trinity study at:
http://www.fpanet.org/journal/CurrentIs ... cessRates/
Table 2 shows 4% inflation adjusted for 30 years as having had 100% success for 75/25
and 96% success rate for 50/50 when back-tested over Jan 1926-Dec 2009
I would interpolate something higher than 90%, more likely in the neighborhood of 97 or 98%
It's easy to look better when you give low success rates for a competing plan.
Maybe the author swapped the ratios and 90% is the figure for 40/60 , not 60/40 ?
This does not give me much confidence in his plan.
Also, note that you do not inflation adjust in his plan when stocks are down.
That would certainly also increase the SWR above what is shown in the Trinity Tables.
So,
1) give incorrect low SWR's for the other guy's plan
2) make a change in your plan that could also be made in the other guy's plan,
but only give improved SWR for your plan.
I think I have seen this kind of argument before.
I also did not see a success rate for his plan, or what constituted success.
(Maybe his plan has a 100% success rate because you don't run out of money, inflation just keeps eroding it.)
I don't believe the 90% chance given here, it is suspicously low.Old: The 4% Rule. Withdraw 4% of your initial retirement nest egg in the first year of retirement and adjust the amount annually by the rate of inflation of the preceding year. You have a 90% chance of sustaining that income for 30 years. The rule assumes a 60/40 allocation of stocks to bonds ..
From the updated Trinity study at:
http://www.fpanet.org/journal/CurrentIs ... cessRates/
Table 2 shows 4% inflation adjusted for 30 years as having had 100% success for 75/25
and 96% success rate for 50/50 when back-tested over Jan 1926-Dec 2009
I would interpolate something higher than 90%, more likely in the neighborhood of 97 or 98%
It's easy to look better when you give low success rates for a competing plan.
Maybe the author swapped the ratios and 90% is the figure for 40/60 , not 60/40 ?
This does not give me much confidence in his plan.
Also, note that you do not inflation adjust in his plan when stocks are down.
That would certainly also increase the SWR above what is shown in the Trinity Tables.
So,
1) give incorrect low SWR's for the other guy's plan
2) make a change in your plan that could also be made in the other guy's plan,
but only give improved SWR for your plan.
I think I have seen this kind of argument before.
I also did not see a success rate for his plan, or what constituted success.
(Maybe his plan has a 100% success rate because you don't run out of money, inflation just keeps eroding it.)
Re: Leverage Your Way To A Richer Retirement
Just bumping my own thread up. I am wondering if I did the math right here?Leesbro63 wrote:Following up on the prior post, would this actually be a synthetic 35/65 portfolio? 85 parts bonds and effectively 45 parts equity for a total of 130. Then take the 85 bond parts into 130 and you get 65% bonds (and 35% equity). ?? Or am I missing something (besides some natural "decay" for the interest required internally in the ETF to do the leverage)
Re: Leverage Your Way To A Richer Retirement
Just the title is enough for me not to read it.
Re: Leverage Your Way To A Richer Retirement
Leaders, good morning/afternoon/evening
Good conversation. Not for me. My non-leveraged-and-boring SWAN portfolio is doing fine.
Have a productive Presidents Day and thanks for reading.
Good conversation. Not for me. My non-leveraged-and-boring SWAN portfolio is doing fine.
Have a productive Presidents Day and thanks for reading.
~ Member of the Active Retired Force since 2014 ~
Re: Leverage Your Way To A Richer Retirement
Isn't this more or less taken into account in the early work on CAPM where you can dial in additional risk and expected return by borrowing at the riskless rate? This scheme does that but then reduces the overall risk of the portfolio by lending (buying bonds) at the riskless rate. Of course, you can't usually borrow (leverage) at the riskless rate so you have an additional cost there. This is really a psychological slight of hand -- all of the risk is borne by the 15% in leveraged equities, so you never have to feel that your "floor" is in danger, but you are in much greater danger of losing in the 15% leveraged equity portion.
What do you do if you lose your entire 15% equity and also have to pay back the loans that you used to leverage (greater than a 15% loss)? Do you just accept that you now have a 100% TIPS portfolio or do you put up another 15% for leveraged equities (you are really risking more than 15%)? If you put up another 15% (or do this several times), you will be putting more than 15% at risk for the life of your portfolio, you just won't have a chance of losing more than that at one time. The closest analogy seems to be a stop loss order -- if you had a portfolio of ETFs (with a more normal AA) with a stop loss order to sell if it went down by 15% ( you could do this yourself if you monitored the market every day), wouldn't you be accomplishing the same thing but without the borrowing costs of leverage?
What do you do if you lose your entire 15% equity and also have to pay back the loans that you used to leverage (greater than a 15% loss)? Do you just accept that you now have a 100% TIPS portfolio or do you put up another 15% for leveraged equities (you are really risking more than 15%)? If you put up another 15% (or do this several times), you will be putting more than 15% at risk for the life of your portfolio, you just won't have a chance of losing more than that at one time. The closest analogy seems to be a stop loss order -- if you had a portfolio of ETFs (with a more normal AA) with a stop loss order to sell if it went down by 15% ( you could do this yourself if you monitored the market every day), wouldn't you be accomplishing the same thing but without the borrowing costs of leverage?
Re: Leverage Your Way To A Richer Retirement
The stock market is risky enough without adding leverage. The idea of coupling steady annuity payments from a single premium annuity with leveraged stock market investments seems appealing and on the surface makes sense. But we have to factor in Murphy's Law, what can go wrong at some point will go wrong. The markets have a way of doing the one thing that the smartest among us don't think of. A long grinding bear market can just devastate a leveraged strategy. We had two 50% plunges in 2000-2002 and again in 2008-2009. The US Market was essentially flat from 2000 to about 2012.
The fact is that risks don't magically go away when we retire. One can fortify themselves against one risk only to be wide open to another. So one can be guarded against fluctation of principal and be vulnerable to inflation. Life is risky and whatever plan of action we choose has its problems and weaknesses. So we have to realize that markets fluctuate even for retirees and have to learn to live with some uncertainty.
The reality is that all of us have to assume risks, even in retirement. Nothing is going to make all that go away. A 50/50 or 60/40 portfolio sounds a lot better to me than using leverage for the stock portion.
The fact is that risks don't magically go away when we retire. One can fortify themselves against one risk only to be wide open to another. So one can be guarded against fluctation of principal and be vulnerable to inflation. Life is risky and whatever plan of action we choose has its problems and weaknesses. So we have to realize that markets fluctuate even for retirees and have to learn to live with some uncertainty.
The reality is that all of us have to assume risks, even in retirement. Nothing is going to make all that go away. A 50/50 or 60/40 portfolio sounds a lot better to me than using leverage for the stock portion.
A fool and his money are good for business.