Do My Assets Support Increasing Exposure to Levered Funds to Achieve FIRE?

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Topic Author
IntolerableOptimism
Posts: 4
Joined: Fri Jul 10, 2020 10:28 am

Do My Assets Support Increasing Exposure to Levered Funds to Achieve FIRE?

Post by IntolerableOptimism » Tue Jul 28, 2020 5:21 pm

Hello Bogleheads,

Emergency funds: My wife and I have 65 months of expenses saved up. We will be using a lot of the cash in our emergency account save for 12 months as a 20% down payment on a construction loan in the next year or so.

Debt: My wife bought a house for her parents. The remaining loan amount is 147k. Her parents pay her monthly which covers all the mortgage payment + taxes.

Tax Filing Status: Married Filing Jointly

Tax Rate: 35% to 37% federal tax bracket (depends on wife’s annual bonus amount), 8.75% State

State of Residence: DC

Age: 33/34

Desired Asset allocation: 100%+ domestic stocks

Just over 7 figures.

Current retirement assets

His & Her Taxable
1.25%% TQQQ (.95%)
0.65% EDV (.07%)
0.45% TMF (1.05%)

His Roth 401k
26%% S Fund (.06%)
Company match: 5%

Her Traditional 401k
58% FSKAX
Company match: 6%

His Traditional IRA at Fidelity
3.25%% SCHD fund name (.06%)
1.30% UPRO (.92%)

Her Traditional IRA at Fidelity
3.25% SCHD (.06%)
5.85% FNCL (.08%)

Contributions

New annual Contributions
$19.500 + annual match His Roth 401k
$19,500 + annual match Her Traditional 401k
6,000 His Traditional IRA
6,000 Her Traditional IRA
40,000+ taxable accounts (depends on wife’s bonus)

Questions:
1. Currently, the leveraged assets in my portfolio make up a very small amount in our total combined assets. I would like to slowly increase the leveraged amount of my portfolio to make up between 10-15 percent of our total assets. Is this a smart thing to do or should I stay the course and keep fully investing and wait for around 15 years longer than what I’ve projected with adding leverage?

I’ve read market timer’s thread (example of horrible risk management and how not to borrow), Hedgefundie’s thread (fairly solid theory and practical in terms of how to implement), lifecycle investing (too aggressive in its use of leverage), and personally have been convinced that leverage used correctly can potentially accelerate my goal of achieving around 12 – 15 million dollars in total assets for the possibility of financial independence before 65.

What am I missing? My wife and I are savers, spend way below our means, love our jobs, and plan to start a family.

Do I have enough assets and time to “afford” using small amounts of leverage to amplify gains slightly?

Impatience
Posts: 61
Joined: Thu Jul 23, 2020 3:15 pm

Re: Do My Assets Support Increasing Exposure to Levered Funds to Achieve FIRE?

Post by Impatience » Tue Jul 28, 2020 5:31 pm

Do you really need to? Couldn’t you mimic the effect of the leverage by simply holding riskier non-leveraged assets? Why have 10% of your portfolio be 3x leveraged when you could have your entire portfolio be 1.3x leveraged (or whatever the equivalent would be). Think of your investments as a whole.

jarjarM
Posts: 157
Joined: Mon Jul 16, 2018 1:21 pm

Re: Do My Assets Support Increasing Exposure to Levered Funds to Achieve FIRE?

Post by jarjarM » Tue Jul 28, 2020 5:38 pm

Just beware that a 30% drop in QQQ, similar to the one early this year, will result in significant loss to TQQQ ~70% drawdown. What happen if it doesn't come back for 10-15 years (similar to what happened after dot com bust)? Look at UPRO, using sim data, it got to all time high in march 2000 but doesn't return the same place until dec 2017. This time, long bonds won't be there to balance it out since the yield is already low at ~1% vs. 6-7% back in 2000. As long as you're well aware the potential possibilities and the significant risk LETFs poses, I think it's fine to dabble in it in hope of boosting returns.

Full disclosure, I have ~10% in LETFs.

Topic Author
IntolerableOptimism
Posts: 4
Joined: Fri Jul 10, 2020 10:28 am

Re: Do My Assets Support Increasing Exposure to Levered Funds to Achieve FIRE?

Post by IntolerableOptimism » Wed Jul 29, 2020 8:20 am

Impatience wrote:
Tue Jul 28, 2020 5:31 pm
o you really need to? Couldn’t you mimic the effect of the leverage by simply holding riskier non-leveraged assets? Why have 10% of your portfolio be 3x leveraged when you could have your entire portfolio be 1.3x leveraged (or whatever the equivalent would be). Think of your investments as a whole.
Hi Impatience, thank you for your reply. Wouldn't that be stock picking or market timing which has been shown to not actually work and that it's really luck? There are methods such as replicating a small cap value index, but about half of those returns are from rebalancing, and the other from positive factor changes. It's a strategy that does work during certain time periods (I feel any premium will be arbitraged away and will be close to zero in the future which would go along with the efficient market theory). With leverage, the biggest risk is volatility drag followed by borrowing costs which will reduce any gain. The first and second can be mitigated without trying to beat the market necessarily. I am aware of the other risks, but my opinion is that most asset classes will not do well during a nuclear war, and none are important during such a time (known, unknown risk and unknown, unknown risks).
jarjarM wrote:
Tue Jul 28, 2020 5:38 pm
Just beware that a 30% drop in QQQ, similar to the one early this year, will result in significant loss to TQQQ ~70% drawdown. What happen if it doesn't come back for 10-15 years (similar to what happened after dot com bust)? Look at UPRO, using sim data, it got to all time high in march 2000 but doesn't return the same place until dec 2017. This time, long bonds won't be there to balance it out since the yield is already low at ~1% vs. 6-7% back in 2000. As long as you're well aware the potential possibilities and the significant risk LETFs poses, I think it's fine to dabble in it in hope of boosting returns.

Full disclosure, I have ~10% in LETFs.
Thanks for your reply jarjar. Your scenario is something I have considered. In terms of 1 a day lose-it-all risk, I view that risk close to zero mainly due to the market circuit-breaker rules put into place in 2013 assuming the use of a long, leveraged etf (UPRO or TQQQ).

It did take UPRO to return to equal a while. A few things from my perspective. One, that's fine. I've got time and barring total economic collapse, etc, it's an understandable risk. Second, it can be mitigated by additional purchases (dollar cost averaging), and using simple risk parity strategies.

The long-term bonds / interest rates are the biggest factor here. I've been fairly convinced by Hedgfundie's (and several others perspectives) that it is highly unlikely we'll return to post Volcker / Breton Woods interest rates for the foreseeable future. I can't prove this, but my opinion is that even with modest increase in interest rates, the impact will be fairly small. Additionally, if a major economic depression hits with rates low I believe that the Federal Reserve has multiple other financial tools to impact interest rates (including using negative interest rates), and provide liquidity which will impact in a positive way long-term Treasury bonds.

Admittedly, I have a ton of assumptions here, so I'll cross my fingers, and enjoy the ride!

User avatar
JoMoney
Posts: 9374
Joined: Tue Jul 23, 2013 5:31 am

Re: Do My Assets Support Increasing Exposure to Levered Funds to Achieve FIRE?

Post by JoMoney » Wed Jul 29, 2020 8:37 am

I think you're playing a dangerous game that's as likely to hurt as it is to help.... perhaps more likely to hurt, in that we have no idea how much volatility and "risk" is too much, and will actually slow the growth, and most of these exotic investments have higher fees associated with them.
The market will have some unknown broad 'average' return of money that's saved or invested. If you want something more, the best way to get it is to do something that deserves it.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

novemberrain
Posts: 384
Joined: Wed May 09, 2018 12:26 pm

Re: Do My Assets Support Increasing Exposure to Levered Funds to Achieve FIRE?

Post by novemberrain » Fri Jul 31, 2020 1:25 pm

Could you elaborate on what you mean by a leveraged asset ? Is it LETF ? or real estate? or something else

retiredjg
Posts: 41131
Joined: Thu Jan 10, 2008 12:56 pm

Re: Do My Assets Support Increasing Exposure to Levered Funds to Achieve FIRE?

Post by retiredjg » Fri Jul 31, 2020 1:38 pm

You are saving near $100k a year. That's a lot. :D But only 1/5th of that (her 401k) is tax-deferred. Is there a reason or plan behind that? Seems low for your tax bracket, but there could be some logic behind it. Just curious.

What do you consider "lifecycle investing"?

What do you have in mind for "leveraged investing".

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