Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

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oldchap
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Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

Post by oldchap »

Hi fellow BHs !

While the S&P 500 or VT (Vanguard total world) were down 35% during Covid, my drawdown from peak to valley was only -15%,
This is due to the fact that I have been DCA-ing for the past 3 years.

Therefore my question is simple : knowing the above, and that my portfolio (comprised of VT) is less prone to volatility thanks to DCA-ing, why buying a bit on margin cannot be considered in this case?

Can't even 120% be considered?

Thanks
Last edited by oldchap on Tue Feb 02, 2021 9:02 am, edited 5 times in total.
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vsquid
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by vsquid »

Why not if you are willing to accept more volatility. I'm around 120% invested in global stock ETFs. You just need to remember that margin needs to be cheap for this to work and that margin requirements may change when stock market volatility goes up (they did last year).
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oldchap
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

Thanks vsquid, I'm using IB so I believe I should be fine on that side.

I also found out about the Kelly criterion so I was curious if 117% is really the best trade-off risk/return?
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Tamarind
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by Tamarind »

Have you calculated the drag from cash or whatever you are holding your non-invested amount in over the past 3 years?

If you have greater stomach for volatility than you thought, why not accelerate your DCA schedule?
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oldchap
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

Tamarind wrote: Wed Jan 20, 2021 5:32 am Have you calculated the drag from cash or whatever you are holding your non-invested amount in over the past 3 years?

If you have greater stomach for volatility than you thought, why not accelerate your DCA schedule?
I'm already running full speed: all my savings, when I say all it is literally all, are invested in VT (actually 90% VT then 10% AGG because owning only 10% allows me to get rid of all the emotions, while 100% stocks does not).

My job is secure, and I only have 2 months of salary as EF... I want to accelerate more but I can't... I'm already investing 60% of my salary every month.

Do you have any other idea or going 120% is the best I can do so far?
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whodidntante
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by whodidntante »

Yes, leverage can be beneficial. I was leveraged myself until recently. Read the book life cycle investing. Think of that like reading a recipe before turning on the oven.
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Tamarind
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by Tamarind »

thibaulthib wrote: Wed Jan 20, 2021 5:43 am
Tamarind wrote: Wed Jan 20, 2021 5:32 am Have you calculated the drag from cash or whatever you are holding your non-invested amount in over the past 3 years?

If you have greater stomach for volatility than you thought, why not accelerate your DCA schedule?
I'm already running full speed: all my savings, when I say all it is literally all, are invested in VT (actually 90% VT then 10% AGG because owning only 10% allows me to get rid of all the emotions, while 100% stocks does not).

My job is secure, and I only have 2 months of salary as EF... I want to accelerate more but I can't... I'm already investing 60% of my salary every month.

Do you have any other idea or going 120% is the best I can do so far?
Ah, I thought you meant the other meaning of DCA (that you had a lump sum you were not fully investing rather than investing every time money becomes available).

I do not have another suggestion. If I were not comfortable holding 100% equities, I don't believe I would feel comfortable using leverage to buy more equities, regardless of the soundness of the theory of life cycle investing. What happens with the feelings that cause you to hold 10% bonds if you imagine vividly being forced to sell your margin account stocks at a deep loss because of a margin call?
vsquid
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by vsquid »

Tamarind wrote: Wed Jan 20, 2021 7:06 am What happens with the feelings that cause you to hold 10% bonds if you imagine vividly being forced to sell your margin account stocks at a deep loss because of a margin call?
Margin calls are not random events. They happen based on rules that are available before the fact and can be mitigated. Original post proposed limiting margin to 20% which would appear to be an effective way of avoiding margin calls.
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oldchap
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

Thanks guys!

The reason why I only have 10% of bonds is not because I'm scared of a stock crash, but because this allows me to get rid of all the emotions as in it gives me an indicator as per when to buy/sell stocks.

During covid, if I didn’t have these 10% of bonds, I would have bought stocks as soon as it was hitting the circuit breaker. That would have been a big mistake. Or, I would have waited my payday to buy some stocks (once a month on the 1st). That would also have been a mistake, looking at how violent and fast this crash was.

When looking at it, I had to rebalance 3 times over the span or not even 2 months, on top of using my salary!
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corp_sharecropper
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by corp_sharecropper »

thibaulthib wrote: Wed Jan 20, 2021 5:11 am Thanks vsquid, I'm using IB so I believe I should be fine on that side.

I also found out about the Kelly criterion so I was curious if 117% is really the best trade-off risk/return?
It's been awhile since I've seen that kelly criterion paper, and I'll admit I didn't go over it with a fine toothed comb and verify the math, but that paper is ooooooold (if I recall correctly they used an Apple IIe to perform some of the math). Some things in finance are universal and timeless, I would not at all put this in that category given how different interest rates, global trade, market access, the fed's willingness to intervene, more widespread acceptance of MMT, etc are now versus just a 2 decades ago.

117% equities to me, imo, seems like a terrible idea, a big part of which comes behavioral aspects that are nearly universal & timeless. Unfortunately you simply can't just not look with leverage, as you likely need to rebalance it. That said, I'm a believer in using leverage, in many cases higher than 117%, but on an allocation far more diverse than equities only (eg. equities, real estate, gold/prec. metals, commodities, nominal bonds, inflation protected bonds, etc). That, I believe, can be easier to behaviorally stay true to the path than even unlevered boglehead allocations (eg. 80/20, 70/30, and even the dusty 60/40) as those portfolios are still almost entirely driven by the equity side.

A lot depends on how much "reserve" cash you'd be able to scrounge up in the event you need it as a last stand against a margin call. If you're levered portfolio isn't enormous relative to your EF or income you would likely be able to avoid a margin call unless you've taken on an absurd amount leverage. You can also spread your leverage exposure to other entities, make it their problem to manage directly, and they likely have more room before their own margin call ETFs like (NTSX) come to mind here, or mutual funds like PSLDX. One can use some implicit leverage with funds like those in conjunction with direct/explicit leverage in the form of margin at your broker. Also, futures allow a good bit more breathing room, you'd need to take into account the way taxes work in a taxable account (could go either way depending on how each individual invests).
totality
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by totality »

thibaulthib wrote: Wed Jan 20, 2021 4:47 am While the S&P 500 or VT (Vanguard total world) were down 35% during Covid, my drawdown from peak to valley was only -15%,
This is due to the fact that I have been DCA-ing for the past 3 years.
I really don't understand what you mean. The drawdown is the same regardless of how you bought in. You're saying that at the valley, you were -15% from your cost basis? And that makes you feel like you can take on more risk?

If so, that's just mental accounting that has no bearing on your actual financial situation, and you shouldn't make decisions based on that. The drawdown really was -35%.

A lottery winner would have a "cost basis" of $1 on millions of dollars, does that mean they shouldn't worry about losing it?
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oldchap
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

totality wrote: Wed Jan 20, 2021 6:03 pm
thibaulthib wrote: Wed Jan 20, 2021 4:47 am While the S&P 500 or VT (Vanguard total world) were down 35% during Covid, my drawdown from peak to valley was only -15%,
This is due to the fact that I have been DCA-ing for the past 3 years.
I really don't understand what you mean. The drawdown is the same regardless of how you bought in. You're saying that at the valley, you were -15% from your cost basis? And that makes you feel like you can take on more risk?

If so, that's just mental accounting that has no bearing on your actual financial situation, and you shouldn't make decisions based on that. The drawdown really was -35%.

A lottery winner would have a "cost basis" of $1 on millions of dollars, does that mean they shouldn't worry about losing it?
Agree with you that the drawdown really was 35%, but this is provided you put all your money in at the peak.

If you've been DCA-ing for few years prior to that, your overall portfolio drawdown would be much less, as it was for me: 15%.

That is what raised my curiosity as in, since I know even a market crash of 50% won't make me lose 50%, but something probably around 25%-30% "only", why is using leveraging even for 120%, a mistake?
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7eight9
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by 7eight9 »

thibaulthib wrote: Wed Jan 20, 2021 8:48 pm
totality wrote: Wed Jan 20, 2021 6:03 pm
thibaulthib wrote: Wed Jan 20, 2021 4:47 am While the S&P 500 or VT (Vanguard total world) were down 35% during Covid, my drawdown from peak to valley was only -15%,
This is due to the fact that I have been DCA-ing for the past 3 years.
I really don't understand what you mean. The drawdown is the same regardless of how you bought in. You're saying that at the valley, you were -15% from your cost basis? And that makes you feel like you can take on more risk?

If so, that's just mental accounting that has no bearing on your actual financial situation, and you shouldn't make decisions based on that. The drawdown really was -35%.

A lottery winner would have a "cost basis" of $1 on millions of dollars, does that mean they shouldn't worry about losing it?
Agree with you that the drawdown really was 35%, but this is provided you put all your money in at the peak.

If you've been DCA-ing for few years prior to that, your overall portfolio drawdown would be much less, as it was for me: 15%.

That is what raised my curiosity as in, since I know even a market crash of 50% won't make me lose 50%, but something probably around 25%-30% "only", why is using leveraging even for 120%, a mistake?
You go to the casino with $100. You win $31. Now you have $131 in front of you. You continue to gamble and now find yourself with $85.

Did you lose 35% or 15%?

You lost 35%. When you had $131 on the table you were free pick up your chips and walk over to the cage.

A market crash of 50% will make you lose 50%. Thinking it is something less is a Jedi mind trick.

Kind of like the people who allege that paper losses aren't real losses (hint - they are real losses).
I guess it all could be much worse. | They could be warming up my hearse.
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by Pandemic Bangs »

7eight9 wrote: Wed Jan 20, 2021 10:00 pm
You lost 35%. When you had $131 on the table you were free pick up your chips and walk over to the cage.

A market crash of 50% will make you lose 50%. Thinking it is something less is a Jedi mind trick.
Absolutely.

And if you are young and you now think you have "endured a crash" and therefore know how you will react next time, you are seriously mistaken on both counts.
Wait 'til I get my money right | Then you can't tell me nothing, right?
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Steve Reading
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by Steve Reading »

thibaulthib wrote: Wed Jan 20, 2021 4:47 am Hi fellow BHs !

While the S&P 500 or VT (Vanguard total world) were down 35% during Covid, my drawdown from peak to valley was only -15%,
This is due to the fact that I have been DCA-ing for the past 3 years.

Therefore my question is simple : knowing the above, and that my portfolio (comprised of VT) is less prone to volatility thanks to DCA-ing, why buying a bit on margin cannot be considered in this case?

Can't even 120% be considered?

Thanks
Yes, if you’re constantly saving money (and DCA-ing every paycheck) then leverage makes sense. 120% is perfectly reasonable.
See also:

viewtopic.php?f=10&t=274390

As someone else mentioned, consider reading the book Lifecycle Investing (they recommend 200% stocks).
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
totality
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by totality »

thibaulthib wrote: Wed Jan 20, 2021 8:48 pm Agree with you that the drawdown really was 35%, but this is provided you put all your money in at the peak.

If you've been DCA-ing for few years prior to that, your overall portfolio drawdown would be much less, as it was for me: 15%.

That is what raised my curiosity as in, since I know even a market crash of 50% won't make me lose 50%, but something probably around 25%-30% "only", why is using leveraging even for 120%, a mistake?
I continue steadfast in my belief that cost basis is totally irrelevant except for tax planning purposes. :)

I have never used margin/leverage, so I could be mistaken, but my understanding is that one's amount of leverage is calculated based on current market values. If you have $12K worth of stock in an account with a $2K margin loan, then you have:

$12K / ($12K - $2K) = 1.2 = 120% leverage

It doesn't matter if your cost basis for the stock was $6K, $12K, or $20K, the leverage is the same.

If this portfolio lost 35%, it would be left with $7800. If you had to liquidate and pay back the loan, you'd be left with $5800, a 42% loss (from the $10K net position) even though the market only declined 35%.

I think you are sort of observing that in a rising portfolio with a fixed margin loan, your leverage percentage goes down over time if you don't borrow any more. This is true. It is also true that in a falling portfolio, the leverage percentage goes up over time if don't ever pay the loan down.

But cost basis has nothing to do with it.
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oldchap
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

Steve Reading wrote: Wed Jan 20, 2021 10:51 pm
thibaulthib wrote: Wed Jan 20, 2021 4:47 am Hi fellow BHs !

While the S&P 500 or VT (Vanguard total world) were down 35% during Covid, my drawdown from peak to valley was only -15%,
This is due to the fact that I have been DCA-ing for the past 3 years.

Therefore my question is simple : knowing the above, and that my portfolio (comprised of VT) is less prone to volatility thanks to DCA-ing, why buying a bit on margin cannot be considered in this case?

Can't even 120% be considered?

Thanks
Yes, if you’re constantly saving money (and DCA-ing every paycheck) then leverage makes sense. 120% is perfectly reasonable.
See also:

viewtopic.php?f=10&t=274390

As someone else mentioned, consider reading the book Lifecycle Investing (they recommend 200% stocks).
Hi Steve Reading

I have bought the book on Friday evening and finished it yesterday: it is a Jem, thank you so much! I devoured it, and all that is explained makes a lot of sense to me.

I am now making simulations to check how much leverage I could really use, as in I am only 30 yo but I already have accumulated a lot of savings because I currently work in Singapore, but I am not sure i will still have that high salary 3 years down the road (if I go back to France for instance, as I'm French).

So I'm contemplating around 1.5x or maybe 1.2x.

Will keep you posted but I will definitely use some leverage moving forward, knowing that my Phase 1 is already over (while I never used any leverage). So my plan is to start straight in Phase 2, using some leverage while I will reimburse it over the span of 3 years or so.
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by qwertyjazz »

Be careful - in your last post you just potentially went against one of the core ideas in lifecycle investing to leverage
How secure is your human capital now? Is this the height of your income and will it decrease in future?
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oldchap
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

qwertyjazz wrote: Sat Jan 23, 2021 11:50 pm Be careful - in your last post you just potentially went against one of the core ideas in lifecycle investing to leverage
How secure is your human capital now? Is this the height of your income and will it decrease in future?
qwertyjazz,

I got your idea and you are right, thank you so much !

I am also reading the very interesting "Lifecycle Investing - Leveraging when young" from Steve Reading, viewtopic.php?f=10&t=274390&start=150, and indeed, since I'm not sure at all about my near future (3 years from now) as well as my salary, I am not able to say that my salary in the future will increase, hence leveraging 150% or 125% right now may be doing more harm than good, since I will have been heavily invested in the stocks market over a span of 6 years only (I have started heavily investing in early 2018).

Since I am not sure about my future from 2024 onwards, it means I may concentrate my risk in the stock market over these 6 years only (2018 - 2023), which is pretty dangerous.

Is this the idea you also have in mind towards my case?

In this case, I better not leverage at all, since my contributions today are already pretty big, is that correct?
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Steve Reading
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by Steve Reading »

thibaulthib wrote: Sat Jan 23, 2021 11:13 pm
Steve Reading wrote: Wed Jan 20, 2021 10:51 pm
thibaulthib wrote: Wed Jan 20, 2021 4:47 am Hi fellow BHs !

While the S&P 500 or VT (Vanguard total world) were down 35% during Covid, my drawdown from peak to valley was only -15%,
This is due to the fact that I have been DCA-ing for the past 3 years.

Therefore my question is simple : knowing the above, and that my portfolio (comprised of VT) is less prone to volatility thanks to DCA-ing, why buying a bit on margin cannot be considered in this case?

Can't even 120% be considered?

Thanks
Yes, if you’re constantly saving money (and DCA-ing every paycheck) then leverage makes sense. 120% is perfectly reasonable.
See also:

viewtopic.php?f=10&t=274390

As someone else mentioned, consider reading the book Lifecycle Investing (they recommend 200% stocks).
Hi Steve Reading

I have bought the book on Friday evening and finished it yesterday: it is a Jem, thank you so much! I devoured it, and all that is explained makes a lot of sense to me.

I am now making simulations to check how much leverage I could really use, as in I am only 30 yo but I already have accumulated a lot of savings because I currently work in Singapore, but I am not sure i will still have that high salary 3 years down the road (if I go back to France for instance, as I'm French).

So I'm contemplating around 1.5x or maybe 1.2x.

Will keep you posted but I will definitely use some leverage moving forward, knowing that my Phase 1 is already over (while I never used any leverage). So my plan is to start straight in Phase 2, using some leverage while I will reimburse it over the span of 3 years or so.
Glad you liked the book. If you check back on that thread, you'll see I have updated the original post with the most relevant information from that thread. So if you have any questions, they might already be answered there (or feel free to post there as well).

Good luck.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
Jags4186
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by Jags4186 »

Dollar cost averaging only mitigates risk for the time period of dollar cost averaging. If you are afraid to invest in a big lump some today, but are comfortable with splitting your investments over say a 12 month time period, the fear you feel today should be felt 365 days from now.
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oldchap
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

Jags4186 wrote: Sun Jan 24, 2021 9:22 am Dollar cost averaging only mitigates risk for the time period of dollar cost averaging. If you are afraid to invest in a big lump some today, but are comfortable with splitting your investments over say a 12 month time period, the fear you feel today should be felt 365 days from now.
Thanks Jags4186.
Steve Reading wrote: Sun Jan 24, 2021 9:12 am Glad you liked the book. If you check back on that thread, you'll see I have updated the original post with the most relevant information from that thread. So if you have any questions, they might already be answered there (or feel free to post there as well).
Good luck.
Thanks Steve.

I have a question though, which I believe I may have the answer but we never know... Better to ask again :-)

I'm 30 years old, and have been investing US$5K per month (=60% of my salary) since January 2018, back when I was 27 yo.
I know for a fact that I will only still be investing US$5K per month for the next 3 years or so.
So it means, I will have invested exactly US$5K per month for a total of 6 years.
After the 6th year, I don't know if I will still be working in Singapore. Two options:
1) I still am, and my salary will remain around the same, hence my savings rate will also be similar to what I have today.
2) I am not anymore, and am back to France, where my salary will become shit and be divided by 3x. In this case, I will not be able to ever invest US$5K per month anymore, but likely to be something around US$1K. Yes, US$1K !

Anyways, my understanding is the following: If I've been investing US$5K per month for 6 years, from 2018 to 2023, and that I predict that I may only be able to invest US$1K per month from 2024 onwards, I believe I am not gonna be able to expose myself to stock market risk more evenly across time, since I know my savings rate are likely to lower down dramatically moving forward.

Now, moving on to the questions:

1) Is my understanding here-above correct?

2) I believe lifecycle investing will definitely not make sense to me since I will be overexposed to the stock market risk only from 2018 to 2023, and underexposed from 2024 onwards. Could you confirm the statement is correct?
2018: US$60K (cash upfront, DCA-ing with payday)
2019: US$60K (cash upfront, DCA-ing with payday)
2020: US$60K (cash upfront, DCA-ing with payday)
2021: US$60K (cash upfront, DCA-ing with payday)
2022: US$60K (cash upfront, DCA-ing with payday)
2023: US$60K (cash upfront, DCA-ing with payday)
2024 onwards: US$12K (cash upfront, DCA-ing with payday)

3) Do you still see/believe there is an interest/value add in following the path of the lifecycle investing, by buying on margin some stocks today, based on my "human capital" (= salary) for my next 3 years only, i.e. US$180K ?
(To be honest, if my understanding is correct, it means I will heavily overexpose myself to year 2021 only, since it means I would have invested:
2018: US$60K (cash upfront, DCA-ing with payday)
2019: US$60K (cash upfront, DCA-ing with payday)
2020: US$60K (cash upfront, DCA-ing with payday)
2021: US$180K (buying on margin)
2022: US$0
2023: US$0
2024 onwards: US$12K (cash upfront, DCA-ing with payday)
Which I believe even more dangerous than overexposing evenly to the stock market over the span of 6 years from 2018 - 2023.

4) In this case, would it be better for me to try to even out the best I can, or reduce this dramatic "plunge" in the savings rate, by starting buying on margin only from 2024 onwards, in order to try to lengthen as much as I can my years of exposure to the same yearly US$60K of savings, or at least trying to streamline as much as I can, i.e. :
2018: US$60K (cash upfront, DCA-ing with payday)
2019: US$60K (cash upfront, DCA-ing with payday)
2020: US$60K (cash upfront, DCA-ing with payday)
2021: US$60K (cash upfront, DCA-ing with payday)
2022: US$60K (cash upfront, DCA-ing with payday)
2023: US$60K (cash upfront, DCA-ing with payday)

Option 1:
2024 onwards: US$30K (buying on margin, while reimbursing US$12K per year, so 1 year of margin = 3 years of reimbursement. Must make sure my leverage never goes above 1.5x. Without any capital gains, the investment value would be US$360K. Meaning 1.5x leverage will provide $180K loan. Rough number (without counting the additional $12K contribution from 2024 onwards) show I can do this scheme for 6 years, from 2024 to 2030, before reaching 1.5x leverage. This means I will need 3 x 6 = 18 years to reimburse that loan!). This would give me a high exposure for 6 years from 2018 to 2023, a mid exposure for 6 additional years from 2024 to 2030, and no exposure at all from 2031 onwards)
2024: US$30K
2025: US$30K
2026: US$30K
2027: US$30K
2028: US$30K
2029: US$30K
2030: US$30K
2031 onwards: US$0 (Yes, US$0)

Option 2:
2024 onwards: US$20K (buying on margin, while reimbursing US$12K per year, so 1 year of margin = 2 years of reimbursement. Must make sure my leverage never goes above 1.5x. Without any capital gains, the investment value would be US$360K. Meaning 1.5x leverage will provide $180K loan. Rough number (without counting the additional $12K contribution from 2024 onwards) show I can do this scheme for 9 years, from 2024 to 2033, before reaching 1.5x leverage. This means I will need 2 x 9 = 18 years to reimburse that loan too!). This would give me a high exposure for 6 years from 2018 to 2023, a low exposure for 9 additional years from 2024 to 2033, and no exposure at all from 2034 onwards)
PS: If reaching 150% margin is too risky, then I am OK to cut it down to 125% since that would allow a stock plunge of 73% before getting a margin call (If never rebalancing by selling every time the stock drops 10% as explained in the book), while 150% only allows me a 56% crash.
2024: US$20K
2025: US$20K
2026: US$20K
2027: US$20K
2028: US$20K
2029: US$20K
2030: US$20K
2031: US$20K
2032: US$20K
2033: US$20K
2034 onwards: US$0 (Yes, US$0)

5) Last, I have the strong feeling that my Phase 1 is working and living in Singapore, that is already providing me the 200% (or 150%) stock exposure I should be getting while using margin, but the difference being I already have this money available in cash every month, without needing to buy on margin. However, I have the strong feeling that my Phase 2 will only exist and start once/if I go back to France, where I will have to leverage in order to get as many more years with US$60K exposure as I can, until I reach 150% margin, before I start leveraging back down, until my 50th birthday where I will be back to 100% stocks (Since 1 year of leverage will cost me either 3 Years (Option 1) or 2 Years (Option 2) of reimbursement based on my French salary).

6) With regards to the outcome of question 5, i.e. reaching 100% of stock exposure at 50 years old only, would that really make sense, or I better make sure that I am reaching 100% stock exposure earlier on, i.e. 40 years old, or even, this should only be calculated based on my Samuelson Share?

Thanks for your guidance in helping me answering all these questions, your answers are very valuable to me.
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by Steve Reading »

thibaulthib wrote: Sun Jan 24, 2021 8:46 pm
Jags4186 wrote: Sun Jan 24, 2021 9:22 am Dollar cost averaging only mitigates risk for the time period of dollar cost averaging. If you are afraid to invest in a big lump some today, but are comfortable with splitting your investments over say a 12 month time period, the fear you feel today should be felt 365 days from now.
Thanks Jags4186.
Steve Reading wrote: Sun Jan 24, 2021 9:12 am Glad you liked the book. If you check back on that thread, you'll see I have updated the original post with the most relevant information from that thread. So if you have any questions, they might already be answered there (or feel free to post there as well).
Good luck.
Thanks Steve.

I have a question though, which I believe I may have the answer but we never know... Better to ask again :-)

I'm 30 years old, and have been investing US$5K per month (=60% of my salary) since January 2018, back when I was 27 yo.
I know for a fact that I will only still be investing US$5K per month for the next 3 years or so.
So it means, I will have invested exactly US$5K per month for a total of 6 years.
After the 6th year, I don't know if I will still be working in Singapore. Two options:
1) I still am, and my salary will remain around the same, hence my savings rate will also be similar to what I have today.
2) I am not anymore, and am back to France, where my salary will become shit and be divided by 3x. In this case, I will not be able to ever invest US$5K per month anymore, but likely to be something around US$1K. Yes, US$1K !

Anyways, my understanding is the following: If I've been investing US$5K per month for 6 years, from 2018 to 2023, and that I predict that I may only be able to invest US$1K per month from 2024 onwards, I believe I am not gonna be able to expose myself to stock market risk more evenly across time, since I know my savings rate are likely to lower down dramatically moving forward.

Now, moving on to the questions:

1) Is my understanding here-above correct?

2) I believe lifecycle investing will definitely not make sense to me since I will be overexposed to the stock market risk only from 2018 to 2023, and underexposed from 2024 onwards. Could you confirm the statement is correct?
2018: US$60K (cash upfront, DCA-ing with payday)
2019: US$60K (cash upfront, DCA-ing with payday)
2020: US$60K (cash upfront, DCA-ing with payday)
2021: US$60K (cash upfront, DCA-ing with payday)
2022: US$60K (cash upfront, DCA-ing with payday)
2023: US$60K (cash upfront, DCA-ing with payday)
2024 onwards: US$12K (cash upfront, DCA-ing with payday)

3) Do you still see/believe there is an interest/value add in following the path of the lifecycle investing, by buying on margin some stocks today, based on my "human capital" (= salary) for my next 3 years only, i.e. US$180K ?
(To be honest, if my understanding is correct, it means I will heavily overexpose myself to year 2021 only, since it means I would have invested:
2018: US$60K (cash upfront, DCA-ing with payday)
2019: US$60K (cash upfront, DCA-ing with payday)
2020: US$60K (cash upfront, DCA-ing with payday)
2021: US$180K (buying on margin)
2022: US$0
2023: US$0
2024 onwards: US$12K (cash upfront, DCA-ing with payday)
Which I believe even more dangerous than overexposing evenly to the stock market over the span of 6 years from 2018 - 2023.

4) In this case, would it be better for me to try to even out the best I can, or reduce this dramatic "plunge" in the savings rate, by starting buying on margin only from 2024 onwards, in order to try to lengthen as much as I can my years of exposure to the same yearly US$60K of savings, or at least trying to streamline as much as I can, i.e. :
2018: US$60K (cash upfront, DCA-ing with payday)
2019: US$60K (cash upfront, DCA-ing with payday)
2020: US$60K (cash upfront, DCA-ing with payday)
2021: US$60K (cash upfront, DCA-ing with payday)
2022: US$60K (cash upfront, DCA-ing with payday)
2023: US$60K (cash upfront, DCA-ing with payday)

Option 1:
2024 onwards: US$30K (buying on margin, while reimbursing US$12K per year, so 1 year of margin = 3 years of reimbursement. Must make sure my leverage never goes above 1.5x. Without any capital gains, the investment value would be US$360K. Meaning 1.5x leverage will provide $180K loan. Rough number (without counting the additional $12K contribution from 2024 onwards) show I can do this scheme for 6 years, from 2024 to 2030, before reaching 1.5x leverage. This means I will need 3 x 6 = 18 years to reimburse that loan!). This would give me a high exposure for 6 years from 2018 to 2023, a mid exposure for 6 additional years from 2024 to 2030, and no exposure at all from 2031 onwards)
2024: US$30K
2025: US$30K
2026: US$30K
2027: US$30K
2028: US$30K
2029: US$30K
2030: US$30K
2031 onwards: US$0 (Yes, US$0)

Option 2:
2024 onwards: US$20K (buying on margin, while reimbursing US$12K per year, so 1 year of margin = 2 years of reimbursement. Must make sure my leverage never goes above 1.5x. Without any capital gains, the investment value would be US$360K. Meaning 1.5x leverage will provide $180K loan. Rough number (without counting the additional $12K contribution from 2024 onwards) show I can do this scheme for 9 years, from 2024 to 2033, before reaching 1.5x leverage. This means I will need 2 x 9 = 18 years to reimburse that loan too!). This would give me a high exposure for 6 years from 2018 to 2023, a low exposure for 9 additional years from 2024 to 2033, and no exposure at all from 2034 onwards)
PS: If reaching 150% margin is too risky, then I am OK to cut it down to 125% since that would allow a stock plunge of 73% before getting a margin call (If never rebalancing by selling every time the stock drops 10% as explained in the book), while 150% only allows me a 56% crash.
2024: US$20K
2025: US$20K
2026: US$20K
2027: US$20K
2028: US$20K
2029: US$20K
2030: US$20K
2031: US$20K
2032: US$20K
2033: US$20K
2034 onwards: US$0 (Yes, US$0)

5) Last, I have the strong feeling that my Phase 1 is working and living in Singapore, that is already providing me the 200% (or 150%) stock exposure I should be getting while using margin, but the difference being I already have this money available in cash every month, without needing to buy on margin. However, I have the strong feeling that my Phase 2 will only exist and start once/if I go back to France, where I will have to leverage in order to get as many more years with US$60K exposure as I can, until I reach 150% margin, before I start leveraging back down, until my 50th birthday where I will be back to 100% stocks (Since 1 year of leverage will cost me either 3 Years (Option 1) or 2 Years (Option 2) of reimbursement based on my French salary).

6) With regards to the outcome of question 5, i.e. reaching 100% of stock exposure at 50 years old only, would that really make sense, or I better make sure that I am reaching 100% stock exposure earlier on, i.e. 40 years old, or even, this should only be calculated based on my Samuelson Share?

Thanks for your guidance in helping me answering all these questions, your answers are very valuable to me.
These are some very specific questions and I think you might be complicating things.You want to do the following:
1) Figure out your Relative Risk Aversion, as the book says to do.
2) Figure out the present value of your future savings. Assume first you do go to France (so you'd save 1K a month for I don't know how many years). The book tells you how to estimate this based on the number of years until retirement and your current savings.
3) Add the value from number 2 to your current savings. Multiply by your Samuelson Share (which you get from step 1). That's the amount of stock you want to reach today, using leverage if needed.

You could then re-do the above, assuming you do stay in Singapore. And then compare.

I thought you were in your 30s? If so, you probably are underexposed to stocks and will do better to leverage, but the above numbers will confirm it.

Something to keep in mind is that you have to retire no matter what. So if you move to France, you might work more years. If you stay in Singapore, yes you'll save more, but you might not need to save for as many years. So the present value of your future savings might be similar regardless of where you move in 3 years. Whether you save a little for many years, or a lot for a few years, the amount might be roughly the same.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

Steve Reading wrote: Sun Jan 24, 2021 9:50 pm These are some very specific questions and I think you might be complicating things.You want to do the following:
1) Figure out your Relative Risk Aversion, as the book says to do.
2) Figure out the present value of your future savings. Assume first you do go to France (so you'd save 1K a month for I don't know how many years). The book tells you how to estimate this based on the number of years until retirement and your current savings.
3) Add the value from number 2 to your current savings. Multiply by your Samuelson Share (which you get from step 1). That's the amount of stock you want to reach today, using leverage if needed.

You could then re-do the above, assuming you do stay in Singapore. And then compare.

I thought you were in your 30s? If so, you probably are underexposed to stocks and will do better to leverage, but the above numbers will confirm it.

Something to keep in mind is that you have to retire no matter what. So if you move to France, you might work more years. If you stay in Singapore, yes you'll save more, but you might not need to save for as many years. So the present value of your future savings might be similar regardless of where you move in 3 years. Whether you save a little for many years, or a lot for a few years, the amount might be roughly the same.
Thanks Steve! I am only 30 yo, but I have a pretty good salary even for my age in Singapore.

Will check my RRA as well as my present value of my future savings.

But in the event I am starting to leverage right now, in order to reach ~150%, is it wise to do one of the below options?
1) Either over 3 years. Year 1: 129%. Year 2: 136%. Year 3: 140%. Then from Year 4 onwards: no contributions to the market anymore, just reimbursing the loan. And the margin will ramp down slowly.
2) Or over 2 years. Year 1: 130%. Year 2: 145%. Then from Year 3 onwards: no contributions to the market anymore, just reimbursing the loan. And the margin will ramp down slowly.
3) Or over 1 year. Year 1: 150%. Then from Year 2 onwards: no contributions to the market anymore, just reimbursing the loan. And the margin will ramp down slowly.

Or, must it be a 150% margin in a lump-sum (or over the course of few weeks in order to get familiar with the GUI, figures, interfaces and alerts), and then you just make sure to reimburse the loan with your paycheck every month, without any further contributions to the stock market?

I have read "How does this compare to DCA?" hence I am curious to know if there is a way to combine both lifecycle and DCA, on purpose.
Lifecycle Investing is basically the opposite of DCA. See:
viewtopic.php?p=4420588#p4420588

But to be honest, I'm not sure that the lifecycle investing model can really work if your salary is already pretty high early in your life, and that you know for a fact it will be lower later on. In that case, it would be better not to leverage at all because it could be counter-intuitive, and a simple DCA may provide better returns.
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qwertyjazz
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Re: Using Lifecycle Investing while DCA-ing in order to slowly ramp up leverage to 150% over few months

Post by qwertyjazz »

If you lose your market stake, you might not get it back. Volatility per se is not problematic but if you over due it ...
You might also want to check out another concept popularized by Bodie another life cycle researcher
‘Are you a stock or a bond?’
https://www.kitces.com/blog/investing-a ... or-a-bond/

Kitces wrote a little about it, but you can also go to the source. The basic logics in your case is controlling for variability in income AND stock market sequence of return risk. You need to consider both. OTOH having a good paying job now is a good problem to have just potentially do not rely on it.
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Steve Reading
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by Steve Reading »

thibaulthib wrote: Sun Jan 24, 2021 10:12 pm But in the event I am starting to leverage right now, in order to reach ~150%, is it wise to do one of the below options?
1) Either over 3 years. Year 1: 129%. Year 2: 136%. Year 3: 140%. Then from Year 4 onwards: no contributions to the market anymore, just reimbursing the loan. And the margin will ramp down slowly.
2) Or over 2 years. Year 1: 130%. Year 2: 145%. Then from Year 3 onwards: no contributions to the market anymore, just reimbursing the loan. And the margin will ramp down slowly.
3) Or over 1 year. Year 1: 150%. Then from Year 2 onwards: no contributions to the market anymore, just reimbursing the loan. And the margin will ramp down slowly.

Or, must it be a 150% margin in a lump-sum (or over the course of few weeks in order to get familiar with the GUI, figures, interfaces and alerts), and then you just make sure to reimburse the loan with your paycheck every month, without any further contributions to the stock market?
It is what I bolded above. If the parameters I mentioned above dictate that you should use 150% leverage to get to your target today, then just do it right away, no need to buy over a year.

From then on, if the market stays at the same level or goes up, you would just pay down the loan. If the market drops somewhat, then you'd buy stocks to get back to your target. In essence, you will re-do the calculations I mentioned, say, every month, and contribute to either stocks or the loan based on what they say.
thibaulthib wrote: Sun Jan 24, 2021 10:12 pm But to be honest, I'm not sure that the lifecycle investing model can really work if your salary is already pretty high early in your life, and that you know for a fact it will be lower later on. In that case, it would be better not to leverage at all because it could be counter-intuitive, and a simple DCA may provide better returns.
Lifecycle Investing works every time you will have future savings contributions. It is beneficial to expose those future savings contributions to the market today, overinvesting in stocks today (and using leverage if needed to do so).

Whether you have a high salary for the next few years, then low salary, or vice-versa, you should calculate the present value of those future savings, and invest them in the stock market today.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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oldchap
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

Steve Reading wrote: Mon Jan 25, 2021 8:15 am From then on, if the market stays at the same level or goes up, you would just pay down the loan. If the market drops somewhat, then you'd buy stocks to get back to your target. In essence, you will re-do the calculations I mentioned, say, every month, and contribute to either stocks or the loan based on what they say.
Did you mean "If the market drops somewhat, then you'd sell stocks to get back to your target" ?
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by Steve Reading »

thibaulthib wrote: Mon Jan 25, 2021 8:57 am
Steve Reading wrote: Mon Jan 25, 2021 8:15 am From then on, if the market stays at the same level or goes up, you would just pay down the loan. If the market drops somewhat, then you'd buy stocks to get back to your target. In essence, you will re-do the calculations I mentioned, say, every month, and contribute to either stocks or the loan based on what they say.
Did you mean "If the market drops somewhat, then you'd sell stocks to get back to your target" ?
In Phase 1, you'd sell if the market drops to ensure your leverage doesn't get past your maximum. Once you're in Phase 2 and don't need to leverage as much to hit your target, you'd buy stocks as the market drops.

I recommend re-reading that section of the book if anything is unclear.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
ZWorkLess
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Re: Using Lifecycle Investing while DCA-ing in order to slowly ramp up leverage to 150% over few months

Post by ZWorkLess »

Personally, I think that's getting greedy and likely a bad idea.

I know lots of folks prefer to live on the margin, borrowing to invest and thereby "make more." Personally, that's just not my jam. I have no problem living with the inherent risks of being in the market (heavily leaning towards stocks over bonds), as I've been in the market for 30-ish years (100% equities for the first 20 of those years), and so I've had plenty of time to acclimate to the ups and downs . . . and they really don't bother me much more than bad weather -- I know it'll pass.

Debt, on the other hand, isn't something I enjoy, rather it's something that my financial investments are intended to both eliminate and avoid.

I was deeply in debt for education and business acquisition for nearly all my life until recent years, and the last thing I'd want to do would be climb back down into the debt abyss. So, both for RE and for equities, I aim to have debt-free low-stress investments. I accepted deep debt for good purposes -- education and then acquiring and building a profitable business, mortgages . . . -- when there weren't any real alternatives to taking that big risk (of being in big debt) to achieve the important goals we had. I have zero interest in using debt to amplify the inherent risks/rewards of investing.
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

Steve Reading wrote: Mon Jan 25, 2021 10:52 am
thibaulthib wrote: Mon Jan 25, 2021 8:57 am
Steve Reading wrote: Mon Jan 25, 2021 8:15 am From then on, if the market stays at the same level or goes up, you would just pay down the loan. If the market drops somewhat, then you'd buy stocks to get back to your target. In essence, you will re-do the calculations I mentioned, say, every month, and contribute to either stocks or the loan based on what they say.
Did you mean "If the market drops somewhat, then you'd sell stocks to get back to your target" ?
In Phase 1, you'd sell if the market drops to ensure your leverage doesn't get past your maximum. Once you're in Phase 2 and don't need to leverage as much to hit your target, you'd buy stocks as the market drops.

I recommend re-reading that section of the book if anything is unclear.
Alright, missed/misinterpreted that part! I have started reading the book again.

However, there is still something I don't catch. I prefer being pessimistic about the future, telling myself that I will go back to France in 3 years from now. Doing so, I know my savings rate will be muuuch lower than now.

Let me recap:
- I am 30 years old.
- Today, I literally have no savings (Well, I have 2 months of EF only because my job is safe).
- Today, all my money is already invested in Vanguard All-World ETF (VT) at 100%. I hold no bond.
- For the past 3 years, I have been putting ~ US$60K per year in VT:
Year 2018: Yearly contributions: US$60K. Total contributions: US$60K
Year 2019: Yearly contributions: US$60K. Total contributions: US$120K
Year 2020: Yearly contributions: US$60K. Total contributions: US$180K
- In 2021 and 2022, I am likely to invest ~US$50K per year:
Year 2021: Yearly contributions: US$50K. Total contributions: US$230K
Year 2022: Yearly contributions: US$50K. Total contributions: US$280K
- From 2023 onwards, and for the rest of my life, I will only be able to invest ~US$10K per year:
Year 2023: Yearly contributions: US$10K. Total contributions: US$290K
Year 2024: Yearly contributions: US$10K. Total contributions: US$300K
Etc.

My questions are:
- I know that in 2021 and 2022, I will be able to invest US$100K, and that for the next 20 years (if I retire by 50 yo), I will be able to invest US$200K more. So say what I will be able to invest in the stock over what is left of my life is US$300K.
- I will be getting a painful hit once I get back to France.
- Knowing the above, is it still wise for me to leverage right now?
- I feel like my risk is going to be way too concentrated in Year 2021, since I will be able to lever 50% of US$180K, i.e. US$90K.
- I don't feel like I will be evenly exposed to the market over the years doing so, since my salary will not increase in the future, but instead, decrease. What are your thoughts?
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by Steve Reading »

thibaulthib wrote: Mon Feb 01, 2021 8:17 pm
Steve Reading wrote: Mon Jan 25, 2021 10:52 am
thibaulthib wrote: Mon Jan 25, 2021 8:57 am
Steve Reading wrote: Mon Jan 25, 2021 8:15 am From then on, if the market stays at the same level or goes up, you would just pay down the loan. If the market drops somewhat, then you'd buy stocks to get back to your target. In essence, you will re-do the calculations I mentioned, say, every month, and contribute to either stocks or the loan based on what they say.
Did you mean "If the market drops somewhat, then you'd sell stocks to get back to your target" ?
In Phase 1, you'd sell if the market drops to ensure your leverage doesn't get past your maximum. Once you're in Phase 2 and don't need to leverage as much to hit your target, you'd buy stocks as the market drops.

I recommend re-reading that section of the book if anything is unclear.
Alright, missed/misinterpreted that part! I have started reading the book again.

However, there is still something I don't catch. I prefer being pessimistic about the future, telling myself that I will go back to France in 3 years from now. Doing so, I know my savings rate will be muuuch lower than now.

Let me recap:
- I am 30 years old.
- Today, I literally have no savings (Well, I have 2 months of EF only because my job is safe).
- Today, all my money is already invested in Vanguard All-World ETF (VT) at 100%. I hold no bond.
- For the past 3 years, I have been putting ~ US$60K per year in VT:
Year 2018: Yearly contributions: US$60K. Total contributions: US$60K
Year 2019: Yearly contributions: US$60K. Total contributions: US$120K
Year 2020: Yearly contributions: US$60K. Total contributions: US$180K
- In 2021 and 2022, I am likely to invest ~US$50K per year:
Year 2021: Yearly contributions: US$50K. Total contributions: US$230K
Year 2022: Yearly contributions: US$50K. Total contributions: US$280K
- From 2023 onwards, and for the rest of my life, I will only be able to invest ~US$10K per year:
Year 2023: Yearly contributions: US$10K. Total contributions: US$290K
Year 2024: Yearly contributions: US$10K. Total contributions: US$300K
Etc.

My questions are:
- I know that in 2021 and 2022, I will be able to invest US$100K, and that for the next 20 years (if I retire by 50 yo), I will be able to invest US$200K more. So say what I will be able to invest in the stock over what is left of my life is US$300K.
- I will be getting a painful hit once I get back to France.
- Knowing the above, is it still wise for me to leverage right now?
- I feel like my risk is going to be way too concentrated in Year 2021, since I will be able to lever 50% of US$180K, i.e. US$90K.
- I don't feel like I will be evenly exposed to the market over the years doing so, since my salary will not increase in the future, but instead, decrease. What are your thoughts?
How much is your VT investment worth right now? And what is your target Samuelson Share (from the book)?
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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oldchap
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

Steve Reading wrote: Mon Feb 01, 2021 10:55 pm How much is your VT investment worth right now? And what is your target Samuelson Share (from the book)?
Right now, my VT is worth US$240K, and my target Samuelson Share seems to be 50%.
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oldchap
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

Steve Reading wrote: Mon Jan 25, 2021 10:52 am In Phase 1, you'd sell if the market drops to ensure your leverage doesn't get past your maximum. Once you're in Phase 2 and don't need to leverage as much to hit your target, you'd buy stocks as the market drops.
I recommend re-reading that section of the book if anything is unclear.
Sorry for the spam Steve, I have re-read the book but I don't see where the authors clearly state that "once we're in Phase 2 and don't need to leverage as much to hit the target, we would buy stocks as the market drops".

I have found the below two extracts, but not so sure you are referring to the same ones since it is not explicitly explained?
Take Abraham, for example. He was born in 1863 (and named after Lincoln) and invests in the market between 1886 and 1929. When Abraham is thirty-six, he would be investing 176 percent of his current retirement accumulation in stock. But the run-up to the Philippine-American War in 1899 was not kind to the stock market—that November the S&P fell by 6.5 percent (dividends included). Our target strategy responded by directing Abraham to increase his leverage to 189 percent in December. (This higher leverage is a way to maintain a constant percentage of lifetime savings.) In sharp contrast, when the stock market later crashed in October 1929, the 200/83 rule did not direct Abraham to ramp up just before he retired. By the time of the crash, when Abraham was about to retire, 83 percent of his lifetime savings was equivalent to 83 percent of his cash on hand. This investment strategy naturally leads investors to take on more risk after a market drop when they still have time to diversify, but it keeps them ramped down when they are close to retirement. Abraham was unlucky to retire immediately after the crash of 1929. However, our leveraged strategy allowed him to navigate these storms in the market. Investing aggressively after downturns when he was younger, he was able to build up a substantial portfolio and ramp down his risk at the end of his working life.
When Orus’s current savings exceed 20 percent of his total savings, he enters phase 2. For example, if his IRA has $100,000 and his expected future savings contributions remain at $400,000, then total present and future savings is $500,000, and his current $100,000 invested at 2:1 leverage will get him to $200,000, or 40 percent of the total.
As his savings continue to rise (as a result of market returns and additional contributions), he can start to delever. For example, when his retirement savings grow to $150,000 and his future savings add another $318,000, then his target is 40 percent of $468,000, or $187,000. He can invest his available $150,000 with about 5:4 leverage and get to $187,000. He is still more than 100 percent invested, but at 125 percent, not 200 percent. Orus stays in phase 2 until his current savings hit 40 percent of the total.
Another question is: what if I want to benefit from the lifecycle investing method, but do not want to invest for the remaining 44 Years - Phase 1, i.e. around 34 years ? How will that work ?
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by Steve Reading »

thibaulthib wrote: Tue Feb 02, 2021 2:06 am
Steve Reading wrote: Mon Feb 01, 2021 10:55 pm How much is your VT investment worth right now? And what is your target Samuelson Share (from the book)?
Right now, my VT is worth US$240K, and my target Samuelson Share seems to be 50%.
Ok so that means if you were retired today, you would invest 50% of your savings in stocks.

You have $240K in current savings and about 300K in future contributions. These should be discounted to their present value but since interest rates are low, let's just say the present value is also 300K. That's 540K total wealth, so you'd want to invest 50% of that, so 270K to stocks today.

You're already very close to that without leverage so I probably wouldn't bother with leverage. But in theory, you'd borrow 30K today and invest in the market. This spreads risk evenly across time because you're investing 50% of your current wealth in stocks today, and will also do so when retired.
thibaulthib wrote: Tue Feb 02, 2021 8:55 am Sorry for the spam Steve, I have re-read the book but I don't see where the authors clearly state that "once we're in Phase 2 and don't need to leverage as much to hit the target, we would buy stocks as the market drops".

I have found the below two extracts, but not so sure you are referring to the same ones since it is not explicitly explained?
The extracts are examples, yes. But once you fully understand the strategy, it's second nature. For instance, if you borrowed 30K to invest in the market like above (to hit your 50% target), you'd be in Phase 2 since you can hit the target without 2:1 leverage. If the market dropped 20%, you'd have 216K in stocks and 300K in future contributions. The 50% of that is 258K, so you'd have to buy an additional 48K to get back up to 50%, by borrowing further.
thibaulthib wrote: Tue Feb 02, 2021 8:55 am Another question is: what if I want to benefit from the lifecycle investing method, but do not want to invest for the remaining 44 Years - Phase 1, i.e. around 34 years ? How will that work ?
I don't understand. You're saying you won't contribute any more for the remaining 44 years, or you won't invest any more (will sell all of your VT) for the next 44 years?
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

Steve Reading wrote: Tue Feb 02, 2021 9:31 am Ok so that means if you were retired today, you would invest 50% of your savings in stocks.

You have $240K in current savings and about 300K in future contributions. These should be discounted to their present value but since interest rates are low, let's just say the present value is also 300K. That's 540K total wealth, so you'd want to invest 50% of that, so 270K to stocks today.

You're already very close to that without leverage so I probably wouldn't bother with leverage. But in theory, you'd borrow 30K today and invest in the market. This spreads risk evenly across time because you're investing 50% of your current wealth in stocks today, and will also do so when retired.

The extracts are examples, yes. But once you fully understand the strategy, it's second nature. For instance, if you borrowed 30K to invest in the market like above (to hit your 50% target), you'd be in Phase 2 since you can hit the target without 2:1 leverage. If the market dropped 20%, you'd have 216K in stocks and 300K in future contributions. The 50% of that is 258K, so you'd have to buy an additional 48K to get back up to 50%, by borrowing further.
Ho wow, it all makes a lot of sense now, thank you so much!!!
Steve Reading wrote: Tue Feb 02, 2021 9:31 am I don't understand. You're saying you won't contribute any more for the remaining 44 years, or you won't invest any more (will sell all of your VT) for the next 44 years?
Sorry if I wasn't clear, I meant, what if I decide to stop contributing before I'm retired (e.g. I only contribute for the next 30 years, instead of 44 years), how will this impact the lifecycle investing mechanism/strategy?
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

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thibaulthib wrote: Tue Feb 02, 2021 10:34 am Sorry if I wasn't clear, I meant, what if I decide to stop contributing before I'm retired (e.g. I only contribute for the next 30 years, instead of 44 years), how will this impact the lifecycle investing mechanism/strategy?
Just recalculate the present value of future savings contributions and then do the math I showed above.

If you contribute 50K for the next 2 years then 10K for the other 28 years (total of 30 years of contributions), that's 380K of contributions. Plus your savings of 240K is 620K. You'd invest 50% of that in stocks today, so 310K. You can borrow 70K to get there or leverage 1.24x.

If you contribute 50K for the next 2 years then 10K for the other 42 years, that's 520K of contributions. Plus your savings of 240K is 760K. You'd invest 50% of that in stocks today, so 380K. You can borrow 140K to get there or leverage 1.52x.

I'm not going to keep going through examples here. Hopefully you understand now :happy
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

Steve Reading wrote: Tue Feb 02, 2021 11:06 am
Just recalculate the present value of future savings contributions and then do the math I showed above.

If you contribute 50K for the next 2 years then 10K for the other 28 years (total of 30 years of contributions), that's 380K of contributions. Plus your savings of 240K is 620K. You'd invest 50% of that in stocks today, so 310K. You can borrow 70K to get there or leverage 1.24x.

If you contribute 50K for the next 2 years then 10K for the other 42 years, that's 520K of contributions. Plus your savings of 240K is 760K. You'd invest 50% of that in stocks today, so 380K. You can borrow 140K to get there or leverage 1.52x.

I'm not going to keep going through examples here. Hopefully you understand now :happy
It's super clear now, thank you so much for your guidance!

So now, one question would be: what if I lever 1.5x right now, while we are at the peak, and that tomorrow there is a -40% crash ?
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Re: My drawdown from peak to valley during Covid19 was -15%: why buying a bit on margin cannot be considered when DCA-in

Post by oldchap »

Steve Reading wrote: Mon Jan 25, 2021 10:52 am
thibaulthib wrote: Mon Jan 25, 2021 8:57 am
Steve Reading wrote: Mon Jan 25, 2021 8:15 am From then on, if the market stays at the same level or goes up, you would just pay down the loan. If the market drops somewhat, then you'd buy stocks to get back to your target. In essence, you will re-do the calculations I mentioned, say, every month, and contribute to either stocks or the loan based on what they say.
Did you mean "If the market drops somewhat, then you'd sell stocks to get back to your target" ?
In Phase 1, you'd sell if the market drops to ensure your leverage doesn't get past your maximum. Once you're in Phase 2 and don't need to leverage as much to hit your target, you'd buy stocks as the market drops.

I recommend re-reading that section of the book if anything is unclear.
Hi Steve,

In phase 2, you said we need to buy stocks as the market drops.

Am I right to say that, in the event I enter phase 2 now (while having skipped phase 1):
- when the amount of current Retirement Savings invested in stocks (including the loan) is below my Estimated PV of Current Savings and Future Retirement Savings Contributions * Samuelson Share (in my case, 50%), we must keep buying stocks, regardless to what the market does (goes up / goes down)
- when the amount of current Retirement Savings invested in stocks (including the loan) is above my Estimated PV of Current Savings and Future Retirement Savings Contributions * Samuelson Share (in my case, 50%), we must pay back the loan, regardless to what the market does (goes up / goes down)

Is that correct?
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Re: Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

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thibaulthib wrote: Tue Feb 02, 2021 6:20 pm
So now, one question would be: what if I lever 1.5x right now, while we are at the peak, and that tomorrow there is a -40% crash ?
You should recalculate the numbers post that 40% crash to get the answer as to what to do after. I showed you an example of that earlier:
Steve Reading wrote: Tue Feb 02, 2021 9:31 am For instance, if you borrowed 30K to invest in the market like above (to hit your 50% target), you'd be in Phase 2 since you can hit the target without 2:1 leverage. If the market dropped 20%, you'd have 216K in stocks and 300K in future contributions. The 50% of that is 258K, so you'd have to buy an additional 48K to get back up to 50%, by borrowing further.
thibaulthib wrote: Thu Feb 04, 2021 5:12 am Am I right to say that, in the event I enter phase 2 now (while having skipped phase 1):
- when the amount of current Retirement Savings invested in stocks (including the loan) is below my Estimated PV of Current Savings and Future Retirement Savings Contributions * Samuelson Share (in my case, 50%), we must keep buying stocks, regardless to what the market does (goes up / goes down)
- when the amount of current Retirement Savings invested in stocks (including the loan) is above my Estimated PV of Current Savings and Future Retirement Savings Contributions * Samuelson Share (in my case, 50%), we must pay back the loan, regardless to what the market does (goes up / goes down)

Is that correct?
Yeah you got it!
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

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duplicate - to be deleted
Last edited by oldchap on Thu Feb 04, 2021 9:26 am, edited 1 time in total.
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Re: Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

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duplicate - to be deleted
Last edited by oldchap on Thu Feb 04, 2021 9:26 am, edited 1 time in total.
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Re: Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

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duplicate - to be deleted
Last edited by oldchap on Thu Feb 04, 2021 9:26 am, edited 1 time in total.
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Re: Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

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Steve Reading wrote: Thu Feb 04, 2021 8:31 am You should recalculate the numbers post that 40% crash to get the answer as to what to do after. I showed you an example of that earlier:
Steve Reading wrote: Tue Feb 02, 2021 9:31 am For instance, if you borrowed 30K to invest in the market like above (to hit your 50% target), you'd be in Phase 2 since you can hit the target without 2:1 leverage. If the market dropped 20%, you'd have 216K in stocks and 300K in future contributions. The 50% of that is 258K, so you'd have to buy an additional 48K to get back up to 50%, by borrowing further.
Thanks Steve!

Two questions here:
1) Did you mean 42K (and not 48K)?
2) What if the market keeps on dropping for months? In this case, say I'm supposed to be 1.5x leveraged at that time, how to know when to stop the hemorrhage by starting to sell stocks, instead of buying? I wouldn't want to get a margin call... :D
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Re: Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

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thibaulthib wrote: Thu Feb 04, 2021 9:18 am
Steve Reading wrote: Thu Feb 04, 2021 8:31 am You should recalculate the numbers post that 40% crash to get the answer as to what to do after. I showed you an example of that earlier:
Steve Reading wrote: Tue Feb 02, 2021 9:31 am For instance, if you borrowed 30K to invest in the market like above (to hit your 50% target), you'd be in Phase 2 since you can hit the target without 2:1 leverage. If the market dropped 20%, you'd have 216K in stocks and 300K in future contributions. The 50% of that is 258K, so you'd have to buy an additional 48K to get back up to 50%, by borrowing further.
Thanks Steve!

Two questions here:
1) Did you mean 42K (and not 48K)?
2) What if the market keeps on dropping for months? In this case, say I'm supposed to be 1.5x leveraged at that time, how to know when to stop the hemorrhage by starting to sell stocks, instead of buying? I wouldn't want to get a margin call... :D
1) Yes, good catch
2) Once you reach a leverage of 2.2 as per the book, then you would stop buying and would begin selling to make sure leverage doesn't go up any more.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

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Steve Reading wrote: Thu Feb 04, 2021 9:27 am Once you reach a leverage of 2.2 as per the book, then you would stop buying and would begin selling to make sure leverage doesn't go up any more.
1) As per your experience, once I reach a leverage of 2.2x, do you recommend starting to sell to get back to which leverage: 2.2? 2.0? Or even less?
2) I believe in this kind of situation, a close monitoring will be needed more than once a month. But have you ever had to sell few days in a row, or usually, a weekly or bi-monthly check is enough?
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Re: Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

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thibaulthib wrote: Thu Feb 04, 2021 9:53 am 1) As per your experience, once I reach a leverage of 2.2x, do you recommend starting to sell to get back to which leverage: 2.2? 2.0? Or even less?
2) I believe in this kind of situation, a close monitoring will be needed more than once a month. But have you ever had to sell few days in a row, or usually, a weekly or bi-monthly check is enough?
1) If you reach 2.2 leverage, I would sell to get back to 2x leverage.
2) It depends on the market. I haven't thought about selling for like 10 months. I barely monitor my account except to contribute money. But if the market begins to lose money rapidly, you might have to monitor a little more.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

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Steve Reading wrote: Thu Feb 04, 2021 10:02 am
thibaulthib wrote: Thu Feb 04, 2021 9:53 am 1) As per your experience, once I reach a leverage of 2.2x, do you recommend starting to sell to get back to which leverage: 2.2? 2.0? Or even less?
2) I believe in this kind of situation, a close monitoring will be needed more than once a month. But have you ever had to sell few days in a row, or usually, a weekly or bi-monthly check is enough?
1) If you reach 2.2 leverage, I would sell to get back to 2x leverage.
2) It depends on the market. I haven't thought about selling for like 10 months. I barely monitor my account except to contribute money. But if the market begins to lose money rapidly, you might have to monitor a little more.
Lovely, thank you!

I was wondering: I have been using IBKR for more than 3 years now, super happy with them.

I know there is a way to set a "stop loss" when reaching a specific margin cushion, either based on a quantity of shares to sell, or based on a dollar amount to sell.

I'm trying to find a way to automate the sale of stocks once my leverage gets to 2.2, in order to automatically bring it back to 2.0, without having to do this manually. This means, IB should also know how much stocks to sell (either in qty of shares, or dollar amount), automatically, in order to get back to a safe leverage of 2.0, without me having to set it beforehand, since it is a moving target.

Have you ever found a way, or do we have to simply set margin cushion alerts and sell manually?

PS: Trying my luck here... :mrgreen:
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Re: Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

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thibaulthib wrote: Fri Feb 05, 2021 1:49 am
Steve Reading wrote: Thu Feb 04, 2021 10:02 am
thibaulthib wrote: Thu Feb 04, 2021 9:53 am 1) As per your experience, once I reach a leverage of 2.2x, do you recommend starting to sell to get back to which leverage: 2.2? 2.0? Or even less?
2) I believe in this kind of situation, a close monitoring will be needed more than once a month. But have you ever had to sell few days in a row, or usually, a weekly or bi-monthly check is enough?
1) If you reach 2.2 leverage, I would sell to get back to 2x leverage.
2) It depends on the market. I haven't thought about selling for like 10 months. I barely monitor my account except to contribute money. But if the market begins to lose money rapidly, you might have to monitor a little more.
Lovely, thank you!

I was wondering: I have been using IBKR for more than 3 years now, super happy with them.

I know there is a way to set a "stop loss" when reaching a specific margin cushion, either based on a quantity of shares to sell, or based on a dollar amount to sell.

I'm trying to find a way to automate the sale of stocks once my leverage gets to 2.2, in order to automatically bring it back to 2.0, without having to do this manually. This means, IB should also know how much stocks to sell (either in qty of shares, or dollar amount), automatically, in order to get back to a safe leverage of 2.0, without me having to set it beforehand, since it is a moving target.

Have you ever found a way, or do we have to simply set margin cushion alerts and sell manually?

PS: Trying my luck here... :mrgreen:
I haven't looked into it sorry. I would say if you're concerned about the potential time requirements, it's also perfectly fine not to leverage. 100% stocks is already a great choice and won't require any monitoring at all.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

Post by oldchap »

Steve Reading wrote: Fri Feb 05, 2021 9:19 am I haven't looked into it sorry. I would say if you're concerned about the potential time requirements, it's also perfectly fine not to leverage. 100% stocks is already a great choice and won't require any monitoring at all.
No worries! I check my IBKR every single day so no issue on that side actually, it was more out of curiosity.

Alright, I'm convinced by both the book and all your very clear explanations: I have started the adventure yesterday!

Modified the columns in my app, added info in my TWS, created all the margin cushion alerts to be sent to me daily. And I have started buying stocks on margin. I will ramp up over few days, since I'm just getting familiar for now. I'm only 110% VT exposed.

I've also created an Excel file computing all the margin/leverage data for me, in order to make sure that both the data from IB and from my XLS are tally. To be checked daily.


Do you get any other important advise Steve?
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Re: Using Lifecycle Investing and investing on margin while knowing a big salary hit is about to come

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thibaulthib wrote: Fri Feb 05, 2021 6:17 pm
Steve Reading wrote: Fri Feb 05, 2021 9:19 am I haven't looked into it sorry. I would say if you're concerned about the potential time requirements, it's also perfectly fine not to leverage. 100% stocks is already a great choice and won't require any monitoring at all.
No worries! I check my IBKR every single day so no issue on that side actually, it was more out of curiosity.

Alright, I'm convinced by both the book and all your very clear explanations: I have started the adventure yesterday!

Modified the columns in my app, added info in my TWS, created all the margin cushion alerts to be sent to me daily. And I have started buying stocks on margin. I will ramp up over few days, since I'm just getting familiar for now. I'm only 110% VT exposed.

I've also created an Excel file computing all the margin/leverage data for me, in order to make sure that both the data from IB and from my XLS are tally. To be checked daily.


Do you get any other important advise Steve?
Honestly, just re-reading the book, to make sure you really get it. I think I've read it like 5 times (I have it as an audiobook and just listened to it when not doing anything).
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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