Lifecycle Investing - Leveraging when young

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bling
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Re: Lifecycle Investing - Leveraging when young

Post by bling »

calvin111 wrote: Sun Jan 24, 2021 2:08 am
Steve Reading wrote: Thu Aug 27, 2020 2:29 pm
ScubaHogg wrote: Thu Aug 27, 2020 12:11 pm OP,

This thread has grown to 21 pages, so I apologize if this is answered elsewhere. Would you mind posting a rough snapshot of how you are currently executing your leverage (Options at IB, Futures at IB, maybe mixed with the Excellent Adventure?) and how much leverage you are currently holding?

Thanks!
My taxable account is leveraged 2:1 at the moment. It's all invested in stock ETFs as well. No futures.
I achieved this leverage via margin at IB*.

-- Apologies, and I am still learning this and went thru lots of pages. I am interested in following this strategy. So can you please help simplify it.

If I have 100K cash in my taxable account, so do I just buy 200K worth of SPY or VTI or something in my account ?
In this case I will be leveraged 2:1. Correct ?
For borrowing 100K, I will pay margin interest on it (whatever it may be at fidelity - my broker) ?

Is this it ? or what else do I have to do
when i was learning and looking through various resources i found firsttrade's explanation particularly useful because of the visual aid: https://www.firstrade.com/content/en-us ... quirements

but yes, your balance goes negative, you pay interest (and goes negative a little more). with everything being digital these days, for me it was a bit freaky how "easy" it was to just buy positions with money i didn't have. i can totally understand how this could ruin people if they are not careful.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

calvin111 wrote: Sun Jan 24, 2021 2:08 am
Steve Reading wrote: Thu Aug 27, 2020 2:29 pm
ScubaHogg wrote: Thu Aug 27, 2020 12:11 pm OP,

This thread has grown to 21 pages, so I apologize if this is answered elsewhere. Would you mind posting a rough snapshot of how you are currently executing your leverage (Options at IB, Futures at IB, maybe mixed with the Excellent Adventure?) and how much leverage you are currently holding?

Thanks!
My taxable account is leveraged 2:1 at the moment. It's all invested in stock ETFs as well. No futures.
I achieved this leverage via margin at IB*.

-- Apologies, and I am still learning this and went thru lots of pages. I am interested in following this strategy. So can you please help simplify it.

If I have 100K cash in my taxable account, so do I just buy 200K worth of SPY or VTI or something in my account ?
In this case I will be leveraged 2:1. Correct ?
For borrowing 100K, I will pay margin interest on it (whatever it may be at fidelity - my broker) ?

Is this it ? or what else do I have to do
Yeah, you got it. But Fidelity charges quite a bit for margin so you'd probably want to either move to Interactive Brokers, or use derivatives. See OP for more info.
"... 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: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

@all:
I finally had a chance to go through this thread and pick out the most important posts. I have updated the OP to answer most questions that have been addressed in this thread, with links to various relevant posts. Hopefully this means the information is clearer and no one needs to look through 24 pages to see if their answer was addressed.

Cheers
"... 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: Lifecycle Investing - Leveraging when young

Post by imak »

Steve Reading wrote: Sun Jan 24, 2021 9:11 am @all:
I finally had a chance to go through this thread and pick out the most important posts. I have updated the OP to answer most questions that have been addressed in this thread, with links to various relevant posts. Hopefully this means the information is clearer and no one needs to look through 24 pages to see if their answer was addressed.

Cheers
Thanks for your efforts. This is very helpful.
"Take a simple idea and take it seriously" ~ Charlie Munger
DMoogle
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Re: Lifecycle Investing - Leveraging when young

Post by DMoogle »

calvin111 wrote: Sun Jan 24, 2021 2:08 am
Steve Reading wrote: Thu Aug 27, 2020 2:29 pm
ScubaHogg wrote: Thu Aug 27, 2020 12:11 pm OP,

This thread has grown to 21 pages, so I apologize if this is answered elsewhere. Would you mind posting a rough snapshot of how you are currently executing your leverage (Options at IB, Futures at IB, maybe mixed with the Excellent Adventure?) and how much leverage you are currently holding?

Thanks!
My taxable account is leveraged 2:1 at the moment. It's all invested in stock ETFs as well. No futures.
I achieved this leverage via margin at IB*.

-- Apologies, and I am still learning this and went thru lots of pages. I am interested in following this strategy. So can you please help simplify it.

If I have 100K cash in my taxable account, so do I just buy 200K worth of SPY or VTI or something in my account ?
In this case I will be leveraged 2:1. Correct ?
For borrowing 100K, I will pay margin interest on it (whatever it may be at fidelity - my broker) ?

Is this it ? or what else do I have to do
Basically, yes. However, read up on margin requirements. Essentially there are two types - Reg T, and Portfolio. Reg T has very specific margin requirements, and if you buy $200k with $100k equity, you're likely to get margin called very quickly (due to 50% equity end-of-day requirement). Portfolio margin is normally much more flexible, but there are stricter requirements for opening a margin account.

And I wouldn't bother doing this with any site other than Interactive Brokers, due to their low rates.
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Re: Lifecycle Investing - Leveraging when young

Post by chasiu209 »

Hi guys, thank you for all the sharing. This topic and thread is really getting fascinating and special thanks to OP Steve for sharing his views and summarizing things. Summing up you guys discussions, I think a consistent leverage of 1.5x works for me.

There're a few fundamental questions that I am not entirely sure so I'd really appreciate you guys comments / critique / suggestions:

Numbers to start:

Total Debt
(1.5%) IB: 300,000
(2.5%) Bank Loan: 200,000
Will be paid down through next 4 years, replaced by IB loans

Total Asset
Illiquid asset - Cash equivalent: 200,000
ELV: 750,000 (My IB SMV minus IB loan)
PV of Future Income: 750,000

Total PV of Future Income + Current Equity (ELV + illiquid asset 200 - bank loan 200k): 1,500,000

Samuelson Share: 70%
Implied Stock Exposure at 70% = 1.5 mil * 70% = 1,050,000

Portfolio:

IB SMV: 1,050,000 (coincidence, not by design)
of which stocks 850,000
of which bonds 200,000

Leverage: 1.526

Assuming I already have my best guestimate of my PV of Future income and also Samuelson Share. My questions are:

Q1 - If my samuelson share is 70% and my total lifetime portfolio is 1.5 mil as computed above, does this mean I shall aim to have stock exposure of 1,050,000 as calculated?

Q2 - Is my computed leverage correct? I've seen fellow Bogleheads calculate it taking Debt / Total SMV (which doesn't seem right to me). I get my leverage no of 1.526 being = Debt (300+200k) / ( IB ELV 750k + Cash balance 200k )= 500 / 950 + 1 = 1.526.

Q3 - If the math is correct and my samuelson calculations the 'targeted' stock exposure is 1.05mil, does this imply I actually don't have to borrow further, but probably just a simple rebalance, switch 200k of bonds into stocks to get 1.05 mil stocks? Alternatively, if I feel a 'all-stock' portfolio too risky, is it the right thing to do to borrow 200k more and buy stocks, while keeping 200k bond exposure?

Q4 - If market tanks (say 50%) and my leverage spike to 2.176, do you guys think it's better to do nothing, and not sell on the way down, so that the portfolio could eventually recover from the plunge?

I've taken PortfolioVisualizer results, the max drawdown for my 1.5x portfolio is 28%. Understand fellow Bogleheads says historical doesn't necessarily be good guide but let's say the market does drop 50%, I'd still have excess liquidity and thus won't have a margin call, thus I figure it's better to sit and wait the market to rise. Please let me know if you feel the logic is not right.

Thank you so much for shedding light.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

chasiu209 wrote: Tue Jan 26, 2021 5:58 am Q1 - If my samuelson share is 70% and my total lifetime portfolio is 1.5 mil as computed above, does this mean I shall aim to have stock exposure of 1,050,000 as calculated?
Yes but do keep in mind that since you borrow at above the risk-free rate, you should decrease the ERP you use in the numerator of the Samuelson share by the difference between your borrowing rate and the RFR. So if you think the ERP will be about 6%, and the RFR is 0%, if you borrow at 2-3%, then the ERP you should use for your Samuelson Share is 3-4%.

This nuance isn’t discussed in the book but is discussed in the paper. That’s why the paper has 4 Phases and the book 3.
chasiu209 wrote: Tue Jan 26, 2021 5:58 am Q2 - Is my computed leverage correct? I've seen fellow Bogleheads calculate it taking Debt / Total SMV (which doesn't seem right to me). I get my leverage no of 1.526 being = Debt (300+200k) / ( IB ELV 750k + Cash balance 200k )= 500 / 950 + 1 = 1.526.
You have 500k of debt and 1250000 in assets (for a net worth of 750K. So overall leverage is asset/net assets = 1.25M/0.75M = 1.667.

In terms of risk management, I’d argue the leverage of IB is the most important. If the bank loan cannot be recalled, then it isn’t as relevant. And the 200K in illiquid assets can’t be used to stabilize IB either. So I would say the more relevant figure is debt of 300K (at IB), assets of 1.05M at IB, for a leverage of 1.4.
chasiu209 wrote: Tue Jan 26, 2021 5:58 am
Q3 - If the math is correct and my samuelson calculations the 'targeted' stock exposure is 1.05mil, does this imply I actually don't have to borrow further, but probably just a simple rebalance, switch 200k of bonds into stocks to get 1.05 mil stocks? Alternatively, if I feel a 'all-stock' portfolio too risky, is it the right thing to do to borrow 200k more and buy stocks, while keeping 200k bond exposure?
Right it looks like you only need to shift bonds into stocks. Borrowing more without selling the bonds as you suggest strikes me as riskier. It has the same stock exposure as the first scenario, but now borrowed 200K to buy bonds. This might be less risky but I’mmot sure. Also, your borrowing at 1.5% at IB to buy bonds that probably yield less so this really only works if you think bonds will be sufficiently negatively correlated with stocks. Personally, I expect bonds to, at best, be uncorrelated so I don’t buy bonds while leveraged personally.

Up to you though.
chasiu209 wrote: Tue Jan 26, 2021 5:58 am Q4 - If market tanks (say 50%) and my leverage spike to 2.176, do you guys think it's better to do nothing, and not sell on the way down, so that the portfolio could eventually recover from the plunge?
The correct thing would be to rebalance (certainly if you believe markets are random walks). And historically, this would’vebeen fine. I’m personally a bit more opportunistic and think if markets drop (like in March), they probably have a higher ERP than before so I’m willing to tolerate higher leverage and not rebalance. I like 1.5 leverage because it gives you some flexibility in that (since it’s way below 2x leverage, it’s not a big deal to not rebalance since youre still within what the Prof. recommend).

But everything in moderation. If your leverage is getting past 2.5-3, you should really rebalance. The one way to mess Lifecycle Investing is by blowing up. So don’t!
"... 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: Lifecycle Investing - Leveraging when young

Post by cos »

DMoogle wrote: Sun Jan 24, 2021 12:36 pm And I wouldn't bother doing this with any site other than Interactive Brokers, due to their low rates.
M1 Finance ain't too bad either. They offer 2% for their subscription users and 3.5% for their free users. Best part is they don't automatically sell securities during a margin call; they actually call you on the phone and work with you to handle it as gracefully as possible (e.g. simply depositing more cash).
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Re: Lifecycle Investing - Leveraging when young

Post by DMoogle »

cos wrote: Tue Jan 26, 2021 12:40 pm
DMoogle wrote: Sun Jan 24, 2021 12:36 pm And I wouldn't bother doing this with any site other than Interactive Brokers, due to their low rates.
M1 Finance ain't too bad either. They offer 2% for their subscription users and 3.5% for their free users. Best part is they don't automatically sell securities during a margin call; they actually call you on the phone and work with you to handle it as gracefully as possible (e.g. simply depositing more cash).
Those are good rates relative to the market, but IB's rates are currently 1.59% for Pro users and 2.59% for Lite users, assuming you're borrowing <$100k (less if you borrow more). Bogleheads is all about low expenses - that's a pretty substantial difference when we're talking about long-term investing.
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Re: Lifecycle Investing - Leveraging when young

Post by freyj6 »

Steve Reading wrote: Fri Jan 22, 2021 11:26 am
freyj6 wrote: Fri Jan 22, 2021 11:20 am
Steve Reading wrote: Fri Jan 22, 2021 7:43 am
freyj6 wrote: Thu Jan 21, 2021 11:39 pm
Steve Reading wrote: Fri Jan 01, 2021 2:12 pm Updated OP with 2021 numbers:

January 2021
Total Stock Exposure = 742k
Effective Debt = 361k
Equity in the exposure = 381k
Leverage (@ IBKR) = 2.0

I've made big changes since August (increase risk aversion coefficient for my calculations, different future discounted savings, etc). The numbers look quite different from last update. The end result is that I am back to Phase 1, trying to hit a specific equity target. I decided to go up to 2:1 leverage to get as close to that target as possible. That's how this strategy goes; you make the best estimates and revise as you learn more about the future.

2020 Summary
This year had a fairly large and very fast market crash, but the strategy continues just fine. Hopefully this shows this strategy isn't implemented just because all I know are bull markets, and that I would fold at the first crash (as many posters implied early in the thread). I think a big challenge was the psychological aspect of March, especially with the amount of panic present in BHs. It's key to stick to your convictions and take losses with equanimity. William Bernstein is not quite right when he said there are no sentients being in this galaxy that can tolerate a portfolio with 2.0 beta, but he isn't too wrong either.

In all though, 2020 was fantastic for leveraged strategies and returns have been outstanding honestly. My concern was precisely what happened; stock prices going way up and forcing accumulation at expensive valuations. I think this is a big risk for accumulators, and this strategy addresses it.

Happy New Year!
How do you feel about what you mentioned earlier in the thread: favoring lower leverage and so as to not require selling on the way down? Now that you're 2x, what do you plan on doing if there's another 30 or 40% drop, particularly if it lasts longer?

As I've thought more about implementing this myself in the future, I think I'm most comfortable with a fixed dollar amount of leverage vs fixed (or variable) percent. I like the idea of having, say $150k in stock and borrowing another $50k. This version is more intuitively appealing to me because I'd be able to buy non-leveraged stocks aggressively during a crash without worrying about my leverage getting out of control.
I still stand by 1.5x leverage. Historically, it was about as good as 2x leverage any ways. And even after a 33% market decline, you still end up at 2x leverage, which was the recommendation from the paper. So it gives a large cushion in case you want to be opportunistic and not rebalance your leverage back to 1.5x in the midst of a bear market.

The only reason I went to 2x this year is because doing so got me right within reach of my equity goal rebalancing bands so I decided to just go for it already.

If the market dropped 30 or 40%, I would just sell positions. I don’t think it’s as big of a deal as I made it out earlier in the thread.

What you suggest (using 1.25x leverage) seems reasonable to me. I would just be wary that if you’re set on not selling for a loss and your leverage goes past 2x in a Bear market, that you do rebalance (at least back to 2x) as per the book.
Good to know.

I'm not sure if this was clear from the last post, but I like the idea of the fixed dollar amount version because I'd be buying unleveraged stocks all the way down. This would make it really difficult to actually end up more than 2x leveraged.

For example, take a 1.33x leveraged portfolio of 150k regular stock and 50k borrowed (200k stock total).

If the market drops 50%, you'd still have 75k regular stock and 50k borrowed (125k total). The market would need to drop 66.6% to move beyond 2x.

Furthermore, I'd be buying into the unlevered position only. Even with contribution as low as 1k per month, it would take roughly a 75% drop in 12 months to exceed a 2x position.

Anyway, even if I'm not jumping into leverage yet, this topic has been super helpful both in terms of education and perspective. Sometimes I get a little nervous being 100% stock with these high valuations and rampant speculation, but when I view it through the perspective of stock exposure vs lifetime human capital it's much easier. Realistically, I'm about 10% stock and 90% human-capital bond :)
Right but if the market doubled from then and you ended up at 400k in stock (350k yours, 50k borrowed), would you not re-lever back up to 1.33x? Assuming you haven’t hit your target yet (still in Phase 1).
Honestly, I understand that it would statistically be the right thing to do, but I probably would not. What feels the most intuitive and safest (among risky, leveraged strategies) is to follow a strategy where the fixed dollar amount allocation becomes the glide path. At 150k saved, 200k invested, I'd be 1.33% invested, at 350k/50k, I'd be roughly 1.14% leveraged, and so on. Once I hit my Samuelson share, I'd begin to lever down.

Again the main reason this appeals to me is that it's very aggressive but has little to no chance of ever getting out of hand. 50k is roughly 1 year of savings for me; perhaps if my income increases significantly I'll feel differently. But then again, that means my Samuelson share would also increase significantly.

Really happy you're doing this and putting so much time into describing it.

PS - what's your AA roughly? Do you tilt at all, even though it's difficult to do so with large amount of leverage?
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

freyj6 wrote: Tue Jan 26, 2021 1:58 pm
Steve Reading wrote: Fri Jan 22, 2021 11:26 am
freyj6 wrote: Fri Jan 22, 2021 11:20 am
Steve Reading wrote: Fri Jan 22, 2021 7:43 am
freyj6 wrote: Thu Jan 21, 2021 11:39 pm

How do you feel about what you mentioned earlier in the thread: favoring lower leverage and so as to not require selling on the way down? Now that you're 2x, what do you plan on doing if there's another 30 or 40% drop, particularly if it lasts longer?

As I've thought more about implementing this myself in the future, I think I'm most comfortable with a fixed dollar amount of leverage vs fixed (or variable) percent. I like the idea of having, say $150k in stock and borrowing another $50k. This version is more intuitively appealing to me because I'd be able to buy non-leveraged stocks aggressively during a crash without worrying about my leverage getting out of control.
I still stand by 1.5x leverage. Historically, it was about as good as 2x leverage any ways. And even after a 33% market decline, you still end up at 2x leverage, which was the recommendation from the paper. So it gives a large cushion in case you want to be opportunistic and not rebalance your leverage back to 1.5x in the midst of a bear market.

The only reason I went to 2x this year is because doing so got me right within reach of my equity goal rebalancing bands so I decided to just go for it already.

If the market dropped 30 or 40%, I would just sell positions. I don’t think it’s as big of a deal as I made it out earlier in the thread.

What you suggest (using 1.25x leverage) seems reasonable to me. I would just be wary that if you’re set on not selling for a loss and your leverage goes past 2x in a Bear market, that you do rebalance (at least back to 2x) as per the book.
Good to know.

I'm not sure if this was clear from the last post, but I like the idea of the fixed dollar amount version because I'd be buying unleveraged stocks all the way down. This would make it really difficult to actually end up more than 2x leveraged.

For example, take a 1.33x leveraged portfolio of 150k regular stock and 50k borrowed (200k stock total).

If the market drops 50%, you'd still have 75k regular stock and 50k borrowed (125k total). The market would need to drop 66.6% to move beyond 2x.

Furthermore, I'd be buying into the unlevered position only. Even with contribution as low as 1k per month, it would take roughly a 75% drop in 12 months to exceed a 2x position.

Anyway, even if I'm not jumping into leverage yet, this topic has been super helpful both in terms of education and perspective. Sometimes I get a little nervous being 100% stock with these high valuations and rampant speculation, but when I view it through the perspective of stock exposure vs lifetime human capital it's much easier. Realistically, I'm about 10% stock and 90% human-capital bond :)
Right but if the market doubled from then and you ended up at 400k in stock (350k yours, 50k borrowed), would you not re-lever back up to 1.33x? Assuming you haven’t hit your target yet (still in Phase 1).
Honestly, I understand that it would statistically be the right thing to do, but I probably would not. What feels the most intuitive and safest (among risky, leveraged strategies) is to follow a strategy where the fixed dollar amount allocation becomes the glide path. At 150k saved, 200k invested, I'd be 1.33% invested, at 350k/50k, I'd be roughly 1.14% leveraged, and so on. Once I hit my Samuelson share, I'd begin to lever down.

Again the main reason this appeals to me is that it's very aggressive but has little to no chance of ever getting out of hand. 50k is roughly 1 year of savings for me; perhaps if my income increases significantly I'll feel differently. But then again, that means my Samuelson share would also increase significantly.

Really happy you're doing this and putting so much time into describing it.

PS - what's your AA roughly? Do you tilt at all, even though it's difficult to do so with large amount of leverage?
But if you're starting out (say, with 5K), you'd just borrow 2.5K and no more ever again? That's basically as good as not borrowing at all. I think you do want to borrow more as you save and your collateral grows. But maybe you have a limit once it's bigger than, say X years of salary?

My AA is 80% stocks. I tilt to value and quality and don't find it hard to do since I just buy whatever ETFs I want on margin. I'm not limited to the products offered by derivatives.
"... 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: Lifecycle Investing - Leveraging when young

Post by freyj6 »

Steve Reading wrote: Tue Jan 26, 2021 4:53 pm
But if you're starting out (say, with 5K), you'd just borrow 2.5K and no more ever again? That's basically as good as not borrowing at all. I think you do want to borrow more as you save and your collateral grows. But maybe you have a limit once it's bigger than, say X years of salary?

My AA is 80% stocks. I tilt to value and quality and don't find it hard to do since I just buy whatever ETFs I want on margin. I'm not limited to the products offered by derivatives.
Ahh, makes sense. For some reason I was thinking that you were still doing it mostly with options.

And yes you're correct, the 50k is roughly 1 year of savings. Had I known about lifecycle investing at the start of my career, I might have tried to lever a fixed 20k or so, since that was roughly my savings potential back then. In fact, had it been possible without a real chance of margin call, it might have made sense to lever even higher at the very start. Unfortunately I didn't know at that time, so I had a small nest egg early in my investing career.

Viewing all of this through the lens of human capital and sequence of return risk really gives me a different perspective. Even at 100% stock, a deep dive for the market would end up being a net benefit.
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Re: Lifecycle Investing - Leveraging when young

Post by bobcat2 »

Steve Reading wrote: Sun Jan 24, 2021 9:11 am @all:
I finally had a chance to go through this thread and pick out the most important posts. I have updated the OP to answer most questions that have been addressed in this thread, with links to various relevant posts. Hopefully this means the information is clearer and no one needs to look through 24 pages to see if their answer was addressed.
Cheers
Gee Steve, you seem to have left out the part Ayres and Nalebuff emphasize about who should not be following this strategy. I will update that part for you.

Investors who shouldn’t do this. (from the book)

You have student loan debt. - pg 9
You have credit card debt. – pg 119
You have less than $4,000 to invest – pg 121
Your employer matches contributions to a 401k plan. – pg 121 (Invest to the match before any leveraging.)
Your salary is correlated with the market. - pg 121
You need the money to pay for your kids’ college education. – pg 121
Your risk aversion is average or higher. – pg 121

Other contraindications

You don’t know a great deal about finance.
You have Payday loans etc..
You are not willing to constantly monitor the account.


Cheers and your welcome. :sharebeer
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

bobcat2 wrote: Tue Jan 26, 2021 8:00 pm Your risk aversion is average or higher. – pg 121
I don't recall them claiming average risk aversion is a contraindicaton. Looked at pg 121 and couldn't find it. Can you provide the exact quote and location?
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

bobcat2 wrote: Tue Jan 26, 2021 8:00 pm
Steve Reading wrote: Sun Jan 24, 2021 9:11 am @all:
I finally had a chance to go through this thread and pick out the most important posts. I have updated the OP to answer most questions that have been addressed in this thread, with links to various relevant posts. Hopefully this means the information is clearer and no one needs to look through 24 pages to see if their answer was addressed.
Cheers
Gee Steve, you seem to have left out the part Ayres and Nalebuff emphasize about who should not be following this strategy. I will update that part for you.

Investors who shouldn’t do this. (from the book)

You have student loan debt. - pg 9
You have credit card debt. – pg 119
You have less than $4,000 to invest – pg 121
Your employer matches contributions to a 401k plan. – pg 121 (Invest to the match before any leveraging.)
Your salary is correlated with the market. - pg 121
You need the money to pay for your kids’ college education. – pg 121
Your risk aversion is average or higher. – pg 121

Other contraindications

You don’t know a great deal about finance.
You have Payday loans etc..
You are not willing to constantly monitor the account.


Cheers and your welcome. :sharebeer
Presumably, everyone will notice that once they read the book (which is required reading for everyone serious about this). The OP simply introduces some intuition about the concept, as well as fills in the gaps I believe the book left. I'd rather not say things that the book covers (if possible) in order to make it clear the book must be read.
"... 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: Lifecycle Investing - Leveraging when young

Post by chasiu209 »

Thank you Steve!

Followup with Ans1 - While currently borrowing at 2% avg, long term (3 years to go) I'll move all borrowing to IB thus expecting 1.5%. But agree it shall be Gross stock return - borrowing rate. In fact I've taken the 5.68% long term ERP you suggested in earlier post since my understanding is set a long-term samuelson share and stick with it.

With Ans 2 - Agree on the bank loan and also illiquid cash part. I actually have a IB leverage (the callable part) and also a real leverage including the bank loan / cash in my excel sheet so that I know my real actual leverage and exposure.

With your calculated leverage: Looks like you are suggesting option E: Asset-to-equity ratio. Sorry for the basic question but looks like there're multiple ways to calculate this. For like-for-like comparison with what's suggested in the book, is Asset/Equity ratio the way Ian and Barry calculates the leverage on their book?

A: Debt-to-Assets Ratio = Total Debt / Total Assets
B: Debt-to-Equity Ratio = Total Debt / Total Equity
C: Debt-to-Capital Ratio = Today Debt / (Total Debt + Total Equity)
D: Debt-to-EBITDA Ratio = Total Debt / Earnings Before Interest Taxes Depreciation & Amortization (EBITDA)
E: Asset-to-Equity Ratio = Total Assets / Total Equity
https://corporatefinanceinstitute.com/r ... ge-ratios/

Ans 3 - Yeah food for thoughts. 100% Stocks or 100% Stocks 20% Bonds -20%CASHX is more volatile.

Steve Reading wrote: Tue Jan 26, 2021 12:07 pm
chasiu209 wrote: Tue Jan 26, 2021 5:58 am Q1 - If my samuelson share is 70% and my total lifetime portfolio is 1.5 mil as computed above, does this mean I shall aim to have stock exposure of 1,050,000 as calculated?
Yes but do keep in mind that since you borrow at above the risk-free rate, you should decrease the ERP you use in the numerator of the Samuelson share by the difference between your borrowing rate and the RFR. So if you think the ERP will be about 6%, and the RFR is 0%, if you borrow at 2-3%, then the ERP you should use for your Samuelson Share is 3-4%.

This nuance isn’t discussed in the book but is discussed in the paper. That’s why the paper has 4 Phases and the book 3.
chasiu209 wrote: Tue Jan 26, 2021 5:58 am Q2 - Is my computed leverage correct? I've seen fellow Bogleheads calculate it taking Debt / Total SMV (which doesn't seem right to me). I get my leverage no of 1.526 being = Debt (300+200k) / ( IB ELV 750k + Cash balance 200k )= 500 / 950 + 1 = 1.526.
You have 500k of debt and 1250000 in assets (for a net worth of 750K. So overall leverage is asset/net assets = 1.25M/0.75M = 1.667.

In terms of risk management, I’d argue the leverage of IB is the most important. If the bank loan cannot be recalled, then it isn’t as relevant. And the 200K in illiquid assets can’t be used to stabilize IB either. So I would say the more relevant figure is debt of 300K (at IB), assets of 1.05M at IB, for a leverage of 1.4.
chasiu209 wrote: Tue Jan 26, 2021 5:58 am
Q3 - If the math is correct and my samuelson calculations the 'targeted' stock exposure is 1.05mil, does this imply I actually don't have to borrow further, but probably just a simple rebalance, switch 200k of bonds into stocks to get 1.05 mil stocks? Alternatively, if I feel a 'all-stock' portfolio too risky, is it the right thing to do to borrow 200k more and buy stocks, while keeping 200k bond exposure?
Right it looks like you only need to shift bonds into stocks. Borrowing more without selling the bonds as you suggest strikes me as riskier. It has the same stock exposure as the first scenario, but now borrowed 200K to buy bonds. This might be less risky but I’mmot sure. Also, your borrowing at 1.5% at IB to buy bonds that probably yield less so this really only works if you think bonds will be sufficiently negatively correlated with stocks. Personally, I expect bonds to, at best, be uncorrelated so I don’t buy bonds while leveraged personally.

Up to you though.
chasiu209 wrote: Tue Jan 26, 2021 5:58 am Q4 - If market tanks (say 50%) and my leverage spike to 2.176, do you guys think it's better to do nothing, and not sell on the way down, so that the portfolio could eventually recover from the plunge?
The correct thing would be to rebalance (certainly if you believe markets are random walks). And historically, this would’vebeen fine. I’m personally a bit more opportunistic and think if markets drop (like in March), they probably have a higher ERP than before so I’m willing to tolerate higher leverage and not rebalance. I like 1.5 leverage because it gives you some flexibility in that (since it’s way below 2x leverage, it’s not a big deal to not rebalance since youre still within what the Prof. recommend).

But everything in moderation. If your leverage is getting past 2.5-3, you should really rebalance. The one way to mess Lifecycle Investing is by blowing up. So don’t!
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Re: Lifecycle Investing - Leveraging when young

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chasiu209 wrote: Tue Jan 26, 2021 9:16 pm Thank you Steve!

Followup with Ans1 - While currently borrowing at 2% avg, long term (3 years to go) I'll move all borrowing to IB thus expecting 1.5%. But agree it shall be Gross stock return - borrowing rate. In fact I've taken the 5.68% long term ERP you suggested in earlier post since my understanding is set a long-term samuelson share and stick with it.

With Ans 2 - Agree on the bank loan and also illiquid cash part. I actually have a IB leverage (the callable part) and also a real leverage including the bank loan / cash in my excel sheet so that I know my real actual leverage and exposure.

With your calculated leverage: Looks like you are suggesting option E: Asset-to-equity ratio. Sorry for the basic question but looks like there're multiple ways to calculate this. For like-for-like comparison with what's suggested in the book, is Asset/Equity ratio the way Ian and Barry calculates the leverage on their book?

A: Debt-to-Assets Ratio = Total Debt / Total Assets
B: Debt-to-Equity Ratio = Total Debt / Total Equity
C: Debt-to-Capital Ratio = Today Debt / (Total Debt + Total Equity)
D: Debt-to-EBITDA Ratio = Total Debt / Earnings Before Interest Taxes Depreciation & Amortization (EBITDA)
E: Asset-to-Equity Ratio = Total Assets / Total Equity
https://corporatefinanceinstitute.com/r ... ge-ratios/

Ans 3 - Yeah food for thoughts. 100% Stocks or 100% Stocks 20% Bonds -20%CASHX is more volatile.

Steve Reading wrote: Tue Jan 26, 2021 12:07 pm
chasiu209 wrote: Tue Jan 26, 2021 5:58 am Q1 - If my samuelson share is 70% and my total lifetime portfolio is 1.5 mil as computed above, does this mean I shall aim to have stock exposure of 1,050,000 as calculated?
Yes but do keep in mind that since you borrow at above the risk-free rate, you should decrease the ERP you use in the numerator of the Samuelson share by the difference between your borrowing rate and the RFR. So if you think the ERP will be about 6%, and the RFR is 0%, if you borrow at 2-3%, then the ERP you should use for your Samuelson Share is 3-4%.

This nuance isn’t discussed in the book but is discussed in the paper. That’s why the paper has 4 Phases and the book 3.
chasiu209 wrote: Tue Jan 26, 2021 5:58 am Q2 - Is my computed leverage correct? I've seen fellow Bogleheads calculate it taking Debt / Total SMV (which doesn't seem right to me). I get my leverage no of 1.526 being = Debt (300+200k) / ( IB ELV 750k + Cash balance 200k )= 500 / 950 + 1 = 1.526.
You have 500k of debt and 1250000 in assets (for a net worth of 750K. So overall leverage is asset/net assets = 1.25M/0.75M = 1.667.

In terms of risk management, I’d argue the leverage of IB is the most important. If the bank loan cannot be recalled, then it isn’t as relevant. And the 200K in illiquid assets can’t be used to stabilize IB either. So I would say the more relevant figure is debt of 300K (at IB), assets of 1.05M at IB, for a leverage of 1.4.
chasiu209 wrote: Tue Jan 26, 2021 5:58 am
Q3 - If the math is correct and my samuelson calculations the 'targeted' stock exposure is 1.05mil, does this imply I actually don't have to borrow further, but probably just a simple rebalance, switch 200k of bonds into stocks to get 1.05 mil stocks? Alternatively, if I feel a 'all-stock' portfolio too risky, is it the right thing to do to borrow 200k more and buy stocks, while keeping 200k bond exposure?
Right it looks like you only need to shift bonds into stocks. Borrowing more without selling the bonds as you suggest strikes me as riskier. It has the same stock exposure as the first scenario, but now borrowed 200K to buy bonds. This might be less risky but I’mmot sure. Also, your borrowing at 1.5% at IB to buy bonds that probably yield less so this really only works if you think bonds will be sufficiently negatively correlated with stocks. Personally, I expect bonds to, at best, be uncorrelated so I don’t buy bonds while leveraged personally.

Up to you though.
chasiu209 wrote: Tue Jan 26, 2021 5:58 am Q4 - If market tanks (say 50%) and my leverage spike to 2.176, do you guys think it's better to do nothing, and not sell on the way down, so that the portfolio could eventually recover from the plunge?
The correct thing would be to rebalance (certainly if you believe markets are random walks). And historically, this would’vebeen fine. I’m personally a bit more opportunistic and think if markets drop (like in March), they probably have a higher ERP than before so I’m willing to tolerate higher leverage and not rebalance. I like 1.5 leverage because it gives you some flexibility in that (since it’s way below 2x leverage, it’s not a big deal to not rebalance since youre still within what the Prof. recommend).

But everything in moderation. If your leverage is getting past 2.5-3, you should really rebalance. The one way to mess Lifecycle Investing is by blowing up. So don’t!
E is how the book calculates leverage too, that’s correct.
"... 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: Lifecycle Investing - Leveraging when young

Post by daze »

[duplicated post]
Last edited by daze on Sat Jan 30, 2021 9:20 pm, edited 2 times in total.
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Re: Lifecycle Investing - Leveraging when young

Post by dont_know_mind »

Steve Reading wrote: Tue Jan 26, 2021 8:12 pm
bobcat2 wrote: Tue Jan 26, 2021 8:00 pm
Steve Reading wrote: Sun Jan 24, 2021 9:11 am @all:
I finally had a chance to go through this thread and pick out the most important posts. I have updated the OP to answer most questions that have been addressed in this thread, with links to various relevant posts. Hopefully this means the information is clearer and no one needs to look through 24 pages to see if their answer was addressed.
Cheers
Gee Steve, you seem to have left out the part Ayres and Nalebuff emphasize about who should not be following this strategy. I will update that part for you.

Investors who shouldn’t do this. (from the book)

You have student loan debt. - pg 9
You have credit card debt. – pg 119
You have less than $4,000 to invest – pg 121
Your employer matches contributions to a 401k plan. – pg 121 (Invest to the match before any leveraging.)
Your salary is correlated with the market. - pg 121
You need the money to pay for your kids’ college education. – pg 121
Your risk aversion is average or higher. – pg 121

Other contraindications

You don’t know a great deal about finance.
You have Payday loans etc..
You are not willing to constantly monitor the account.


Cheers and your welcome. :sharebeer
Presumably, everyone will notice that once they read the book (which is required reading for everyone serious about this). The OP simply introduces some intuition about the concept, as well as fills in the gaps I believe the book left. I'd rather not say things that the book covers (if possible) in order to make it clear the book must be read.
Steve, something I don’t understand about the book is why they suggest to reduce leverage ratio when volatility increases.

I have generally trimmed leverage with cycle maturity and increased or added leverage when VIX>40.

During the last cycle I was 90:10 (risk assets:cash/fixed income) prior to covid and since covid have been 120:-20, or about 120% risk assets. I intend to reduce leverage over the next 5-7 years back to zero.

I guess my strategy is more market timing the leverage aspect than lifecycle.

2 things are most important to me:
1. non-callable debt source
2. I only want to acquire leverage after a washout. Even though there is a risk of further downturn as in the Great Depression episode, the risk of higher rates seems to me less after a downturn so it is much easier to calculate cost of capital/leverage or fix this at a good rate.
My ramblings are probably rubbish, biased by my position and talking my own book. No-one should invest based on my views. Some days I wonder whether I've had some skill or just been a lucky gambler.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

dont_know_mind wrote: Sat Jan 30, 2021 6:11 am
Steve Reading wrote: Tue Jan 26, 2021 8:12 pm
bobcat2 wrote: Tue Jan 26, 2021 8:00 pm
Steve Reading wrote: Sun Jan 24, 2021 9:11 am @all:
I finally had a chance to go through this thread and pick out the most important posts. I have updated the OP to answer most questions that have been addressed in this thread, with links to various relevant posts. Hopefully this means the information is clearer and no one needs to look through 24 pages to see if their answer was addressed.
Cheers
Gee Steve, you seem to have left out the part Ayres and Nalebuff emphasize about who should not be following this strategy. I will update that part for you.

Investors who shouldn’t do this. (from the book)

You have student loan debt. - pg 9
You have credit card debt. – pg 119
You have less than $4,000 to invest – pg 121
Your employer matches contributions to a 401k plan. – pg 121 (Invest to the match before any leveraging.)
Your salary is correlated with the market. - pg 121
You need the money to pay for your kids’ college education. – pg 121
Your risk aversion is average or higher. – pg 121

Other contraindications

You don’t know a great deal about finance.
You have Payday loans etc..
You are not willing to constantly monitor the account.


Cheers and your welcome. :sharebeer
Presumably, everyone will notice that once they read the book (which is required reading for everyone serious about this). The OP simply introduces some intuition about the concept, as well as fills in the gaps I believe the book left. I'd rather not say things that the book covers (if possible) in order to make it clear the book must be read.
Steve, something I don’t understand about the book is why they suggest to reduce leverage ratio when volatility increases.

I have generally trimmed leverage with cycle maturity and increased or added leverage when VIX>40.

During the last cycle I was 90:10 (risk assets:cash/fixed income) prior to covid and since covid have been 120:-20, or about 120% risk assets. I intend to reduce leverage over the next 5-7 years back to zero.

I guess my strategy is more market timing the leverage aspect than lifecycle.

2 things are most important to me:
1. non-callable debt source
2. I only want to acquire leverage after a washout. Even though there is a risk of further downturn as in the Great Depression episode, the risk of higher rates seems to me less after a downturn so it is much easier to calculate cost of capital/leverage or fix this at a good rate.
Since stock allocation from Samuelson Share is inversely proportional to stock volatility, they mention the possibility reducing stock allocation in more volatile times.

The logic is theoretically interesting but I’ve found that historically, changing the stock allocation based on the VIX didn’t lead to better risk-adjusted returns (even though current VIX did have predictive power of future volatility). I never sat down to really think why that was the empirical result but you could ask Uncorrolated who has looked at it more than myself.
"... 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: Lifecycle Investing - Leveraging when young

Post by purg »

thanks for all the great info and discussion in this thread! good to know that there are people actually doing this lol

just applied for the Roth IRA with Ally because my current brokerage doesn't allow options trading in IRAs. i've only been working for two years, so i only have $7k in my Roth from my contribution last year, but from now on, because of the mega backdoor everything above my 401k limit is going into this account. plan is to buy calls on SPY, EFA, and EEM for international diversification with 2:1 leverage. feels weird to be doing this if my plan is to be able to FIRE in 20 years but according to the book 20 years is long enough for this strategy to win out. haven't calculated a target equity exposure yet because i'm at least half a decade out from that mattering

edit: trying to calculate the implied interest rates here, i'm getting 5.42% for SPY, and a whopping 16%+ for the other two indices. maybe not worth internationally diversifying then, and that SPY rate is higher than i would have thought. my dividend projection might be little optimistic, which pushes the implied rates up a bit, but this gives me pause
Last edited by purg on Sat Jan 30, 2021 11:53 am, edited 6 times in total.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

purg wrote: Sat Jan 30, 2021 11:26 am thanks for all the great info and discussion in this thread! good to know that there are people actually doing this lol

just applied for the Roth IRA with Ally because my current brokerage doesn't allow options trading in IRAs. i've only been working for two years, so i only have $7k in my Roth from my contribution last year, but from now on, because of the mega backdoor everything above my 401k limit is going into this account. plan is to buy calls on SPY, EFA, and EEM for international diversification with 2:1 leverage. feels weird to be doing this if my plan is to be able to FIRE in 20 years but according to the book 20 years is long enough for this strategy to win out. haven't calculated a target equity exposure yet because i'm at least half a decade out from that mattering

edit: trying to calculate the implied interest rates here, i'm getting 5.42% for SPY, and a whopping 16%+ for the other two indices. maybe not worth internationally diversifying then, and that SPY rate is much higher than i would have thought. my dividend projection might be little optimistic, which pushes the implied rates up a bit, but this gives me pause
I’ve found the same things you have. International call options have really high implicit borrowing rates (I think it’s probably just the high spreads, otherwise they’d be great options to sell haha). SPY is about the best but with the elevated VIX, the downside protection is worth a lot more so that’s why you get that high of a rate. That’s why I don’t particularly recommend them any more.

With that balance, I would recommend either of the following two options:
1) Invest both in UPRO and regular stock ETFs in proportion to get the leverage you wanted. You’ll have to rebalance occasionally between the various ETFs to make sure the overall leverage is what you want. This has the advantage of letting you have international diversification.
2) Move the account to a brokerage that lets you trade futures and buy an E-Micro (notional of 5X S&P500). It’s about 2.6x leverage so it’s on the high side but if you have contributions left this year, it might not be so bad.

Otherwise, just going 100% stocks is good too.
"... 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: Lifecycle Investing - Leveraging when young

Post by abuss368 »

Personally, I do not like the use of leverage with investing at all during our investment journey. Leverage can work very well when on an investors side but can also blow up when the tide pulls back.

Keep investing simple.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

abuss368 wrote: Sat Jan 30, 2021 1:56 pm Personally, I do not like the use of leverage with investing at all during our investment journey. Leverage can work very well when on an investors side but can also blow up when the tide pulls back.

Keep investing simple.
Tony
Lifecycle investing's use of leverage is quite different in spirit because it is intended to increase safety by spreading risk better rather than to simply make a bigger bet. From the lifecycle investing perspective, the most dangerous years are the ones right around retirement where stock risk is most concentrated using traditional glidepaths. So traditional glidepaths are more likely to blow up--or more technically, provide poorer risk-return over a lifetime.

Still, using leverage responsibly when young requires a maturity and psychological constitution that many young investors may not have. They would have to tolerate large losses on their savings portfolio when young. In principle, these large losses are okay because it's still not much money relative to their lifetime savings. But psychologically it may be hard. I know it would have been hard for me to lose my $200K that I had saved up in the first few years. Seemed like a huge sum for me. For people like me who don't have the necessary constitution, stopping at 100% stocks when the model suggests leveraging might be a good compromise. It also avoids some of the technical difficulties and costs involved in leveraging. But whether people decide to leverage or not, it's important to understand the principle of lifecycle investing because it can lead to a more sensible glidepath over a lifetime, even without leverage.
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Re: Lifecycle Investing - Leveraging when young

Post by abuss368 »

Ben Mathew wrote: Sat Jan 30, 2021 2:44 pm
abuss368 wrote: Sat Jan 30, 2021 1:56 pm Personally, I do not like the use of leverage with investing at all during our investment journey. Leverage can work very well when on an investors side but can also blow up when the tide pulls back.

Keep investing simple.
Tony
Lifecycle investing's use of leverage is quite different in spirit because it is intended to increase safety by spreading risk better rather than to simply make a bigger bet. From the lifecycle investing perspective, the most dangerous years are the ones right around retirement where stock risk is most concentrated using traditional glidepaths. So traditional glidepaths are more likely to blow up--or more technically, provide poorer risk-return over a lifetime.

Still, using leverage responsibly when young requires a maturity and psychological constitution that many young investors may not have. They would have to tolerate large losses on their savings portfolio when young. In principle, these large losses are okay because it's still not much money relative to their lifetime savings. But psychologically it may be hard. I know it would have been hard for me to lose my $200K that I had saved up in the first few years. Seemed like a huge sum for me. For people like me who don't have the necessary constitution, stopping at 100% stocks when the model suggests leveraging might be a good compromise. It also avoids some of the technical difficulties and costs involved in leveraging. But whether people decide to leverage or not, it's important to understand the principle of lifecycle investing because it can lead to a more sensible glidepath over a lifetime, even without leverage.
That makes sense and perhaps some investors (when younger) would be able to employ leverage and sustain the impact from the additional risk. I for one would probably struggle to stay true to that strategy. The miracle of compounding and placing our contributions on a scheduled plan has worked very well.

I have appreciated more that often investor behavior may be the biggest risk of all.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

abuss368 wrote: Sat Jan 30, 2021 1:56 pm Personally, I do not like the use of leverage with investing at all during our investment journey. Leverage can work very well when on an investors side but can also blow up when the tide pulls back.

Keep investing simple.
Tony
Let me put it this way Tony: You know how you’re always backing up the truck? Well, I simply backed up an ocean freight and now I’m good for a long time :mrgreen:
"... 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: Lifecycle Investing - Leveraging when young

Post by dont_know_mind »

Ben Mathew wrote: Sat Jan 30, 2021 2:44 pm
abuss368 wrote: Sat Jan 30, 2021 1:56 pm Personally, I do not like the use of leverage with investing at all during our investment journey. Leverage can work very well when on an investors side but can also blow up when the tide pulls back.

Keep investing simple.
Tony
Lifecycle investing's use of leverage is quite different in spirit because it is intended to increase safety by spreading risk better rather than to simply make a bigger bet. From the lifecycle investing perspective, the most dangerous years are the ones right around retirement where stock risk is most concentrated using traditional glidepaths. So traditional glidepaths are more likely to blow up--or more technically, provide poorer risk-return over a lifetime.

Still, using leverage responsibly when young requires a maturity and psychological constitution that many young investors may not have. They would have to tolerate large losses on their savings portfolio when young. In principle, these large losses are okay because it's still not much money relative to their lifetime savings. But psychologically it may be hard. I know it would have been hard for me to lose my $200K that I had saved up in the first few years. Seemed like a huge sum for me. For people like me who don't have the necessary constitution, stopping at 100% stocks when the model suggests leveraging might be a good compromise. It also avoids some of the technical difficulties and costs involved in leveraging. But whether people decide to leverage or not, it's important to understand the principle of lifecycle investing because it can lead to a more sensible glidepath over a lifetime, even without leverage.
It is only one way of thinking about it.
I think it depends on your utility function.
I found mine changed over the lifespan.
When I was young without children, I was comfortable with 4-5X yearly income in debt.
When I had young children (under 5), even though I had insurances, there was always a risk they would not pay out, so I was only comfortable with 2-3X yearly income in debt. I didn't want to leave my wife with a mess of debt in case I died prematurely and the insurances didn't pay out.
Now that the kids are older, I find this balances the reduction in human capital and I am still comfortable with 2-3X yearly income in debt.
It's all very subjective how people assess this.
My ramblings are probably rubbish, biased by my position and talking my own book. No-one should invest based on my views. Some days I wonder whether I've had some skill or just been a lucky gambler.
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

Steve Reading wrote: Sat Jan 30, 2021 8:43 pm .
If I'm not mistaken, leverage with SPX options or E-micro S&P 500 are essentially borrowing USD.

For those who earns USD, borrowing USD against their future income is straightforward.
But for those who earns other currencies, I suppose it expose them to currency risk.

IB provides several currencies for margin borrowing, so those earning EUR or JPY would probably be fine.
However, my salary is in Taiwan dollar, which IB does not provide.

How should one using leverage while taking account of currency risk?
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

daze wrote: Sat Jan 30, 2021 9:22 pm
Steve Reading wrote: Sat Jan 30, 2021 8:43 pm .
If I'm not mistaken, leverage with SPX options or E-micro S&P 500 are essentially borrowing USD.

For those who earns USD, borrowing USD against their future income is straightforward.
But for those who earns other currencies, I suppose it expose them to currency risk.

IB provides several currencies for margin borrowing, so those earning EUR or JPY would probably be fine.
However, my salary is in Taiwan dollar, which IB does not provide.

How should one using leverage while taking account of currency risk?
I don’t really know. If it were me, I probably would just use margin or futures in USD and take on the currency risk. This is the same currency risk you’d take if you invested in the SPX denominated in USD. It’s not like futures are literally a debt in USD that you must pay. They just expose you to more stock than you could with your savings.

Maybe Ben can chime in, I know the above isn’t a very satisfying answer.
"... 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: Lifecycle Investing - Leveraging when young

Post by daze »

Steve Reading wrote: Sat Jan 30, 2021 10:31 pm
daze wrote: Sat Jan 30, 2021 9:22 pm
Steve Reading wrote: Sat Jan 30, 2021 8:43 pm .
If I'm not mistaken, leverage with SPX options or E-micro S&P 500 are essentially borrowing USD.

For those who earns USD, borrowing USD against their future income is straightforward.
But for those who earns other currencies, I suppose it expose them to currency risk.

IB provides several currencies for margin borrowing, so those earning EUR or JPY would probably be fine.
However, my salary is in Taiwan dollar, which IB does not provide.

How should one using leverage while taking account of currency risk?
I don’t really know. If it were me, I probably would just use margin or futures in USD and take on the currency risk. This is the same currency risk you’d take if you invested in the SPX denominated in USD. It’s not like futures are literally a debt in USD that you must pay. They just expose you to more stock than you could with your savings.
Imaging I'm provided a noncallable loan as large as I want, either in USD or in TWD.
Let's say the PV of my future income is 28M TWD or 1M USD and the targeted stock exposure is 50%.
(TWD:USD is about 28:1 currently. It was 33:1 in 2015. A volatility of 20% or more is not too impossible on a lifecycle viewpoint.)

1. I can take a loan of 14M TWD and invest all of them into VT. If USD appreciated by 20%, I could still service the debt with 50% of my future income.
2. I can take a loan of 0.5M USD and invest all of them into VT. If USD appreciated by 20%, I would need to service the debt with 60% of my future income. I could also sell some VT, but the currency exposure of VT is not totally in USD and the volatility of VT is involved.

If I use e-micro futures to get leverage, and I paired futures with ex-US ETF to reach a global market exposure, it would be similar to borrow USD to buy VT and there's real currency risk in it.
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Re: Lifecycle Investing - Leveraging when young

Post by dont_know_mind »

Steve Reading wrote: Sat Jan 30, 2021 8:43 pm
abuss368 wrote: Sat Jan 30, 2021 1:56 pm Personally, I do not like the use of leverage with investing at all during our investment journey. Leverage can work very well when on an investors side but can also blow up when the tide pulls back.

Keep investing simple.
Tony
Let me put it this way Tony: You know how you’re always backing up the truck? Well, I simply backed up an ocean freight and now I’m good for a long time :mrgreen:
Steve (and please also Ben if he wants to comment also),
If you are able to handle 150%-250% earlier in your life, and you reach 2X or 3X FI level by retirement age (eg a SWR of 2%), what stops you from staying at 100% or 125% in retirement ?

If the point of Lifecycle investing is to show that the AA of 100% is an illusion due to the unrealised future labour income aspect, why should the conventional AA still be a barrier after something arbitary like reaching FI or retirement age ?

If you can handle 200% earlier in your life, then 100% in retirement seems a breeze if your cashflows allow it (ie your SWR is in the 2% range). Whether you want to take that risk is another thing but...
My ramblings are probably rubbish, biased by my position and talking my own book. No-one should invest based on my views. Some days I wonder whether I've had some skill or just been a lucky gambler.
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Re: Lifecycle Investing - Leveraging when young

Post by abuss368 »

Steve Reading wrote: Sat Jan 30, 2021 8:43 pm
abuss368 wrote: Sat Jan 30, 2021 1:56 pm Personally, I do not like the use of leverage with investing at all during our investment journey. Leverage can work very well when on an investors side but can also blow up when the tide pulls back.

Keep investing simple.
Tony
Let me put it this way Tony: You know how you’re always backing up the truck? Well, I simply backed up an ocean freight and now I’m good for a long time :mrgreen:
Baaaaa haaaa! That was good. Made me laugh out loud. :beer
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Lifecycle Investing - Leveraging when young

Post by dont_know_mind »

daze wrote: Sun Jan 31, 2021 2:13 am
Steve Reading wrote: Sat Jan 30, 2021 10:31 pm
daze wrote: Sat Jan 30, 2021 9:22 pm
Steve Reading wrote: Sat Jan 30, 2021 8:43 pm .
If I'm not mistaken, leverage with SPX options or E-micro S&P 500 are essentially borrowing USD.

For those who earns USD, borrowing USD against their future income is straightforward.
But for those who earns other currencies, I suppose it expose them to currency risk.

IB provides several currencies for margin borrowing, so those earning EUR or JPY would probably be fine.
However, my salary is in Taiwan dollar, which IB does not provide.

How should one using leverage while taking account of currency risk?
I don’t really know. If it were me, I probably would just use margin or futures in USD and take on the currency risk. This is the same currency risk you’d take if you invested in the SPX denominated in USD. It’s not like futures are literally a debt in USD that you must pay. They just expose you to more stock than you could with your savings.
Imaging I'm provided a noncallable loan as large as I want, either in USD or in TWD.
Let's say the PV of my future income is 28M TWD or 1M USD and the targeted stock exposure is 50%.
(TWD:USD is about 28:1 currently. It was 33:1 in 2015. A volatility of 20% or more is not too impossible on a lifecycle viewpoint.)

1. I can take a loan of 14M TWD and invest all of them into VT. If USD appreciated by 20%, I could still service the debt with 50% of my future income.
2. I can take a loan of 0.5M USD and invest all of them into VT. If USD appreciated by 20%, I would need to service the debt with 60% of my future income. I could also sell some VT, but the currency exposure of VT is not totally in USD and the volatility of VT is involved.

If I use e-micro futures to get leverage, and I paired futures with ex-US ETF to reach a global market exposure, it would be similar to borrow USD to buy VT and there's real currency risk in it.
If you could get a non-callable loan in TWD and your income is in TWD and you intend to retire in Taiwan, why would you not just buy a Taiwan domiciled Taiwan ETF and ex-Taiwan (world) ETF (in whatever local:world ratio you think is optimal) ? Would there not be a Vanguard or low cost index fund options on the TWSE ?
My ramblings are probably rubbish, biased by my position and talking my own book. No-one should invest based on my views. Some days I wonder whether I've had some skill or just been a lucky gambler.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

dont_know_mind wrote: Sun Jan 31, 2021 6:31 am
Steve Reading wrote: Sat Jan 30, 2021 8:43 pm
abuss368 wrote: Sat Jan 30, 2021 1:56 pm Personally, I do not like the use of leverage with investing at all during our investment journey. Leverage can work very well when on an investors side but can also blow up when the tide pulls back.

Keep investing simple.
Tony
Let me put it this way Tony: You know how you’re always backing up the truck? Well, I simply backed up an ocean freight and now I’m good for a long time :mrgreen:
Steve (and please also Ben if he wants to comment also),
If you are able to handle 150%-250% earlier in your life, and you reach 2X or 3X FI level by retirement age (eg a SWR of 2%), what stops you from staying at 100% or 125% in retirement ?

If the point of Lifecycle investing is to show that the AA of 100% is an illusion due to the unrealised future labour income aspect, why should the conventional AA still be a barrier after something arbitary like reaching FI or retirement age ?

If you can handle 200% earlier in your life, then 100% in retirement seems a breeze if your cashflows allow it (ie your SWR is in the 2% range). Whether you want to take that risk is another thing but...
You can be 100% in retirement if that’s what your risk aversion says.

The lesson from Lifecycle Investing is that 200% in stocks when young is less risky than, say, 50% stocks when retired because the dollar amounts in the former are much smaller than the latter. In fact, one way I think of Lifecycle Investing is to spread risk such that no point in my life is riskier than any other financial-wise.
"... 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: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

daze wrote: Sun Jan 31, 2021 2:13 am
Steve Reading wrote: Sat Jan 30, 2021 10:31 pm
daze wrote: Sat Jan 30, 2021 9:22 pm
Steve Reading wrote: Sat Jan 30, 2021 8:43 pm .
If I'm not mistaken, leverage with SPX options or E-micro S&P 500 are essentially borrowing USD.

For those who earns USD, borrowing USD against their future income is straightforward.
But for those who earns other currencies, I suppose it expose them to currency risk.

IB provides several currencies for margin borrowing, so those earning EUR or JPY would probably be fine.
However, my salary is in Taiwan dollar, which IB does not provide.

How should one using leverage while taking account of currency risk?
I don’t really know. If it were me, I probably would just use margin or futures in USD and take on the currency risk. This is the same currency risk you’d take if you invested in the SPX denominated in USD. It’s not like futures are literally a debt in USD that you must pay. They just expose you to more stock than you could with your savings.
Imaging I'm provided a noncallable loan as large as I want, either in USD or in TWD.
Let's say the PV of my future income is 28M TWD or 1M USD and the targeted stock exposure is 50%.
(TWD:USD is about 28:1 currently. It was 33:1 in 2015. A volatility of 20% or more is not too impossible on a lifecycle viewpoint.)

1. I can take a loan of 14M TWD and invest all of them into VT. If USD appreciated by 20%, I could still service the debt with 50% of my future income.
2. I can take a loan of 0.5M USD and invest all of them into VT. If USD appreciated by 20%, I would need to service the debt with 60% of my future income. I could also sell some VT, but the currency exposure of VT is not totally in USD and the volatility of VT is involved.

If I use e-micro futures to get leverage, and I paired futures with ex-US ETF to reach a global market exposure, it would be similar to borrow USD to buy VT and there's real currency risk in it.
Right, I understand it’s ideal to borrow in your own currency, even if it’s to buy the same ETF. So it’s better to be, say, 200% VT/ -100% TWD than 200% VTI/-100% USD.

Like I said, I don’t have a good answer for you. I probably would just use futures to get leverage and just take the currency risk. Could also go long a USD/TWD futures or a forward (in a way that the contract appreciates if the USD appreciates vs the TWD). This would hedge your currency risk entirely but makes things a little more complicated.
"... 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
dont_know_mind
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Re: Lifecycle Investing - Leveraging when young

Post by dont_know_mind »

Steve Reading wrote: Sun Jan 31, 2021 9:02 am
dont_know_mind wrote: Sun Jan 31, 2021 6:31 am
Steve Reading wrote: Sat Jan 30, 2021 8:43 pm
abuss368 wrote: Sat Jan 30, 2021 1:56 pm Personally, I do not like the use of leverage with investing at all during our investment journey. Leverage can work very well when on an investors side but can also blow up when the tide pulls back.

Keep investing simple.
Tony
Let me put it this way Tony: You know how you’re always backing up the truck? Well, I simply backed up an ocean freight and now I’m good for a long time :mrgreen:
Steve (and please also Ben if he wants to comment also),
If you are able to handle 150%-250% earlier in your life, and you reach 2X or 3X FI level by retirement age (eg a SWR of 2%), what stops you from staying at 100% or 125% in retirement ?

If the point of Lifecycle investing is to show that the AA of 100% is an illusion due to the unrealised future labour income aspect, why should the conventional AA still be a barrier after something arbitary like reaching FI or retirement age ?

If you can handle 200% earlier in your life, then 100% in retirement seems a breeze if your cashflows allow it (ie your SWR is in the 2% range). Whether you want to take that risk is another thing but...
You can be 100% in retirement if that’s what your risk aversion says.

The lesson from Lifecycle Investing is that 200% in stocks when young is less risky than, say, 50% stocks when retired because the dollar amounts in the former are much smaller than the latter. In fact, one way I think of Lifecycle Investing is to spread risk such that no point in my life is riskier than any other financial-wise.
This might only apply if you value a dollar at a similar amount at different net worths intertemporally.
If your utility function for money reduces at a fast enough rate, say $1 is worth 1000 units when your NW is <100k and $1 is worth 1 unit when your NW is above 10M, then there may not be higher risk due to higher dollar amounts in older age.

The idea of spreading risk over the lifespan has merit but how we define that risk is subjective, and very much depends on the individual's utility function. I don't recall the authors of the book discussing this. Maybe it is implied they assume a log utility function.

Excuse me for bringing it up again if you've already covered this earlier in the post (from previous pages). Feel free to refer me back to a previous post if this was already discussed.
My ramblings are probably rubbish, biased by my position and talking my own book. No-one should invest based on my views. Some days I wonder whether I've had some skill or just been a lucky gambler.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

dont_know_mind wrote: Sun Jan 31, 2021 9:42 am This might only apply if you value a dollar at a similar amount at different net worths intertemporally.
If your utility function for money reduces at a fast enough rate, say $1 is worth 1000 units when your NW is <100k and $1 is worth 1 unit when your NW is above 10M, then there may not be higher risk due to higher dollar amounts in older age.

The idea of spreading risk over the lifespan has merit but how we define that risk is subjective, and very much depends on the individual's utility function. I don't recall the authors of the book discussing this. Maybe it is implied they assume a log utility function.

Excuse me for bringing it up again if you've already covered this earlier in the post (from previous pages). Feel free to refer me back to a previous post if this was already discussed.
There's a lot of nuance in this topic and Ben can probably answer you better. FWIW, the authors assume constant relative risk aversion for utility function. So the value of a dollar is valued exponentially less such that a percent increase in wealth is valued the same at different net worths.

All I'm trying to say is that the phrase: "you're 200% stocks when accumulating" does not imply "then you should have no problem being 125% stocks when retired". Maybe from a psychological standpoint but it doesn't follow from a utility standpoint.
"... 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: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

dont_know_mind wrote: Sun Jan 31, 2021 9:42 am
Steve Reading wrote: Sun Jan 31, 2021 9:02 am
dont_know_mind wrote: Sun Jan 31, 2021 6:31 am Steve (and please also Ben if he wants to comment also),
If you are able to handle 150%-250% earlier in your life, and you reach 2X or 3X FI level by retirement age (eg a SWR of 2%), what stops you from staying at 100% or 125% in retirement ?

If the point of Lifecycle investing is to show that the AA of 100% is an illusion due to the unrealised future labour income aspect, why should the conventional AA still be a barrier after something arbitary like reaching FI or retirement age ?

If you can handle 200% earlier in your life, then 100% in retirement seems a breeze if your cashflows allow it (ie your SWR is in the 2% range). Whether you want to take that risk is another thing but...
You can be 100% in retirement if that’s what your risk aversion says.

The lesson from Lifecycle Investing is that 200% in stocks when young is less risky than, say, 50% stocks when retired because the dollar amounts in the former are much smaller than the latter. In fact, one way I think of Lifecycle Investing is to spread risk such that no point in my life is riskier than any other financial-wise.
This might only apply if you value a dollar at a similar amount at different net worths intertemporally.
If your utility function for money reduces at a fast enough rate, say $1 is worth 1000 units when your NW is <100k and $1 is worth 1 unit when your NW is above 10M, then there may not be higher risk due to higher dollar amounts in older age.

The idea of spreading risk over the lifespan has merit but how we define that risk is subjective, and very much depends on the individual's utility function. I don't recall the authors of the book discussing this. Maybe it is implied they assume a log utility function.

Excuse me for bringing it up again if you've already covered this earlier in the post (from previous pages). Feel free to refer me back to a previous post if this was already discussed.
The way the standard models are set up, utility is defined over consumption, not over current $ in the savings portfolio. So in the context of retirement planning over ages 65 to 100, utility is defined over withdrawal at age 65 , withdrawal at age 66, and so on. These withdrawals have to be funded by current savings portfolio + future savings. In other words, the net worth is being broadly defined to include future savings, not just the current portfolio. That's because a a young person starting out in the workforce, having saved up only say $50,000 in the first few years, is not planning for a meager retirement funded by the $50,000 currently saved, but will include the expected future savings as well in the plan. When the a person is young, savings portfolio is small, but future savings is large, so the net worth available to fund retirement may still be large. That will require a commensurately large allocation to stocks to maintain the target AA.
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

daze wrote: Sun Jan 31, 2021 2:13 am
Steve Reading wrote: Sat Jan 30, 2021 10:31 pm
daze wrote: Sat Jan 30, 2021 9:22 pm
Steve Reading wrote: Sat Jan 30, 2021 8:43 pm .
If I'm not mistaken, leverage with SPX options or E-micro S&P 500 are essentially borrowing USD.

For those who earns USD, borrowing USD against their future income is straightforward.
But for those who earns other currencies, I suppose it expose them to currency risk.

IB provides several currencies for margin borrowing, so those earning EUR or JPY would probably be fine.
However, my salary is in Taiwan dollar, which IB does not provide.

How should one using leverage while taking account of currency risk?
I don’t really know. If it were me, I probably would just use margin or futures in USD and take on the currency risk. This is the same currency risk you’d take if you invested in the SPX denominated in USD. It’s not like futures are literally a debt in USD that you must pay. They just expose you to more stock than you could with your savings.
Imaging I'm provided a noncallable loan as large as I want, either in USD or in TWD.
Let's say the PV of my future income is 28M TWD or 1M USD and the targeted stock exposure is 50%.
(TWD:USD is about 28:1 currently. It was 33:1 in 2015. A volatility of 20% or more is not too impossible on a lifecycle viewpoint.)

1. I can take a loan of 14M TWD and invest all of them into VT. If USD appreciated by 20%, I could still service the debt with 50% of my future income.
2. I can take a loan of 0.5M USD and invest all of them into VT. If USD appreciated by 20%, I would need to service the debt with 60% of my future income. I could also sell some VT, but the currency exposure of VT is not totally in USD and the volatility of VT is involved.

If I use e-micro futures to get leverage, and I paired futures with ex-US ETF to reach a global market exposure, it would be similar to borrow USD to buy VT and there's real currency risk in it.
One thing to note here is that in the long run, inflation rates and currency values are strongly linked. High inflation rates lead to weakening exchange rates. So in your example, if the USD appreciated by 20% against TWD, it might be because TWD experienced 20% more inflation. That may mean that your nominal income in TWD is 20% more, so you can still service the debt with 50% of your future income.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Ben Mathew wrote: Sun Jan 31, 2021 11:57 am
daze wrote: Sun Jan 31, 2021 2:13 am
Steve Reading wrote: Sat Jan 30, 2021 10:31 pm
daze wrote: Sat Jan 30, 2021 9:22 pm
Steve Reading wrote: Sat Jan 30, 2021 8:43 pm .
If I'm not mistaken, leverage with SPX options or E-micro S&P 500 are essentially borrowing USD.

For those who earns USD, borrowing USD against their future income is straightforward.
But for those who earns other currencies, I suppose it expose them to currency risk.

IB provides several currencies for margin borrowing, so those earning EUR or JPY would probably be fine.
However, my salary is in Taiwan dollar, which IB does not provide.

How should one using leverage while taking account of currency risk?
I don’t really know. If it were me, I probably would just use margin or futures in USD and take on the currency risk. This is the same currency risk you’d take if you invested in the SPX denominated in USD. It’s not like futures are literally a debt in USD that you must pay. They just expose you to more stock than you could with your savings.
Imaging I'm provided a noncallable loan as large as I want, either in USD or in TWD.
Let's say the PV of my future income is 28M TWD or 1M USD and the targeted stock exposure is 50%.
(TWD:USD is about 28:1 currently. It was 33:1 in 2015. A volatility of 20% or more is not too impossible on a lifecycle viewpoint.)

1. I can take a loan of 14M TWD and invest all of them into VT. If USD appreciated by 20%, I could still service the debt with 50% of my future income.
2. I can take a loan of 0.5M USD and invest all of them into VT. If USD appreciated by 20%, I would need to service the debt with 60% of my future income. I could also sell some VT, but the currency exposure of VT is not totally in USD and the volatility of VT is involved.

If I use e-micro futures to get leverage, and I paired futures with ex-US ETF to reach a global market exposure, it would be similar to borrow USD to buy VT and there's real currency risk in it.
One thing to note here is that in the long run, inflation rates and currency values are strongly linked. High inflation rates lead to weakening exchange rates. So in your example, if the USD appreciated by 20% against TWD, it might be because TWD experienced 20% more inflation. That may mean that your nominal income in TWD is 20% more, so you can still service the debt with 50% of your future income.
Is that just saying that to the extent your income is inflation-adjusted, and to the extent the real rate is the same throughout the world, then there's really no problem?

If so, that makes a lot of sense!
"... 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: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

Steve Reading wrote: Sun Jan 31, 2021 12:06 pm
Ben Mathew wrote: Sun Jan 31, 2021 11:57 am
daze wrote: Sun Jan 31, 2021 2:13 am
Steve Reading wrote: Sat Jan 30, 2021 10:31 pm
daze wrote: Sat Jan 30, 2021 9:22 pm

If I'm not mistaken, leverage with SPX options or E-micro S&P 500 are essentially borrowing USD.

For those who earns USD, borrowing USD against their future income is straightforward.
But for those who earns other currencies, I suppose it expose them to currency risk.

IB provides several currencies for margin borrowing, so those earning EUR or JPY would probably be fine.
However, my salary is in Taiwan dollar, which IB does not provide.

How should one using leverage while taking account of currency risk?
I don’t really know. If it were me, I probably would just use margin or futures in USD and take on the currency risk. This is the same currency risk you’d take if you invested in the SPX denominated in USD. It’s not like futures are literally a debt in USD that you must pay. They just expose you to more stock than you could with your savings.
Imaging I'm provided a noncallable loan as large as I want, either in USD or in TWD.
Let's say the PV of my future income is 28M TWD or 1M USD and the targeted stock exposure is 50%.
(TWD:USD is about 28:1 currently. It was 33:1 in 2015. A volatility of 20% or more is not too impossible on a lifecycle viewpoint.)

1. I can take a loan of 14M TWD and invest all of them into VT. If USD appreciated by 20%, I could still service the debt with 50% of my future income.
2. I can take a loan of 0.5M USD and invest all of them into VT. If USD appreciated by 20%, I would need to service the debt with 60% of my future income. I could also sell some VT, but the currency exposure of VT is not totally in USD and the volatility of VT is involved.

If I use e-micro futures to get leverage, and I paired futures with ex-US ETF to reach a global market exposure, it would be similar to borrow USD to buy VT and there's real currency risk in it.
One thing to note here is that in the long run, inflation rates and currency values are strongly linked. High inflation rates lead to weakening exchange rates. So in your example, if the USD appreciated by 20% against TWD, it might be because TWD experienced 20% more inflation. That may mean that your nominal income in TWD is 20% more, so you can still service the debt with 50% of your future income.
Is that just saying that to the extent your income is inflation-adjusted, and to the extent the real rate is the same throughout the world, then there's really no problem?

If so, that makes a lot of sense!
Yes, that's what I was thinking of.
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

dont_know_mind wrote: Sun Jan 31, 2021 6:38 am
daze wrote: Sun Jan 31, 2021 2:13 am
Steve Reading wrote: Sat Jan 30, 2021 10:31 pm
daze wrote: Sat Jan 30, 2021 9:22 pm
Steve Reading wrote: Sat Jan 30, 2021 8:43 pm .
If I'm not mistaken, leverage with SPX options or E-micro S&P 500 are essentially borrowing USD.

For those who earns USD, borrowing USD against their future income is straightforward.
But for those who earns other currencies, I suppose it expose them to currency risk.

IB provides several currencies for margin borrowing, so those earning EUR or JPY would probably be fine.
However, my salary is in Taiwan dollar, which IB does not provide.

How should one using leverage while taking account of currency risk?
I don’t really know. If it were me, I probably would just use margin or futures in USD and take on the currency risk. This is the same currency risk you’d take if you invested in the SPX denominated in USD. It’s not like futures are literally a debt in USD that you must pay. They just expose you to more stock than you could with your savings.
Imaging I'm provided a noncallable loan as large as I want, either in USD or in TWD.
Let's say the PV of my future income is 28M TWD or 1M USD and the targeted stock exposure is 50%.
(TWD:USD is about 28:1 currently. It was 33:1 in 2015. A volatility of 20% or more is not too impossible on a lifecycle viewpoint.)

1. I can take a loan of 14M TWD and invest all of them into VT. If USD appreciated by 20%, I could still service the debt with 50% of my future income.
2. I can take a loan of 0.5M USD and invest all of them into VT. If USD appreciated by 20%, I would need to service the debt with 60% of my future income. I could also sell some VT, but the currency exposure of VT is not totally in USD and the volatility of VT is involved.

If I use e-micro futures to get leverage, and I paired futures with ex-US ETF to reach a global market exposure, it would be similar to borrow USD to buy VT and there's real currency risk in it.
If you could get a non-callable loan in TWD and your income is in TWD and you intend to retire in Taiwan, why would you not just buy a Taiwan domiciled Taiwan ETF and ex-Taiwan (world) ETF (in whatever local:world ratio you think is optimal) ? Would there not be a Vanguard or low cost index fund options on the TWSE ?
The non-callable loan example is only for illustration.
In reality, I can get 2M or 3M TWD non-callable loan but never 14M.

The S&P 500 ETF in Taiwan charge TER 0.61% with tracking error about 1.5%. Not very impressive.
And there's no really world ETF available at TWSE.
Steve Reading wrote: Sun Jan 31, 2021 9:08 am
Right, I understand it’s ideal to borrow in your own currency, even if it’s to buy the same ETF. So it’s better to be, say, 200% VT/ -100% TWD than 200% VTI/-100% USD.

Like I said, I don’t have a good answer for you. I probably would just use futures to get leverage and just take the currency risk. Could also go long a USD/TWD futures or a forward (in a way that the contract appreciates if the USD appreciates vs the TWD). This would hedge your currency risk entirely but makes things a little more complicated.
The typical contract size for USD/TWD swap is about 1M USD/contract, not really viable.
Ben Mathew wrote: Sun Jan 31, 2021 11:57 am One thing to note here is that in the long run, inflation rates and currency values are strongly linked. High inflation rates lead to weakening exchange rates. So in your example, if the USD appreciated by 20% against TWD, it might be because TWD experienced 20% more inflation. That may mean that your nominal income in TWD is 20% more, so you can still service the debt with 50% of your future income.
I don't know...
As previous mentioned, TWD:USD is about 28:1 currently and it was 33:1 in 2015.
No sure whether US has 20% more inflation than Taiwan in the previous 5 years.

Taiwan certainly is not in deflation.

==================
I think I might take about 2M TWD non-callable loan, and borrow another 70K in USD via futures.
The currency risk is less although the leverage ratio is also less.

I would be comfortable with this arrangement.
But I'm not sure does it really matter to keep TWD debt and USD debt at about the same amount, or I should just choose an amount of USD debt I'm comfortable with, regardless of the amount of TWD debt.
Last edited by daze on Sun Jan 31, 2021 10:13 pm, edited 1 time in total.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

daze wrote: Sun Jan 31, 2021 9:23 pm
dont_know_mind wrote: Sun Jan 31, 2021 6:38 am
daze wrote: Sun Jan 31, 2021 2:13 am
Steve Reading wrote: Sat Jan 30, 2021 10:31 pm
daze wrote: Sat Jan 30, 2021 9:22 pm

If I'm not mistaken, leverage with SPX options or E-micro S&P 500 are essentially borrowing USD.

For those who earns USD, borrowing USD against their future income is straightforward.
But for those who earns other currencies, I suppose it expose them to currency risk.

IB provides several currencies for margin borrowing, so those earning EUR or JPY would probably be fine.
However, my salary is in Taiwan dollar, which IB does not provide.

How should one using leverage while taking account of currency risk?
I don’t really know. If it were me, I probably would just use margin or futures in USD and take on the currency risk. This is the same currency risk you’d take if you invested in the SPX denominated in USD. It’s not like futures are literally a debt in USD that you must pay. They just expose you to more stock than you could with your savings.
Imaging I'm provided a noncallable loan as large as I want, either in USD or in TWD.
Let's say the PV of my future income is 28M TWD or 1M USD and the targeted stock exposure is 50%.
(TWD:USD is about 28:1 currently. It was 33:1 in 2015. A volatility of 20% or more is not too impossible on a lifecycle viewpoint.)

1. I can take a loan of 14M TWD and invest all of them into VT. If USD appreciated by 20%, I could still service the debt with 50% of my future income.
2. I can take a loan of 0.5M USD and invest all of them into VT. If USD appreciated by 20%, I would need to service the debt with 60% of my future income. I could also sell some VT, but the currency exposure of VT is not totally in USD and the volatility of VT is involved.

If I use e-micro futures to get leverage, and I paired futures with ex-US ETF to reach a global market exposure, it would be similar to borrow USD to buy VT and there's real currency risk in it.
If you could get a non-callable loan in TWD and your income is in TWD and you intend to retire in Taiwan, why would you not just buy a Taiwan domiciled Taiwan ETF and ex-Taiwan (world) ETF (in whatever local:world ratio you think is optimal) ? Would there not be a Vanguard or low cost index fund options on the TWSE ?
The non-callable loan example is only for illustration.
In reality, I can get 2M or 3M TWD non-callable loan but never 14M.

The S&P 500 ETF in Taiwan charge TER 0.61% with tracking error about 1.5%. Not very impressive.
And there's no really world ETF available at TWSE.
Steve Reading wrote: Sun Jan 31, 2021 9:08 am
Right, I understand it’s ideal to borrow in your own currency, even if it’s to buy the same ETF. So it’s better to be, say, 200% VT/ -100% TWD than 200% VTI/-100% USD.

Like I said, I don’t have a good answer for you. I probably would just use futures to get leverage and just take the currency risk. Could also go long a USD/TWD futures or a forward (in a way that the contract appreciates if the USD appreciates vs the TWD). This would hedge your currency risk entirely but makes things a little more complicated.
The typical contract size for USD/TWD swap is about 1M USD/contract, not really viable.
Ben Mathew wrote: Sun Jan 31, 2021 11:57 am One thing to note here is that in the long run, inflation rates and currency values are strongly linked. High inflation rates lead to weakening exchange rates. So in your example, if the USD appreciated by 20% against TWD, it might be because TWD experienced 20% more inflation. That may mean that your nominal income in TWD is 20% more, so you can still service the debt with 50% of your future income.
I don't know...
As previous mentioned, TWD:USD is about 28:1 currently and it was 33:1 in 2015.
No sure whether US has 20% more inflation than Taiwan in the previous 5 years.

We certainly is not in deflation, so either US CPI is a joke or the correlation of currency and inflation is not very strong.

==================
I think I might take about 2M TWD non-callable debt, and borrow another 70K in USD via futures.
The currency risk is less although the leverage ratio is also less.
Umh I thought I saw a TWD/USD futures contract that traded on the HK exchange with a notional value of about $61,000. I might be wrong though, I don’t know a whole lot about this topic. Might be worth checking out if you feel really strongly about the currency exposure.

All the best.
"... 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
daze
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

Steve Reading wrote: Sun Jan 31, 2021 10:03 pm
Umh I thought I saw a TWD/USD futures contract that traded on the HK exchange with a notional value of about $61,000. I might be wrong though, I don’t know a whole lot about this topic. Might be worth checking out if you feel really strongly about the currency exposure.

All the best.
I think it's MSCI Taiwan index denominated in USD. It's a Taiwan equities index, not a currency futures.

If long Taiwan equities denominated in TWD and short Taiwan equities denominated in USD, it could hedge for my currency risk. But it's too complicated and the tax consequence can be nasty. I would rather avoid to do so.

Thank you and best regards.
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Re: Lifecycle Investing - Leveraging when young

Post by gokuisthebest »

Hello everyone,

First, thank you Steve for the post and everyone for their contributions. I realized how much there is to learn.
I read the book and currently going through the thread slowly. In mean time i would like to know whats the best leverage method among the 6 mentioned in the OP for my situation:

No debt
No capital gain tax
No house/car/student - so I cannot take such loans
Credit card avg. APR ~ 25%/yr too high, skip
Margin details at @IBKR:
  • 50% initial margin
  • generally 25% of the long stock value. In order to hold a position overnight, margin requirement reverts to the Reg T requirement of 50% of stock value. Since this is long-term, is the requirement going to be 50%? Im not sure if I understand it correctly.
  • 0 ≤ 100,000 ----- 1.57% (BM + 1.5%)
  • 100,000 ≤ 1,000,000 ----- 1.07% (BM + 1%)
I dont have much knowledge about options/LEAPs and currently reading about them, so I cannot try them right now. This leaves me with 1, 5 methods out of the 6 mentioned:
Method 1) Margin at Interactive Brokers
Method 5) Leveraged ETFs - My entire portfolio right now is in HFEA and a modified 3x strategy

1. Whats the best leverage method for me?
2. If I go with margin, do I still need to do the SPX boxes options strategy or just invest in Index funds. What if I use margin to invest in a 2x/3x ETFs?

Thank you.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

gokuisthebest wrote: Tue Feb 09, 2021 11:55 am Margin details at @IBKR:
  • 50% initial margin
  • generally 25% of the long stock value. In order to hold a position overnight, margin requirement reverts to the Reg T requirement of 50% of stock value. Since this is long-term, is the requirement going to be 50%? Im not sure if I understand it correctly.
This is tricky, I know. The answer is that the "reversion to 50% requirement" only happens on the first day you buy the stock. After that, the requirement is only 25%. Look at this set of examples carefully:
https://www.clientam.com.hk/en/index.ph ... =overview3

Note on Day 3 how the position has lost money, and it would be liquidated end of day based on the SMA 50% requirement ($7,500.00 – $8,750.00 < $0) but since the prior day's SMA was cleared, there's no issue.
gokuisthebest wrote: Tue Feb 09, 2021 11:55 am Method 1) Margin at Interactive Brokers
Method 5) Leveraged ETFs - My entire portfolio right now is in HFEA and a modified 3x strategy
If you pay zero capital gains, then futures (option 2) is going to be the best one most likely. The book goes into those a bit, they're simpler than you might first think.
Margin vs LETFs is close but I prefer margin. The reason is that 1.59% borrowing is a bit better than SSO's borrowing and expense ratio. Plus margin lets you buy the exact ETFs you want (ex-US for instance). UPRO is cheaper than SSO overall but offers too much leverage (3x) so you'd have to hold it with some unleveraged ETFs to get the leverage you want (say, 2x). And then you'd have to buy/sell UPRO as needed to maintain that leverage. I would just keep it simple with margin.
gokuisthebest wrote: Tue Feb 09, 2021 11:55 am 2. If I go with margin, do I still need to do the SPX boxes options strategy or just invest in Index funds. What if I use margin to invest in a 2x/3x ETFs?
Shorting an SPX box is just a way to change the margin borrowing rate from 1.59% (or lower) into about 0.6%. It doesn't change anything else. You still invest in the exact same broad-based ETFs. This is what I did; I bought all of the ETFs I wanted on margin, then shorted SPX boxes to change my margin balance (which I'd pay about 1.2% on) to around 0.6% (via options).

You probably shouldn't use margin to buy 2x/3x ETFs, that's probably too much leverage 0_o
gokuisthebest wrote: Tue Feb 09, 2021 11:55 am I realized how much there is to learn.
I highly recommend you open a paper-trading account at Interactive Brokers (and go through some of the Mosaic tutorials of TWS). And just try out some trades of all sizes and see what happens. Think about how you think a purchase would affect your margin requirement and excess liquidity, do the purchase, then look at the margin requirement to confirm. If you're ever interested in shorting an SPX box to reduce your margin interest, try it out in paper trading first too.

Even though I understood most of this stuff in theory, I still took about a week paper trading to confirm I understood what I'm doing, what the portfolio will look like, etc. Just play around with the $1M they give you. I found it to be invaluable practice.
"... 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
DMoogle
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Re: Lifecycle Investing - Leveraging when young

Post by DMoogle »

Steve Reading wrote: Tue Feb 09, 2021 12:40 pm
gokuisthebest wrote: Tue Feb 09, 2021 11:55 am Margin details at @IBKR:
  • 50% initial margin
  • generally 25% of the long stock value. In order to hold a position overnight, margin requirement reverts to the Reg T requirement of 50% of stock value. Since this is long-term, is the requirement going to be 50%? Im not sure if I understand it correctly.
This is tricky, I know. The answer is that the "reversion to 50% requirement" only happens on the first day you buy the stock. After that, the requirement is only 25%. Look at this set of examples carefully:
https://www.clientam.com.hk/en/index.ph ... =overview3

Note on Day 3 how the position has lost money, and it would be liquidated end of day based on the SMA 50% requirement ($7,500.00 – $8,750.00 < $0) but since the prior day's SMA was cleared, there's no issue.
HOLY CRAP I've looked at those examples a bunch of times and never understood this. I always thought that it the requirement would be 50% for all practical purposes, unless you're doing some funky day trading or something. Thank you!
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Re: Lifecycle Investing - Leveraging when young

Post by gokuisthebest »

Thanks for the answers, Steve. I already have a paper account and I'll checkout how to work the options/futures soon, currently im still reading the theory.
Steve Reading wrote: Tue Feb 09, 2021 12:40 pm Margin vs LETFs is close but I prefer margin. The reason is that 1.59% borrowing is a bit better than SSO's borrowing and expense ratio. Plus margin lets you buy the exact ETFs you want (ex-US for instance). UPRO is cheaper than SSO overall but offers too much leverage (3x) so you'd have to hold it with some unleveraged ETFs to get the leverage you want (say, 2x). And then you'd have to buy/sell UPRO as needed to maintain that leverage. I would just keep it simple with margin.
Do you mean by using margin and buying ETF's, we can get better return than by just buying the corresponding LETF's? I'm not using SSO actually but a different set of 3x LETF's so currently im 100% 3x leveraged. how can a retailer with 2/3x leverage using margin do better than corresponding 2/3x LETF as they can borrow at interest rates which retailers cannot and they use some other financial derivatives too(i have no idea about them).
Steve Reading wrote: Tue Feb 09, 2021 12:40 pm You probably shouldn't use margin to buy 2x/3x ETFs, that's probably too much leverage 0_o
Is my math correct here? Lets consider buying 3x etfs using IBKR margin which is 6:1 leveraged. how much % drop is enough for this go bust? is it 33.3% of 16.6%? in my understanding it should still be 33.3%
assume d% drop in etf implies 3d% drop in 3x etf. using IBKR 25% margin maintenance, d = 11.11% drop and i get a margin call?


I have few other questions from the lifecycle investing book chapter 8 using futures for implementation:
1. Using SnP500 price of 979.26 and 1.94% dividend which is foregone via futures, how does it equate to 385$? here the time period is July 27, 2009 to December which means 2 dividends => 2*979.26*11.94%=233.84$
2. Since the futures gives us about 10:1 leverage, we need to keep enough cash to bring down the leverage close to 2:1, right?
3. He says using above values "385-188 = 195$. This is trivial borrowing cost: 195$ to get access to 49k$ of stock for 4 months leads to an implied interest rate of 1.2%". Can you please help me understand this statement and how the implied IR is calculated?
3. How long expiration dates do you suggest for futures? the book mentions 6 months e-mini contracts.
4. What do u think should be the min value of the account to start with? 50k, 100k?

I'm sorry if these were already answered, im still going through some parts of the book which i skipped and also this thread.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

gokuisthebest wrote: Wed Feb 10, 2021 3:14 pm
Steve Reading wrote: Tue Feb 09, 2021 12:40 pm Margin vs LETFs is close but I prefer margin. The reason is that 1.59% borrowing is a bit better than SSO's borrowing and expense ratio. Plus margin lets you buy the exact ETFs you want (ex-US for instance). UPRO is cheaper than SSO overall but offers too much leverage (3x) so you'd have to hold it with some unleveraged ETFs to get the leverage you want (say, 2x). And then you'd have to buy/sell UPRO as needed to maintain that leverage. I would just keep it simple with margin.
Do you mean by using margin and buying ETF's, we can get better return than by just buying the corresponding LETF's? I'm not using SSO actually but a different set of 3x LETF's so currently im 100% 3x leveraged. how can a retailer with 2/3x leverage using margin do better than corresponding 2/3x LETF as they can borrow at interest rates which retailers cannot and they use some other financial derivatives too(i have no idea about them).
The reason is that SSO has a high expense ratio and if you use margin with regular ETFs, you can actually diversify globally (instead of just the S&P 500). But it's a close race and if you opted for LETFs, that's likely fine as well (the book mentions them as an option).
gokuisthebest wrote: Wed Feb 10, 2021 3:14 pm
Steve Reading wrote: Tue Feb 09, 2021 12:40 pm You probably shouldn't use margin to buy 2x/3x ETFs, that's probably too much leverage 0_o
Is my math correct here? Lets consider buying 3x etfs using IBKR margin which is 6:1 leveraged. how much % drop is enough for this go bust? is it 33.3% of 16.6%? in my understanding it should still be 33.3%
assume d% drop in etf implies 3d% drop in 3x etf. using IBKR 25% margin maintenance, d = 11.11% drop and i get a margin call?
First of all, you can't buy a 3x LETF with 2:1 margin at IBKR. The maintenance margin of UPRO is 75%, not 25%. But say you could, for math sakes. If you did have 6:1 leverage, then a 16% drop in the index will fully wipe out all of your money. And you'd get a margin call well before that.

I think around 1.5-2x leverage is enough, I really would follow the book here.
gokuisthebest wrote: Wed Feb 10, 2021 3:14 pm I have few other questions from the lifecycle investing book chapter 8 using futures for implementation:
1. Using SnP500 price of 979.26 and 1.94% dividend which is foregone via futures, how does it equate to 385$? here the time period is July 27, 2009 to December which means 2 dividends => 2*979.26*11.94%=233.84$
2. Since the futures gives us about 10:1 leverage, we need to keep enough cash to bring down the leverage close to 2:1, right?
3. He says using above values "385-188 = 195$. This is trivial borrowing cost: 195$ to get access to 49k$ of stock for 4 months leads to an implied interest rate of 1.2%". Can you please help me understand this statement and how the implied IR is calculated?
3. How long expiration dates do you suggest for futures? the book mentions 6 months e-mini contracts.
4. What do u think should be the min value of the account to start with? 50k, 100k?

I'm sorry if these were already answered, im still going through some parts of the book which i skipped and also this thread.
1) What page was that?
2) That's right. So one S&P Micro contract is $5 times the S&P 500 (3909 today). So a value of $19,545. So if you keep about $9,772 in cash as the collateral for the contract, you'd have 2:1 leverage. The introduction of the S&P Micro a year ago makes this strategy much more doable for small accounts.
3) Using your numbers: $195/$49K = 0.4% for 4 months of borrowing. We want to take the fourth root of that to get the monthly borrowing, then raise it to the 12 to get the yearly (annualized) borrowing. So ((1.004)^(1/4))^(12) = 1.012, or 1.2% of borrowing for a year.
4) If you can use futures (because you don't pay capital gain taxes, or you're using an IRA), you can start with as low as $9,772 using S&P Micro contracts as shown above.
If you're in taxable, and the tax drag of LEAPs or futures would be too high (my situation) then it's either margin or LETFs. Interactive Brokers has a $10 minimum for accounts under $100K so I'd only recommend it if you had, say, 30K or more. If you use LETFs, you can start with basically nothing (a share of SSO costs 100 bucks).
"... 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: Lifecycle Investing - Leveraging when young

Post by gokuisthebest »

Steve Reading wrote: Wed Feb 10, 2021 6:36 pm The reason is that SSO has a high expense ratio and if you use margin with regular ETFs, you can actually diversify globally (instead of just the S&P 500). But it's a close race and if you opted for LETFs, that's likely fine as well (the book mentions them as an option).
Why is 0.91% considered high when it provides 2/3x leverage. Many leverage ETF's usually have around this much ER. I'm using 3x etfs all of them have ~0.9% ER which are globally diversified. Is it possible to go above 2x leverage using margin and non leveraged ETF?
Steve Reading wrote: Wed Feb 10, 2021 6:36 pm First of all, you can't buy a 3x LETF with 2:1 margin at IBKR. The maintenance margin of UPRO is 75%, not 25%. But say you could, for math sakes. If you did have 6:1 leverage, then a 16% drop in the index will fully wipe out all of your money. And you'd get a margin call well before that.

I think around 1.5-2x leverage is enough, I really would follow the book here.
Can you tell me how its 16% drop and not 33% to wipe out the account? For the usual 3x account 33% is obvious but even for 6x leverage the underlying ETF's are still 3x, only our capital has increased now.
What about the margin call, am i correct that we get margin call at 11.11% drop in my earlier example?
I searched online and found inconsistent results like 50%, 75%, 90% margin maintenance for leveraged ETF's. is there any way to get margin for each ticker on IBKR?
Steve Reading wrote: Wed Feb 10, 2021 6:36 pm 1) What page was that?
2) That's right. So one S&P Micro contract is $5 times the S&P 500 (3909 today). So a value of $19,545. So if you keep about $9,772 in cash as the collateral for the contract, you'd have 2:1 leverage. The introduction of the S&P Micro a year ago makes this strategy much more doable for small accounts.
3) Using your numbers: $195/$49K = 0.4% for 4 months of borrowing. We want to take the fourth root of that to get the monthly borrowing, then raise it to the 12 to get the yearly (annualized) borrowing. So ((1.004)^(1/4))^(12) = 1.012, or 1.2% of borrowing for a year.
4) If you can use futures (because you don't pay capital gain taxes, or you're using an IRA), you can start with as low as $9,772 using S&P Micro contracts as shown above.
If you're in taxable, and the tax drag of LEAPs or futures would be too high (my situation) then it's either margin or LETFs. Interactive Brokers has a $10 minimum for accounts under $100K so I'd only recommend it if you had, say, 30K or more. If you use LETFs, you can start with basically nothing (a share of SSO costs 100 bucks).
  1. I have the book in google playstore pages 114-115 in Chapter 8 -> "Another Approach", the next section is "Investing with ProFunds UltraBull". Maybe the playstore book is in a different format compared to say kindle ebook?
  2. how do i check the s&p micro/mini contract prices in IBKR, whats the window name? i can only see options chain. and how does keeping $9,772 bring the total leverage to 2:1? if 'c' is the contract price and 5x leverage gives us 5c exposure. we add 's' cash => c + s gives us 5c + s exposure. 2x leverage implies 5c + s = 2*(c + s). so s = 3*c. that means i should have 3c as cash and additional c to purchase the contract that means total of 4c to start the account with 2x leverage implementation. i dont think i understand how to calculate leverage tbh :confused
  3. The contract eg. in the book is from July 27, 2009 to December. Shouldnt it be 5 months from Aug-Dec? so the implied iR should be (1.004)^(5/12) = 1.0096 = 0.96%
  4. I live in singapore(not a US citizen) and theres no capital gains tax but theres dividend tax of 30%(can be brought down to 15% if Irish domicile which isnt worth the effort).
Edit: I figured the futures has their own tickers like MES for micro E-mini S&P500 which is currently trading at ~3800-3900. Also theres MES ∞ which is probably the auto-rollover feature in IBKR.
1 MES 18 Jun 2021 @3900 gives exposure to 19500USD which is 5:1, if my calculation in step 2 above are correct, i should maintain 3*c=3*3900=11700 USD cash. maybe short term treasury is better? Since this will be a leverage play, does margin come into account here?
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