- Lifecyle Investing book on Amazon
- This great thread on lifecycle investing, which goes deeper than the book in terms of modern ways to leverage
Lifecycle Investing is meant to be a long-term strategy, and the book includes both historical and bootstrap-simulated results for an entire accumulation phase, including additional contributions over time. The theory is sound and the results are impressive. However, after reading about HFEA, I wondered how the results would compare and if the Lifecycle Investing strategy could be improved by levering a balanced portfolio. Since Hedgefundie intended his strategy to be a one-time purchase, the backtesting did not include additional contributions over time. So I built a backtesting spreadsheet to do the apples-to-apples comparison.
I considered 6 strategies for the backtest:
- A constant allocation of 100% VTSAX
- The HFEA strategy: a constant allocation of 55% UPRO and 45% TMF
- The Lifecycle Investing strategy: gliding from 200% equity to 70%
- An unlevered glidepath: gliding from 100% equity to 70%
- A constant allocation of 2x leverage 70% S&P 500 30% LTT
- A modified version of the Lifecycle Investing strategy where bonds are also levered to maintain a constant stock:bond ratio
From these results, it appears HFEA is just as described: a lottery ticket. It has by far the lowest minimum and the highest maximum outcome. The Lifecycle Investing strategy is a more stable approach but offered little benefit over an unleveraged version. That makes sense for my situation - since I already have a sizable portfolio, significant leverage is only used for the next ~5 years. It seems adding leveraged bonds to this strategy does more harm than good, especially in the lower percentiles.
I think the most attractive option to me is the constant 2x 70-30 portfolio. Its median result is close to HFEA, while its minimum and 10th percentile result are vastly superior.
My current allocation is 100% equities (70% domestic, 30% international). Before I make any changes to my portfolio, I wanted to seek the wisdom of the Bogleheads to correct any mistakes and point out aspects I am not considering. I also have a few more research items I want to complete, though I am hesitant to do much more backtesting for risk of overfitting.
Needs more research:
- Repeat analysis with bootstrap simulation
- Consider using a total bond fund rather than LTT, which was used as the bond fund solely because of its inclusion in HFEA
- Determine optimal way to hold funds across taxable and tax-advantaged accounts. E.g. if I want to use a constant 2x levered 70-30 portfolio, I would have 4 funds: leveraged stocks, stocks, leveraged bonds, bonds. Should I lever proportionally (35/35/15/15) or contain more leverage in one asset class (30/50/20/0)? For the simulation, I assumed proportional leverage and ignored taxes.
- Determine what to do with international equities. I did not include in the backtesting for two reasons. The first is that VTIAX data only goes back to 1970. The second is that I recognize that international has underperformed U.S. in the past, but I am not confident it will continue to do so in the future. So I'd rather use this analysis to determine a general strategy for my equity allocation and then work in international.