Using leverage as a young person

[QuesadaLover]

Hi everyone.

I started thinking about this in another thread and thought to start this so as not to derail the other thread.

The USA market generally goes up. Not every day of course but generally up. This is why we invest. Obviously we invest with the understanding there can be a large correction and the correction can last a long time, though historically not longer than about 20Y. Nearly all my investing life I have been in some combination of VG SP500 and TSM. Now that I am beginning to approach the end of my accumulation phase, I'm thinking ... in light of that said, wouldn't we all have been better off - assuming we can stomach the downturns - to have leveraged? That is to say - most of us do not DCA, most of us invest everything we have every two weeks through our paychecks. If UPRO or TQQQ existed 30Y ago, would it not have been better at least for the first 10 or 20 Y to have invested those biweekly paychecks in UPRO instead of VTSAX?

I appreciate that they are not designed to be LT investments, and I appreciate and understand decay and why it happens. And I do not mean this for someone 10y out from retirement. But for a young person starting out, isn't the best choice really UPRO not VTSAX for the first 10 or 20Y or their investing life?

[DonIce]

I appreciate that they are not designed to be LT investments, and I appreciate and understand decay and why it happens. And I do not mean this for someone 10y out from retirement. But for a young person starting out, isn't the best choice really UPRO not VTSAX for the first 10 or 20Y or their investing life?

No. UPRO would have gone to zero twice in the last 30 years, once in the dot com bust and once in the financial crisis. There is a reasonable case for perhaps 1.2-1.5x leverage using appropriate instruments (quarterly rolling futures probably being the best way), but 3x leverage is guaranteed to blow up.

[nisiprius]

...would it not have been better at least for the first 10 or 20 Y to have invested those biweekly paychecks in UPRO instead of VTSAX?

I appreciate that they are not designed to be LT investments...

How is "twenty years" not a long-term investment?

How do you invest for twenty years in UPRO without making a long-term investment in UPRO?

[alex_686]

I was on the margin desk during the dot.com boom and bust.

I am going to say no, you shouldn’t leverage. It a nuanced question. Yeah, equity returns are higher. But higher returns means higher risk which means higher volatility drag. i.e. lower geometric returns than a unlevered position.

[QuesadaLover]

...would it not have been better at least for the first 10 or 20 Y to have invested those biweekly paychecks in UPRO instead of VTSAX?

I appreciate that they are not designed to be LT investments...

How is "twenty years" not a long-term investment?

How do you invest for twenty years in UPRO without making a long-term investment in UPRO?

I mean you are halfway through your investing career. Still far away from retirement.

[nisiprius]

Let's be clear. We are not talking about "stomach a downturn," we are talking about "financial ruin." Having your net worth go to zero or worse.

Why do I say this?

1) Because it happened. To forum member Market Timer. Who posted about it in an epic thread, A Different Approach to Asset Allocation. He had read some articles a papers by a pair of highly credentialed Yale idiots professors, who advocated and presumably still advocate that young retirement savers should "mortgage their retirement" by investing in 200% stocks, i.e. all stocks at 2X leverage.

He still posts occasionally in the forum but as far as I know has never given an overview of the experience, how it affected his life, or what lessons (if any) he took from it. I will go this far: at one point, when he was in the red, he made a series of posts which made me, for one, somewhat concerned about his mental state. (It was the period of time when he changed his screen avatar to Raskolnikov and began posting things that seemed like some kind of dream).

2) Because the paper by the Yale professors made it clear that in their simulations this did happen sometimes. They assumed that after getting wiped out or worse, the young investors would pick themselves up, dust themselves off, and start all over again. They would begin again saving money out of their salary and investing it into 2X leveraged stocks. They said that, on the average, the next result was still to end up at retirement with a larger number of dollars than without it.

I personally would not have been capable of tolerating total financial ruin at any age.

[QuesadaLover]

I appreciate that they are not designed to be LT investments, and I appreciate and understand decay and why it happens. And I do not mean this for someone 10y out from retirement. But for a young person starting out, isn't the best choice really UPRO not VTSAX for the first 10 or 20Y or their investing life?

No. UPRO would have gone to zero twice in the last 30 years, once in the dot com bust and once in the financial crisis. There is a reasonable case for perhaps 1.2-1.5x leverage using appropriate instruments (quarterly rolling futures probably being the best way), but 3x leverage is guaranteed to blow up.

But since you are funding with fresh money every 2 w wouldn't you also be buying at close to zero also? Over the course of 10 or 20Y wouldn't that still be beneficial? I'd love to look it up to see what would really happen but I don't think they go back that far. I have a small position in Hedgefundie and I was pleased during Covid as the TMF made up for TQQQ but whenever the Fed raised rates (end of 2021?) man I was not a fan!

[QuesadaLover]

Let's be clear. We are not talking about "stomach a downturn," we are talking about "financial ruin." Having your net worth go to zero or worse.

Why do I say this?

1) Because it happened. To forum member Market Timer. Who posted about it in an epic thread, A Different Approach to Asset Allocation. He had read some articles a papers by a pair of highly credentialed Yale idiots professors, who advocated and presumably still advocate that young retirement savers should "mortgage their retirement" by investing in 200% stocks, i.e. all stocks at 2X leverage.

He still posts occasionally in the forum but as far as I know has never given an overview of the experience, how it affected his life, or what lessons (if any) he took from it. I will go this far: at one point, when he was in the red, he made a series of posts which made me, for one, somewhat concerned about his mental state. (It was the period of time when he changed his screen avatar to Raskolnikov and began posting things that seemed like some kind of dream).

2) Because the paper by the Yale professors made it clear that in their simulations this did happen sometimes. They assumed that after getting wiped out or worse, the young investors would pick themselves up, dust themselves off, and start all over again. They would begin again saving money out of their salary and investing it into 2X leveraged stocks. They said that, on the average, the next result was still to end up at retirement with a larger number of dollars than without it.

I personally would not have been capable of tolerating total financial ruin at any age.

Hi. Apparently I did not include it starting this thread but when I was trading comments with Watchnerd my thought was probably 75% VTI and 25% UPRO so save from catastrophe.

[nisiprius]

You might want to look over the 1700-posting thread, Lifecycle investing - Leveraging when young. The initial poster and most participants are people who don't agree with me and do endorse what you are suggesting.

[snowday2022]

I am a young person with extremely high risk tolerance because of almost total job security and very high income relative to expenses. I’ve thought about doing this with some of my extra cash flow but summarizing my research, you don’t get that much more of a risk adjusted return with a small amount of leverage and the means of doing so gets pretty complicated to follow. I decided it is not worth my time or to stress over the potential of my surplus investments going to zero in a crash. I think it’s reasonable in a low interest rate environment to take out a large mortgage and carry that, investing the extra. When one is starting out, doing so consitutes a good amount of leverage that is pretty safe.

[secondopinion]

I personally would not have been capable of tolerating total financial ruin at any age.

Agreed. Despite being 30ish years from social security, I hate to lose the current nest egg I worked so hard to build. It is enough to get me by on social security in retirement age (and SSDI if I were to be disabled) without impacting my standard of living much (it is rather lean by most, but it seems good enough to me). That is a big turning point emotionally, and losing it in an aggressive wager would break me.

The problem with leverage is knowing when is it too much. Some developed markets did not fare well with any leverage (benefited from actually having some extra cash); some supported 2x easily. Personally, I trust companies to properly leverage themselves for long-term success; and I buy bonds because I think it is too much leverage anyway.

[seajay]

PortfolioVisualizer chart for a initial $10K investment started in 1999, with a inflation adjusted $10K/year amount additional savings thereafter, invested in S&P500 total return versus invested in ULPIX (a 2x leveraged S&P500 fund)


https://www.portfoliovisualizer.com/bac ... vjO0FuR7uK

For the first 17 years the ULPIX 2x choice barely compared or lagged the S&P500 (1x) choice. Since then it has pulled ahead, but any modest pullback in the S&P500 could again see ULPIX having just compared or even lagging the S&P500.

It's not unreasonable to assume that the more volatile 2x might broadly zigzag around the 1x, yield similar annualized reward, but having endured twice the volatility along the way, which conventionally is considered as being a lower risk-adjusted reward (lower Sharpe Ratio).

It might be said that leverage was broadly unproductive. Noteworthy is that stocks are generally leveraged, broadly issue corporate bonds to the value of around half of book-value (are around 1.5x leveraged). What then if you de-leveraged stocks, compare 100% S&P500 with 67/33 S&P500/gold. The same savings and period as above applied to PortfolioVisualizer https://www.portfoliovisualizer.com/bac ... uQwafhIf4Q indicates near the exact same annualized rewards, but with the de-leveraged choice having around a two thirds of the worst year downside, a 33% higher (better) Sharpe Ratio (risk adjusted reward).

Many adopt a 67/33 (de-leveraged stock) style asset allocation for reasonable reasons. Might broadly compare to all-stock, or even 2x stock. However with the varying volatilities you can select subset periods to make one or the other look relatively good or bad.

[Rocky Mtn Man]

Let's be clear. We are not talking about "stomach a downturn," we are talking about "financial ruin." Having your net worth go to zero or worse

I personally would not have been capable of tolerating total financial ruin at any age.

Exactly. I remember when I first had a $10,000 balance on my Vanguard quarterly statement. It was an unimaginable amount of wealth. I couldn’t imagine that going to zero.

[Elric]

The USA market generally goes up. Not every day of course but generally up... in light of that said, wouldn't we all have been better off - assuming we can stomach the downturns - to have leveraged? That is to say - most of us do not DCA, most of us invest everything we have every two weeks through our paychecks. If UPRO or TQQQ existed 30Y ago, would it not have been better at least for the first 10 or 20 Y to have invested those biweekly paychecks in UPRO instead of VTSAX?

You are combining two related but separate questions: 1) should you use leverage and 2) should you specifically use UPRO and/or TQQQ, which are 2X leveraged funds designed to have a goal of matching the 3x DAILY performance of their underlying benchmarks.

On the first question, maybe. Personally, I don't trade on margin, but I do invest in BDCs which use very modest leverage.

But on the 2nd question, you state:

I appreciate that they are not designed to be LT investments, and I appreciate and understand decay and why it happens.

• What is your understanding of whay they aren't designed to be long term investments?

• Do you understand that a single year would be "long term" for these funds?

• If you understand decay, then do you understand that a leveraged ETF that resets daily, as these two do, can be expected to deliver FAR DIFFERENT results than simply 3 times the performance of the underlying index during that period?

If your investment goes to zero, as it would the several times the market has lost 40% or more, you've lost it all. NEW money can be invested and grow, but you can't ever recover the totally lost investments, even if the market quickly rebounds.

The answers to your two questions are not necessarily the same.

[cosmos]

Let's be clear. We are not talking about "stomach a downturn," we are talking about "financial ruin." Having your net worth go to zero or worse

I personally would not have been capable of tolerating total financial ruin at any age.

Exactly. I remember when I first had a $10,000 balance on my Vanguard quarterly statement. It was an unimaginable amount of wealth. I couldn’t imagine that going to zero.

But if you had only 2, 3, or 5x leveraged it think of the windfall!

I keep getting reminders of dotcom reading alot of these threads not sure why...

[KlangFool]

But for a young person starting out, isn't the best choice really UPRO not VTSAX for the first 10 or 20Y or their investing life?

QuesadaLover,

It is a simple math problem.

The short answer is it does not work and it is a lousy bet.

A) If you win, it does not matter.

B) If you lose, you will be wiped out.

Why don't you provide some sample numbers and we can show you why it won't work.

A) Gross Income

B) Annual Expense

C) Annual savings/investment.

It will be very educational for you.

KlangFool

[sharukh]

Spym etf. Look up that

[stay_the_course]

What follows is 100% my personal opinion based on my own study and experience.

This is Bogleheads where anything outside the 3-fund portfolio is heresy

I disagree with blanket statements like "it does not work". Leverage is a tool like anything else and in moderation it can improve returns. If all leverage is bad we wouldn't have the American mortgage. I believe some amount of leverage (up to 1.5x is the max I'm willing to tolerate) coupled with an eagle eye on your portfolio and appropriate risk management is totally fine. Most people can't do the last part right which leads to the financial ruin mentioned above. This amount of leverage I agree does not do much at lower NW, but at mid 7 figures can begin to significantly move the needle. I don't think leveraged ETFs are the right way to achieve this leverage though, other posts cover why. Simple futures/LEAPS/margin is the right way to go about it IMHO.

[KlangFool]

I disagree with blanket statements like "it does not work".

stay_the_course,

"This amount of leverage I agree does not do much at lower NW, but at mid 7 figures can begin to significantly move the needle."

A) Essentially, you are saying that it does not work unless someone has mid 7 figures.

B) How does someone get mid 7 figures starting from nothing?

KlangFool

[alex_686]

Hi. Apparently I did not include it starting this thread but when I was trading comments with Watchnerd my thought was probably 75% VTI and 25% UPRO so save from catastrophe.

UPRO is a horrid choice. Because it rebalances daily it suffers from high volatility decay - which is different thsn volatility drag. Basically, after a month, UPRO would be tracking the index 3x by about 50% and something else by 50%. If it helps, there are fact cases where the index is up but UPRO has been down.

[nisiprius]

But, Alex_686, what's the alternative?

Either you use a "leveraged" ETF with daily rebalancing, which... doesn't give you the simple multiplier effect and has behavior unexpected by many investors (like short and long ETFs both losing money over the same time period).

Or you use honest-to-gosh leverage with borrowed money, which gives you the multiplier you expect, and can multiply losses to the point of going below zero and putting you in the red, having lost more money than you have.

[breakfastinbed]

100% UPRO is probably a bad idea, though more people do it than you'd think. One of the listeners on Risk Parity Radio did this, I believe.

50% UPRO + 50% total stock market, rebalanced with each other, would be more reasonable for an aggressive young investor.

50% URPO + 50% non-equities, like long treasuries or managed futures, would be even more reasonable.

Perhaps the most reasonable would be something like 20-40% total leverage across portfolio.

OP, if you are interested in doing this, there are many threads on Bogleheads, and many threads on reddit/other sides, that discuss this at length.

I'm transitioning to a modified HEFA in my Roth IRA and HSA, which is 10% of my account, and may add a lEFT in taxable for a few %.

[rich126]

To me one of the big things in life is to avoid the big loss, whether financially or otherwise. Leverage is nice until it goes against you and the loss is sizable. Slow and steady works well. Personally if I wanted leverage I would use it in housing and rentals.

[nisiprius]

...If it helps, there are fact cases where the index is up but UPRO has been down...

Here's one of them.

Source



Over this time period, on a $10,000 investment...

...the straight S&P 500 index fund, VOO (blue) made about $2,000.

Did 3X-levered UPRO make $6,000? It did not. It lost about -$1,000.

Now I'll show the difference in behavior between UPRO and "real" leverage, in this case 300% VOO and -200% T-bills (yellow):

Source



The straight index fund (blue) made about $2,000.
UPRO lost about -$1,000.
And "real" leverage, by borrowing Treasury bills, made $5,739, a respectable approach to the hoped-for 3X $2,000.

Do not assume that leveraged ETFs will be reasonably close to the effect of multiplying the underlying index by the leverage factor.

[brightlightstonight]

But, Alex_686, what's the alternative?

Either you use a "leveraged" ETF with daily rebalancing, which... doesn't give you the simple multiplier effect and has behavior unexpected by many investors (like short and long ETFs both losing money over the same time period).

Or you use honest-to-gosh leverage with borrowed money, which gives you the multiplier you expect, and can multiply losses to the point of going below zero and putting you in the red, having lost more money than you have.

For what it's worth (which is not much!) there are now 2x weekly, monthly and quarterly S&P 500 ETFs (SPYB, SPYM, SPYQ). Very, very short track record, over which time I can't see a meaningful difference in behavior relative to a daily 2x ETF (SPYUU). (They also have much higher expense ratios, and tiny AUM.)



https://testfol.io/analysis?s=9XZRf3CsLFq

[alex_686]

But, Alex_686, what's the alternative?

First, I am deeply skeptical of any asset allocation over 80% equity, but if we ignore that….

One could buy options or futures.

I am in favor of carrying a large mortgage balance while young and paying it off slow. Mortgages are negative bonds and thus induce leverage. This assumes that buying a house is in the cards.

One could buy high Beta stocks, thus getting multiple market returns. Right now that would mean investing in the magnificent seven.

I read a interesting study that suggested a 60/40 allocation to 3x S&P and 3x 10 year Treasury rebalanced monthly produced a better Sharpe ratio than using un-leveraged assets.

I am debating the last 2.

[steadyosmosis]

"It's your chicken money."

[alex_686]

For what it's worth (which is not much!) there are now 2x weekly, monthly and quarterly S&P 500 ETFs (SPYB, SPYM, SPYQ). Very, very short track record, over which time I can't see a meaningful difference in behavior relative to a daily 2x ETF (SPYUU).

OK, Sunday evening after a glass of wine but my mental math is telling me that this will only have a modest impact on volatility decay.

Maybe 2 to 4 months before you hit 50% instead of 1 month. So while better, not great.

[Callisto]

When the aformentioned lifecycle investing thread first popped up, I followed it for a while and implemented 2x leverage via SSO and later QLD, which has been my default where possible (obviously, most 401k plans do not allow this). I think what has contributed most to my personal success with this strategy is a less obvious criteria, which is not only must you obviously stomach downturns and remain employed, but your income needs to steadily increase over time. This ensures that your contributions remain meaningful, when downturns occur.

If you do a backtest with a lump sum, its probably terrible. Backtest with a constant inflation adjusted contribution, its better but probably overall pretty bad. Have a monotonically increasing periodic contribution, and things become very interesting. Of course, this magnifies the risk by coupling your career success with your investment portfolio.

[seajay]

...If it helps, there are fact cases where the index is up but UPRO has been down...

Here's one of them.

Source



Over this time period, on a $10,000 investment...

...the straight S&P 500 index fund, VOO (blue) made about $2,000.

Did 3X-levered UPRO make $6,000? It did not. It lost about -$1,000.

Now I'll show the difference in behavior between UPRO and "real" leverage, in this case 300% VOO and -200% T-bills (yellow):

Source



The straight index fund (blue) made about $2,000.
UPRO lost about -$1,000.
And "real" leverage, by borrowing Treasury bills, made $5,739, a respectable approach to the hoped-for 3X $2,000.

Do not assume that leveraged ETFs will be reasonably close to the effect of multiplying the underlying index by the leverage factor.

Indeed. There's sequence of returns involved.

If the 1x repeatedly rose day after day so a 3x would increasingly relatively gain more than 3x
If the 1x repeatedly declined day after day so the daily rebalanced 3x would increasingly relatively lose less than 3x. Where the relativity is to the start date amount/value.

Looking to leverage up exposure induces higher risk. Higher volatility will include the likes of more extremes of 30 year MaxWR% figures (support a lower SWR). For mid/longer term holdings leverage is more suited to de-leveraging exposure. TQQQ (3x Nasdaq100) for instance has exhibited (and might generally be anticipated) to have endured 3.3 times the volatility (stdev) of the S&P500. So instead of 100% in S&P500 you might hold 33% TQQQ and drop the remainder into T-Bills. Rebalanced once/year and that will walk its own pathway, but might generally be reflective over multiple years to the rewards from 100% S&P500. Over recent years, since 2015 (PortfolioVisualizer new format limit), it hasn't, as the Nasdaq100 has relatively outpaced S&P500, instead its compared more to 100% QQQ (Nasdaq100) https://www.portfoliovisualizer.com/bac ... K45BOW8Dvm

Taking that further, if your preferred asset allocation was say 67/33 S&P500/gold then you might instead opt for a equal split of BTC and TQQQ for the 'stock' holdings. BTC has exhibited around 7.8x the volatility (stdev) as S&P500, so instead of 33% S&P500 weighting = 33 / 7.8 = 4% (rounding) weighing. Instead of 33% S&P500 TQQQ with 3.3x the volatility = 10% weighting. Alongside the 33% gold and rest in T-Bills = 4/10/33/53 weightings (BTC/TQQQ/Gold/T-Bills) that from 2018 https://www.portfoliovisualizer.com/bac ... o8ejUg7sI0



T-Bills are as good as no-risk, more money can be printed or more taxes raised rather than defaulting. Banks and brokerages involve elements of additional risk, nowadays are you in effect lending your money to the bank/broker. 53% in T-Bills, 33% in-hand in gold, 86% combined considerably lowers such counter-party risk and rebalanced once/year caps your downside.

If you want to employ actual leverage then better is perhaps to buy a house using a mortgage, as many do in their younger years.

[Hydromod]

The key to using leverage is in the risk control, as others have pointed out.

If I were using a fixed allocation, I would use the equity leverage to make room for ballast. So the effective equity allocation is not necessarily much larger than 100% but the ballast increases. In other words, lever up a portfolio with high Sharpe ratio. See linked portfolio ideas. Note that there may be benefit to spreading the bets on which ballast assets will perform better.

I personally prefer keeping a constant risk budget instead of constant allocation, so that the allocation to equities changes with volatility. Two advantages: (i) volatility tends to rise early in a big crash and drop relatively early in the recovery, so you are reducing allocations near the top and increasing allocations near the bottom; and (ii) reducing allocations during high volatility cuts volatility drag while increasing allocations during low volatility tends to promote compounding effects. This works better in tax-advantaged space, of course.

The adaptive allocation approach may not be overall cost effective with unlevered assets due to slippage during trading, but seems to be better with levered assets.

[nisiprius]

QuesadaLover, more generally:

a) You must consider risk. You can measure it however you want if you don't happen to like standard deviation or max drawdown or what have you, but you must consider it. Given the same return, more risk makes an investment less desirable. Therefore less valuable. Risk has a cost.

Any investor needs to put a dollar cost on risk. It won't necessarily be the same for everyone. But it should not be zero. An investor who does not care about risk--an investor who actually believes what Sam Bankman-Fried professes to believe, that the decision should be made on mathematically expected return and nothing else*--will always end up going for infinite leverage, or as high as possible. In turn, this produces a statistical certainty of eventual financial ruin.

Using leverage (on an asset with expected positive return) obviously increases both risk and return. You need to decide whether the increased return is worth the risk.

b) You must consider your risk tolerance. This is not easy to do. I have the impression that some investors really do not believe there is such a thing, using dismissive asides like "merely psychological" or unsupported assumptions that young investors have high risk tolerance--or, worse yet, that they ought to have it. What matters is what your risk tolerance is, not what it "ought" to be. Actually, there isn't any "ought to be." Risk tolerance is an input to financial economics equations, not an output.

*Bankman-Fried:

"Let's say there's a game: 51%, you double the earth out somewhere else; 49%, it all disappears. Would you play that game? And would you keep on playing that, double or nothing?" Tyler Cowen asked Sam Bankman-Fried, the now-disgraced founder of the bankrupt cryptocurrency exchange FTX, in his podcast back in March 2022....

He responded ... that he is quite willing to play that game — and keep playing it, over and over again. Cowen asked Bankman-Fried about the high likelihood of destroying everything by going double of nothing on a series of coin flips. Bankman-Fried responded that he was willing to make this trade-off for the possibility of coin-flipping his way into "an enormously valuable existence."

[ScubaHogg]

Without comment on things like UPRO specifically, you are on the right path that a young person should seriously consider leverage. Here is a great overview

https://www.amazon.com/Lifecycle-Invest ... 0465018297

[deltaneutral83]

Oct 2007-Mar 2009 wasn't that long ago. Equities were down 50% and in March most of the talking heads were screaming it's going even lower. I think you'd want to examine like minded people with a sizable nest egg in Oct 2007 who were even 10% on margin and see how it turned out (theories and backtesting are great, but watching the market move 3-7% a day (which it did in Sept-Dec 2008 all the time) isn't all that much fun)? If they got out it's probably because they generated income since, not their ability to navigate investment ROI. 100% equities is enough of a roller coaster of risk/reward for 99% of the populace and most of those can't even handle that, nor should they.

[firebirdparts]

wouldn't we all have been better off - assuming we can stomach the downturns - to have leveraged?

In retrospect, the answer is "sort of".

Today, you can leverage using something like UPRO and while this is not exactly the same behavior as traditional leverage, it's something. Rule #1 is "avoid ruin" and you can only lose all of UPRO.

Back when we were 25, they only had the kind of leverage that makes you jump out a window. They didn't have UPRO back then.

I tell young guys all the time, I lost half my net worth twice, and I lost it because I was behaving properly. If I was going to use leverage, I would have needed to ride through that somehow. I am not able right now to recommend a plan for that. As it happened, without leverage, it turned out great for me.

[dknightd]

I used leverage to pay for my education, and to buy my house. I really had no choice. That was my only option if I wanted those things. And I did.
Luckily it worked out fine.
It might be tempting for a young person to borrow money to invest in stocks. Knowing (hoping) that they hopefully have many years of earning ahead of them. So in theory, you could borrow money to buy stocks. If it did not work out, and you lost everything, you could try again. That was too risky for me. I'd never recommend it to anybody. But it could suit some people.

[firebirdparts]

I used leverage to pay for my education, and to buy my house. I really had no choice. That was my only option if I wanted those things. And I did.
Luckily it worked out fine.
It might be tempting for a young person to borrow money to invest in stocks. Knowing (hoping) that they hopefully have many years of earning ahead of them. So in theory, you could borrow money to buy stocks. If it did not work out, and you lost everything, you could try again. That was too risky for me. I'd never recommend it to anybody. But it could suit some people.

That's not the same thing, though. You don't get margin calls on your house or your education based on moves in the stock market.

Invested leverage (the old fashioned kind) can demand your immediate failure even when things for you personally are going great.

[deepvalleys]

The market timer thread was the reason I found this forum. It was a fascinating read.

I'd say that
- using leveraged etfs - not a good idea.
- using credit cards to finance investing (which was something market timer ended up with) - horrible idea
- however, using a mortgage to invest - maybe why not. In fact I do this. But I would survive even if my investment goes to zero, I just end up having to pay my mortgage for longer.

Let's be clear. We are not talking about "stomach a downturn," we are talking about "financial ruin." Having your net worth go to zero or worse.

Why do I say this?

1) Because it happened. To forum member Market Timer. Who posted about it in an epic thread, A Different Approach to Asset Allocation.

[Harmanic]

The market timer thread was the reason I found this forum. It was a fascinating read.

I'd say that
- using leveraged etfs - not a good idea.
- using credit cards to finance investing (which was something market timer ended up with) - horrible idea
- however, using a mortgage to invest - maybe why not. In fact I do this. But I would survive even if my investment goes to zero, I just end up having to pay my mortgage for longer.

Let's be clear. We are not talking about "stomach a downturn," we are talking about "financial ruin." Having your net worth go to zero or worse.

Why do I say this?

1) Because it happened. To forum member Market Timer. Who posted about it in an epic thread, A Different Approach to Asset Allocation.

That depends on the mortgage rate. When I was young, rates were high and I chose to only invest enough in my retirement accounts to get the match. I then directed any extra money to paying down my mortgage faster. Once it was paid off, those payments then went towards investing.

[dknightd]

That's not the same thing, though. You don't get margin calls on your house or your education based on moves in the stock market.

Invested leverage (the old fashioned kind) can demand your immediate failure even when things for you personally are going great.

I agree, they are different things. Which was kind of my point.

I like the slow steady approach. But the very very rich people probably risked failure more than once. I have no desire to very rich, and I have no desire to fail. So I only use leverage (aka borrowing) when it makes sense to me.

[QuesadaLover]

I used leverage to pay for my education, and to buy my house. I really had no choice. That was my only option if I wanted those things. And I did.
Luckily it worked out fine.
It might be tempting for a young person to borrow money to invest in stocks. Knowing (hoping) that they hopefully have many years of earning ahead of them. So in theory, you could borrow money to buy stocks. If it did not work out, and you lost everything, you could try again. That was too risky for me. I'd never recommend it to anybody. But it could suit some people.

That's not the same thing, though. You don't get margin calls on your house or your education based on moves in the stock market.

Invested leverage (the old fashioned kind) can demand your immediate failure even when things for you personally are going great.

Buying on margin is too risky for me in terms of wiping out your safer investments. I was thinking should a young person put his biweekly paycheck into something like 75/25 VTI/tqqq. When it goes up it goes up but when it crashes he’s buying cheaper.

[QuesadaLover]

Oct 2007-Mar 2009 wasn't that long ago. Equities were down 50% and in March most of the talking heads were screaming it's going even lower. I think you'd want to examine like minded people with a sizable nest egg in Oct 2007 who were even 10% on margin and see how it turned out (theories and backtesting are great, but watching the market move 3-7% a day (which it did in Sept-Dec 2008 all the time) isn't all that much fun)? If they got out it's probably because they generated income since, not their ability to navigate investment ROI. 100% equities is enough of a roller coaster of risk/reward for 99% of the populace and most of those can't even handle that, nor should they.

It’s funny. I remember that time distinctly. I had built up a meaningful portfolio and was very busy at work. I didn’t often check the portfolio as it was on autopilot. I logged in to check it and remember thinking that’s funny. I could have sworn it was much much bigger. I wasn’t reading the news much either. It was years later I realized the market crashed substantially. So happy at being young and busy and not having time to pay attention to the news!

[Hydromod]

The market timer thread was the reason I found this forum. It was a fascinating read.

I'd say that
- using leveraged etfs - not a good idea.
- using credit cards to finance investing (which was something market timer ended up with) - horrible idea
- however, using a mortgage to invest - maybe why not. In fact I do this. But I would survive even if my investment goes to zero, I just end up having to pay my mortgage for longer.

Be careful in pronouncements. Something can be a nutrient below some value and a poison above that value. Water, for example.

Using LETFs to reach an effective equity exposure around 100% can be a nutrient if the rest of the portfolio is ballast with some positive expected return.

I linked to examples here.

[flyfishers83]

I’ve considered this a few times but have never implemented. I keep coming back to several sticking points.
1. What’s the goal? Just more? A specific endpoint? If I cant define the goal, it’s hard to seriously consider the implementation.
2. How/when to exit. Suppose it works out, do I just pull the plug at my endpoint? Would I be able to or would I let it ride.
3. If a little works, why not a lot? Suppose it really works. Would I want to increase the risk in the pursuit of more?
4. Would my implementation be strategic investing or gambling?
5. My spouse definitely wouldn’t do this. Assuming she agreed with my plan, would I do this with our money?

[deltaneutral83]

Oct 2007-Mar 2009 wasn't that long ago. Equities were down 50% and in March most of the talking heads were screaming it's going even lower. I think you'd want to examine like minded people with a sizable nest egg in Oct 2007 who were even 10% on margin and see how it turned out (theories and backtesting are great, but watching the market move 3-7% a day (which it did in Sept-Dec 2008 all the time) isn't all that much fun)? If they got out it's probably because they generated income since, not their ability to navigate investment ROI. 100% equities is enough of a roller coaster of risk/reward for 99% of the populace and most of those can't even handle that, nor should they.

It’s funny. I remember that time distinctly. I had built up a meaningful portfolio and was very busy at work. I didn’t often check the portfolio as it was on autopilot. I logged in to check it and remember thinking that’s funny. I could have sworn it was much much bigger. I wasn’t reading the news much either. It was years later I realized the market crashed substantially. So happy at being young and busy and not having time to pay attention to the news!

Equities getting halved is one thing, the job market is the other, they usually are correlated. If one states that they concurrently remember the GFC time frame distinctly, but didn't understand the magnitude of the GFC until years later, it signals that employment likely was never interrupted/reduced and close family/peers probably the same, a tunnel of sorts, but a good tunnel. Half my peers I'd estimate faced at least one undesirable employment situation (RIF or reduced comp) during GCF. The situation you describe that you faced is ideal. There are some wild threads on here from back then, give them a look. Most people now have significantly higher expenses and financial obligations if they were young as you mention during the GFC.

[jdibber]

No. UPRO would have gone to zero twice in the last 30 years, once in the dot com bust and once in the financial crisis. There is a reasonable case for perhaps 1.2-1.5x leverage using appropriate instruments (quarterly rolling futures probably being the best way), but 3x leverage is guaranteed to blow up.

I don't think this is the case.

If the S&P 500 ever reaches an intraday loss of 33.3%, you can lose your entire investment in UPRO. (Since 1950, the index's biggest percent loss from open to low was 20.5% on Black Monday, Oct. 19, 1987). -seekingalpha

https://seekingalpha.com/instablog/3094 ... since-1950

[dknightd]

I was thinking should a young person put his biweekly paycheck into something like 75/25 VTI/tqqq. When it goes up it goes up but when it crashes he’s buying cheaper.

I suggest to my kids they save Money. Keep an emergency fund. Invest for the long term (aka retirement).

I think everybody needs to pick their own risk/reward ratio. When I first started out I was about 50/50. I'm still about 50/50. That works for me.

As long as my kids have money in the bank, are investing for the future, and are gainfully employed, they will probably be fine.

Looking back. I do not regret a thing. Yes, I'd have money today if I'd been more aggressive in the past, but that could have worked out the other way. There is a famous saying: past returns do not predict future returns.

[hnd]

real story time.

a guy I worked with got on this leverage kick. for starters he did a interest only loan on his house. But he also was like have you heard of these 2x products? He bought SSO in late 2006. this was at a time where I was not really engaged in investing but have the brochure still somewhere he gave me. He didn't make it past 2009 before bailing. I feel like he was continually investing monthly and his 401k was double what his IRA was. I remember we were talking about his interest only loan and he was like everything is bad and my retirement is tanking as well. I reminded him he was in some heavy debt product and he was like I got out of that a month or so ago.

[seajay]

No. UPRO would have gone to zero twice in the last 30 years, once in the dot com bust and once in the financial crisis. There is a reasonable case for perhaps 1.2-1.5x leverage using appropriate instruments (quarterly rolling futures probably being the best way), but 3x leverage is guaranteed to blow up.

I don't think this is the case.

If the S&P 500 ever reaches an intraday loss of 33.3%, you can lose your entire investment in UPRO. (Since 1950, the index's biggest percent loss from open to low was 20.5% on Black Monday, Oct. 19, 1987). -seekingalpha

https://seekingalpha.com/instablog/3094 ... since-1950

BUT! Is the S&P500 not protected by circuit breakers, where trading is halted if a large single day decline is encountered. The likes of UPRO probably use Futures/Options in order to scale up stock exposure, which may not have such limits protections ???

[brightlightstonight]

I don't think this is the case.

If the S&P 500 ever reaches an intraday loss of 33.3%, you can lose your entire investment in UPRO. (Since 1950, the index's biggest percent loss from open to low was 20.5% on Black Monday, Oct. 19, 1987). -seekingalpha

https://seekingalpha.com/instablog/3094 ... since-1950

BUT! Is the S&P500 not protected by circuit breakers, where trading is halted if a large single day decline is encountered. The likes of UPRO probably use Futures/Options in order to scale up stock exposure, which may not have such limits protections ???

Futures do have limit protections.