A different approach to asset allocation

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Akiva
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Re:

Post by Akiva » Thu Feb 21, 2013 7:47 am

bond50 wrote:MT is at least half right on the theory of time diversification, absent tax considerations and costs. Take a concrete example of a lawyer that graduates law school at 25 and wants to retire at 55. If he literally didn't believe in leverage, then he would wait until he had paid off his student loans, home loan, and cars loans in full before putting a dime into retirement, at least past the company match if law firms do that. By the time that he starts investing for retirement, he is thirty five. However, he is conservative and wants to glide to 100% bonds by retirement. Hence, he starts to age out of stocks at forty five. Effectively, his stock market performance is largely determined by a ten year period. No one, not even Siegel, would call ten years the long run.

The problem is that this theory is not actionable. None of the leveraged ETFs and leveraged index funds come close to actually replicating 2x the index minus expenses due to daily compounding. LEAPs exclude dividends, which is a major component of the stock market yield. That leaves investing on margin with the risk of margin calls.
Well, you left out the obvious solution -- futures. The long run difference between S&P futures and the S&P index is IIRC about 10 basis points. Also AFAIK, LEAPs don't include some kind of price adjustment so deliberately exclude dividends to those should be built into their price as well. (ChicagoOne has two types of single stock futures, and one of them does have such an adjustment, but I don't think any CBOE options are like this.) The leveraged ETFs are day trading instruments and should be avoided by long-term investors (though I don't understand why they can't make a 3x S&P ETF that just invests in S&P futures with that leverage level).

There are some negative tax implications to using either futures or options to obtain leverage, but on a pre-tax basis you are always better off going with a more conservative stock/bond allocation (with a higher sharpe ratio) and then slightly leveraging it to obtain your return goals than you are going with an unlevered portfolio with a more aggressive stock allocation. (The leveraged portfolio will have less risk for the same return or more return for the same risk, or something in between.)
Even, if someone in their twenties was comfortable being 150% in stocks, the most logical place for someone that age to invest, IRAs, prohibits buying on margin.
You can get around this problem by creating an LLC for the IRA to invest in and then having the LLC invest in whatever you want.
If someone invests in taxable accounts, then taxes narrow the equity spread. Further, for loan balances under $20k, Vanguard brokerage charges interest rates of 7.75%, which is above the yields on even junk bonds.
You can get substantially lower margin rates elsewhere. Interactive Brokers will give you margin at 25 basis points above the fed funds rate if your account is big enough. That said, in general I think investing via a margin account is the least preferable way to get leverage. It should only be used when you have no better option or when the tax implications vs futures and LEAPs are sufficient to overcome the higher interest cost.

Akiva
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Re: A different approach to asset allocation

Post by Akiva » Thu Feb 21, 2013 7:52 am

banrep wrote:Through experimentation with lots of different products I found I like selling put options on major indexes like SPY, QQQ, and IWM. I had a strategy where I would sell mostly weekly put options, starting at around 1x leverage and every time we had a relatively big down day I would sell more, averaging down my cost and increasing my leverage so a much smaller price movement would get me even.
In technical parlance, this is called "martingale betting", it provably decreases your returns and increases your risk. You should never do this. If you are going to use high levels of leverage, you need to understand how anti-martingale betting works and how to calculate maximum safe leverage levels. (Which you then never go anywhere near for fear that some error in your model or the data will throw you too far off.)

Akiva
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Re:

Post by Akiva » Thu Feb 21, 2013 7:53 am

market timer wrote:
Random Musings wrote:Perhaps mentioned in another thread which I didn't read, but I notice the net worth has disappeared from your info pack......
Yes, I feel like this adventure has come to an end. I don't even feel regret for the losses anymore. The laptop used for trading and tracking net worth has been destroyed.

Now that my debts have mostly been repaid and I've trimmed my budget, I'm saving $10K/month. While MYR has been fun and entertaining, I'm looking forward to embarking on an even larger adventure. When all is said and done, and the book is written, this MYR episode will simply be background information.
This is a *long* thread. Would it be possible for you or someone else to summarize it in a few paragraphs or is it something I'm just going to have to read?

FillorKill
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Re: Re:

Post by FillorKill » Thu Feb 21, 2013 7:55 am

Akiva wrote:
market timer wrote:
Random Musings wrote:Perhaps mentioned in another thread which I didn't read, but I notice the net worth has disappeared from your info pack......
Yes, I feel like this adventure has come to an end. I don't even feel regret for the losses anymore. The laptop used for trading and tracking net worth has been destroyed.

Now that my debts have mostly been repaid and I've trimmed my budget, I'm saving $10K/month. While MYR has been fun and entertaining, I'm looking forward to embarking on an even larger adventure. When all is said and done, and the book is written, this MYR episode will simply be background information.
This is a *long* thread. Would it be possible for you or someone else to summarize it in a few paragraphs or is it something I'm just going to have to read?
It's only, what 29 pages? What are you doing for the next 5 days?

EDIT: Let me add that I've read the whole thing 2 or 3 times. It is an epic, unparalleled thread.
Last edited by FillorKill on Thu Feb 21, 2013 8:01 am, edited 1 time in total.

Akiva
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Re: A different approach to asset allocation

Post by Akiva » Thu Feb 21, 2013 7:55 am

banrep wrote:Yeah, I understand that what I bought in at has absolutely no bearing on what the stock is worth or where it's going, and so shouldn't enter into my decision. And if I were starting fresh I definitely wouldn't enter into these same positions given my balances, so that's another reason to sell. But it just gets harder to want to sell the further down I go, because I now how difficult it will be to recover versus how easy it was to lose it.
Yeah. If you manage derivatives professionally, the first thing they teach you to do is to take a loss quickly. People have major psychological hangups with doing this that are extensively discussed in the literature, but you have to get over your baises and do the correct thing because it is correct despite how you feel about it.

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market timer
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Re: A different approach to asset allocation

Post by market timer » Thu Feb 21, 2013 8:47 am

Akiva wrote:This is a *long* thread. Would it be possible for you or someone else to summarize it in a few paragraphs or is it something I'm just going to have to read?
Page one, paragraph one. For some technical reason, I'm not able to edit that post anymore. Net worth has steadily climbed to $350K since the Q4 2008 trough of -$210K. The past few years have been spent dealing with the consequences of going so far into debt, while trying to move on with life in the direction that had been planned pre-crash. I married Borte (mentioned earlier in thread), finished my PhD, and am about to become an expat in Southeast Asia.

Park
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Re: Re:

Post by Park » Thu Feb 21, 2013 9:29 am

Akiva wrote:That said, in general I think investing via a margin account is the least preferable way to get leverage. It should only be used when you have no better option or when the tax implications vs futures and LEAPs are sufficient to overcome the higher interest cost.
Leveraged ETFs are effectively loans for one day.

Futures are an effective loan for 3 months.

LEAPs are an effective loan for 3 years.

At the end of the day/3 months/3 years, if the market is up, all is well. But what if the market is down? In that case, you've permanently lost money, and to avoid permanent loss of capital is a cardinal rule of investing.

But in the same situation with a margin loan, loss of capital is temporary, as long as you don't get a margin call. With a margin loan, you can wait until market recovers.

IMO, to make this strategy work for the average investor, you need a loan for no less than 5 years. If someone said you need a loan for 10 or 15 years, I wouldn't argue with them. Loans for a day/3 months/3 years are exercises in market timing. And the average investor (all investors?) should stay away from that.

The following is a tangent. The effective interest rates on LEAPS and futures may be lower than margin rates at IB, but I doubt that the difference is large. However, if your IB margin interest is fully tax deductible, my guess is that IB margin rates would be highly competitive.

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Re: Re:

Post by Akiva » Thu Feb 21, 2013 9:45 am

Park wrote:
Akiva wrote:That said, in general I think investing via a margin account is the least preferable way to get leverage. It should only be used when you have no better option or when the tax implications vs futures and LEAPs are sufficient to overcome the higher interest cost.
Leveraged ETFs are effectively loans for one day.

Futures are an effective loan for 3 months.

LEAPs are an effective loan for 3 years.
You can "roll" a futures position or a LEAP position to keep them open for longer periods of time.
At the end of the day/3 months/3 years, if the market is up, all is well. But what if the market is down? In that case, you've permanently lost money, and to avoid permanent loss of capital is a cardinal rule of investing.
It's only "permanent" in the same sense that the loss on an index fund is "permanent" when the market drops 50% in a few months (as it did twice in the 00s). Otherwise you'd just increased returns and volatility.
But in the same situation with a margin loan, loss of capital is temporary, as long as you don't get a margin call. With a margin loan, you can wait until market recovers.
I think you are making too much of this difference. The futures market is extremely liquid so you can always roll your position (even in the middle of historic financial chaos, the futures markets have stayed liquid when the stock market wasn't). The choice should be based on the interest you have to pay on margin vs. the implied interest on the future and the relative tax advantages.
IMO, to make this strategy work for the average investor, you need a loan for no less than 5 years. If someone said you need a loan for 10 or 15 years, I wouldn't argue with them. Loans for a day/3 months/3 years are exercises in market timing. And the average investor (all investors?) should stay away from that.
Look at it this way: A 30/70 stock/bond portfolio has a higher sharpe ratio than a 60/40 stock/bond portfolio. Consequently if you use futures to leverage the 30/70 portfolio, you can either get the same returns as the 60/40 portfolio for less risk, or get greater returns for the same risk, or something anywhere in between. Leverage itself isn't risk, it just multiplies preexisting risk *and* returns.
The following is a tangent. The effective interest rates on LEAPS and futures may be lower than margin rates at IB, but I doubt that the difference is large. However, if your IB margin interest is fully tax deductible, my guess is that IB margin rates would be highly competitive.
Right, that's why I talked about things on a pretax basis. Things can change depending on your tax situation. The main risk of trading on margin vs. using futures is that if you *do* get a margin call, you may be forced to sell sell your position at a very bad price whereas if you fall below your maintenance level in futures, the offsetting futures order is extremely unlikely to screw you.

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Re: Re:

Post by greg24 » Thu Feb 21, 2013 9:51 am

Akiva wrote:This is a *long* thread. Would it be possible for you or someone else to summarize it in a few paragraphs or is it something I'm just going to have to read?
Young whippersnapper thinks he has everything figured out and loses his shirt.

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Re: Re:

Post by fishndoc » Thu Feb 21, 2013 10:52 am

greg24 wrote:
Akiva wrote:This is a *long* thread. Would it be possible for you or someone else to summarize it in a few paragraphs or is it something I'm just going to have to read?
Young whippersnapper thinks he has everything figured out and loses his shirt.
and becomes much wiser for the experience.

As should anyone who reads this thread.
" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle

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at
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Re: A different approach to asset allocation

Post by at » Fri Feb 22, 2013 9:28 pm

Repent and thou shalt be saved.

John 3:7, "Ye must be born again."

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Re: Re:

Post by boggler » Mon Feb 25, 2013 12:00 am

bond50 wrote: The problem is that this theory is not actionable. None of the leveraged ETFs and leveraged index funds come close to actually replicating 2x the index minus expenses due to daily compounding. LEAPs exclude dividends, which is a major component of the stock market yield. That leaves investing on margin with the risk of margin calls.
What about:
http://www.ipathetn.com/us/product/SFLA/

Akiva
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Re: Re:

Post by Akiva » Mon Feb 25, 2013 1:40 pm

boggler wrote:
bond50 wrote: The problem is that this theory is not actionable. None of the leveraged ETFs and leveraged index funds come close to actually replicating 2x the index minus expenses due to daily compounding. LEAPs exclude dividends, which is a major component of the stock market yield. That leaves investing on margin with the risk of margin calls.
What about:
http://www.ipathetn.com/us/product/SFLA/
You quoted me, but those aren't my words. They are the words of "bond50". (You probably replied to me and then deleted the wrong "
" block. [fixed by admin alex]

As for your questions, ETNs have issues of their own, and I think you are almost always going to be better off using options or futures like I said above.

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Re: A different approach to asset allocation

Post by Snowjob » Wed Feb 27, 2013 11:59 am

market timer wrote:
Akiva wrote:This is a *long* thread. Would it be possible for you or someone else to summarize it in a few paragraphs or is it something I'm just going to have to read?
Page one, paragraph one. For some technical reason, I'm not able to edit that post anymore. Net worth has steadily climbed to $350K since the Q4 2008 trough of -$210K. The past few years have been spent dealing with the consequences of going so far into debt, while trying to move on with life in the direction that had been planned pre-crash. I married Borte (mentioned earlier in thread), finished my PhD, and am about to become an expat in Southeast Asia.

Congratulations on all of these, job well done. Good luck in Asia

clubby
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Re: A different approach to asset allocation

Post by clubby » Tue Feb 04, 2014 4:14 pm

This is one of the most incredible things I've ever read on the internet and it reminds me of a game I play. I'm a scratch golfer. Not a 2 handicap scratch golfer, but a plus handicap scratch golfer. Every now and then I get paired up with a guy that will immediately propose a bet on the first tee without even knowing anything about my game. The guy, no matter who he is, always has a certain demeanor and body language about him. A real cock of the walk type. Rather than going through the whole gamut of trying to figure out what the bet is, how many strokes I've giving him, etc., I usually propose a game called 5/5/5. I will bet you 5 to 1 odds, my $500 to your $100 and I will give you 5 strokes a hole. The ears perk up! 5 strokes a hole! $500! As long as you win every hole, you win. Play by the rules of golf, no made up rules, no dropping a ball where it went out of bounds. The minute you lose a hole, the game is over. Pay up. I've never lost the game. Why? Because I know what I'm going to shoot and I know which players will bite. The last time I played it, the same guy lost four times, each with decreasing odds. He lost on the very first hole, went 4:1 and lost at the fourth hole, went 3:1 and lost at 12 and then went 2:1 and lost at 18. $400. By the last bet the guy was playing to either owe me $400 or $100, he couldn't even win money and he was betting again. This entire thread reminds me of that game. :D

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Re: A different approach to asset allocation

Post by pkcrafter » Wed Feb 05, 2014 3:01 pm

Thanks Clubby, I enjoyed your story. I'd guess the guys proposing a challenge were low to mid 80s shooters--players who could beat the average golfer? Even at that it seems hard to imagine one of them losing a hole with 5 strokes. I'm guessing you won on the par 5s--opponent with a triple bogle, oops--that would be bogie, and you with an eagle!

I know a pro who used to challenge players. His too-good-too-be-true, can't loose, bet was he would play with just one club, a 7 iron.

The point here is some behavioral issues are involved with these challenges and the same goes for trying to beat the market. The difference is a high handicapper like me is never going to beat you scratch or with my handicap, because a poor player can never have enough luck to overcome skill. But that's not true with playing the market. A player who does know something can win sometimes and so can a player who really doesn't know a thing. This leads to the false believe that they do know how to win and they may spend many years losing money while blaming everything except the idea that outcomes are way beyond their control.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: A different approach to asset allocation

Post by clubby » Wed Feb 05, 2014 5:13 pm

pkcrafter wrote:Thanks Clubby, I enjoyed your story. I'd guess the guys proposing a challenge were low to mid 80s shooters--players who could beat the average golfer? Even at that it seems hard to imagine one of them losing a hole with 5 strokes. I'm guessing you won on the par 5s--opponent with a triple bogle, oops--that would be bogie, and you with an eagle!

I know a pro who used to challenge players. His too-good-too-be-true, can't loose, bet was he would play with just one club, a 7 iron.

The point here is some behavioral issues are involved with these challenges and the same goes for trying to beat the market. The difference is a high handicapper like me is never going to beat you scratch or with my handicap, because a poor player can never have enough luck to overcome skill. But that's not true with playing the market. A player who does know something can win sometimes and so can a player who really doesn't know a thing. This leads to the false believe that they do know how to win and they may spend many years losing money while blaming everything except the idea that outcomes are way beyond their control.

Paul
No, I would usually win when the guy would make a 9 or 10 somewhere along the line. Most people shoot in the mid 80s but they don't play by the rules. If you're not used to playing by the rules, be prepared to have it add 5-6 strokes minimum to your round.

But, my thoughts on this thread and how it was similar were that the idea sounds like a great one when the guy first bets but many people don't realize that they have to WIN EVERY HOLE. It's not as easy as it sounds. :sharebeer

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Re: A different approach to asset allocation

Post by pkcrafter » Wed Feb 05, 2014 7:41 pm

Most people shoot in the mid 80s but they don't play by the rules.
Yep. It's similar in investing too. Investors don't calculate things correctly, or they "forget" certain losses.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: A different approach to asset allocation

Post by g$$ » Sun Feb 22, 2015 6:35 pm

:shock:

So I read this entire thread over the last few days. Yes, all 1,418 posts. Very entertaining.

Here are a handful of my favorite excerpts:
market timer wrote:Last edited by market timer on Sat Apr 30, 2011 6:03 pm, edited 83 times in total.
market timer wrote:
EmergDoc wrote:Hmmm...didn't realize your leveraged portfolio was so focused on financial stocks. That's unfortunate. What's with GE? Not enough of it in S&P 500 for you?
I'm done with individual stocks. C, BAC, and GE are the fossilized remains of a youthful arrogance, buried under a sediment of loss aversion.
goggles wrote:DO NOT!!! return to "S&P ultraviolence"!
market timer wrote:There have been some interesting crossovers. I've found that it's harder to be frugal, like taking the subway instead of taxi to work, when you are up or down $10K per day.
It was interesting to read some of the posts knowing what was about to happen. For example, on September 19, 2008:
market timer wrote:What a week!

Exposure: $440K
Net worth: -$80K
Leverage: 5x

Hopefully, we have seen a bottom in the banks. I was able to diversify into EFA and GWX today. My goal is to maintain exposure in the $400-$450K range for a while.
Of course, the market promptly lost about 30% over the next 2 weeks and wouldn't truly bottom out until March. What a ride.

Hats off to Market Timer for documenting his experience. I always enjoy watching people follow through and put their money where their mouth is. Albeit, the timing couldn't have been more terrible for this experiment. Seems like he may have picked the worst possible time to enter the market in the last 50 year).

His graceful replies to the peanut gallery were entertaining as well.

Excellent thread. Thank you for posting.

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market timer
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Re: A different approach to asset allocation

Post by market timer » Mon Feb 23, 2015 12:24 pm

g$$ wrote:Excellent thread. Thank you for posting.
Glad you enjoy it. I just noticed it's been two years since I posted an update.

Equity exposure: $200K
Net worth: $700K, up $910K since Q4 2008

Since 2005, my goal has been to trade for a living. As a grad student at the time, I read about people like Soros and Niederhoffer, and thought I could achieve similar success. Once I decided on this path, there was no career that could compare to the excitement and intellectual challenge of trading. The search for truth in markets is even more pure than in academia. Around that time, I essentially abandoned my formal education to trade--first event derivatives for two years (with much success) and then equities (where I blew up quickly). I came to appreciate the volatility of markets and unreliability of myself in 2008, and then developed and refined some strategies in the years that followed. For most of the past year, I've been "retired," which is to say my only source of income comes from my investments. Where I am now--having some risk capital, getting to live with my wife and son--is a vision that carried me through some dark days several years ago, when I was alone and broke. In total, I spent seven years apart from my wife, nearly the entire duration of this thread, saving the money to make this vision a reality. Now I just can't blow it.

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Re: A different approach to asset allocation

Post by kenyan » Mon Feb 23, 2015 2:25 pm

market timer wrote:
g$$ wrote:Excellent thread. Thank you for posting.
Glad you enjoy it. I just noticed it's been two years since I posted an update.

Equity exposure: $200K
Net worth: $700K, up $910K since Q4 2008

Since 2005, my goal has been to trade for a living. As a grad student at the time, I read about people like Soros and Niederhoffer, and thought I could achieve similar success. Once I decided on this path, there was no career that could compare to the excitement and intellectual challenge of trading. The search for truth in markets is even more pure than in academia. Around that time, I essentially abandoned my formal education to trade--first event derivatives for two years (with much success) and then equities (where I blew up quickly). I came to appreciate the volatility of markets and unreliability of myself in 2008, and then developed and refined some strategies in the years that followed. For most of the past year, I've been "retired," which is to say my only source of income comes from my investments. Where I am now--having some risk capital, getting to live with my wife and son--is a vision that carried me through some dark days several years ago, when I was alone and broke. In total, I spent seven years apart from my wife, nearly the entire duration of this thread, saving the money to make this vision a reality. Now I just can't blow it.
Did you ever write a book on your experiences?
Retirement investing is a marathon.

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market timer
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Re: A different approach to asset allocation

Post by market timer » Mon Feb 23, 2015 8:20 pm

kenyan wrote:Did you ever write a book on your experiences?
I don't expect to publish anything based on this experience. A few pages of excerpts from this thread were included in Lifecycle Investing by Ayres and Nalebuff. That is all I have in print.

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Re: A different approach to asset allocation

Post by Wolfson » Mon Mar 09, 2015 2:26 am

I just finished reading the Ayres and Nalebuff book and their 2010 working paper ("Diversification Across Time"), which led me to this very interesting thread.

Imo they make a pretty good case and it's clear that they worked hard to address many of the criticisms they received from colleagues. They test the robustness of the strategy on non-US returns, use a lower equity premium than in historical US data, and do additional simulations. While the ending distribution of wealth at retirement dominates more traditional target date or fixed (non-levered) equity allocations, the big downsides (thoroughly discussed here) are that the time series volatility of returns along the way is very high and that implementing the strategy requires more work and attention to detail than is feasible for most non-professionals.

In the book, the authors mention their hope that mutual funds will become available to implement their lifecycle investment approach. This was back in 2010. Does anyone know of a mutual fund or perhaps managed ETF that implements this sort of leveraged strategy? Or a Registered Investment Advisor who can implement this on behalf of clients at a reasonable cost?? I did some searching on the internet, but found nothing.

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Re: A different approach to asset allocation

Post by Maverick3320 » Thu May 21, 2015 12:16 pm

I just spent - literally - a day and a half reading this thread. I just have one question for the OP:

Several times you expressed the desire to financially leverage your human capital. Presumably, this would involve some sort of lump-sum payment up front in exchange for X% of your future income. Looking back, and given your somewhat rapid rise in net worth, would this likely have been a wise financial decision? Assume that this reverse mortgage/indentured servitude would be possible, and have an active secondary market with low transaction costs/fees.

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market timer
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Re: A different approach to asset allocation

Post by market timer » Thu May 21, 2015 6:46 pm

Wolfson wrote:Does anyone know of a mutual fund or perhaps managed ETF that implements this sort of leveraged strategy? Or a Registered Investment Advisor who can implement this on behalf of clients at a reasonable cost??
There are various 2x and 3x leveraged ETFs that reset their leverage on a daily basis, e.g., the 2x S&P 500 ETF (ticker SSO). One of the problems with a daily reset of leverage is the associated volatility drag, where choppy markets can reduce long run returns below 2x the underlying index. To mitigate this, Ayres and Nalebuff recommend resetting leverage on a monthly basis. I'm not aware of any funds or RIAs that implement this type of strategy across the lifecycle. Ayres and Nalebuff provided some resources online to help DIYers: http://lifecycleinvesting.net/resources.html

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market timer
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Re: A different approach to asset allocation

Post by market timer » Thu May 21, 2015 7:00 pm

Maverick3320 wrote:Several times you expressed the desire to financially leverage your human capital. Presumably, this would involve some sort of lump-sum payment up front in exchange for X% of your future income. Looking back, and given your somewhat rapid rise in net worth, would this likely have been a wise financial decision? Assume that this reverse mortgage/indentured servitude would be possible, and have an active secondary market with low transaction costs/fees.
It sounds like you're describing a form of equity (x% of income) rather than a typical loan. I remember making some comment about that. Without knowing the terms of the contract, it is hard to answer your question. One would need some estimate for what the market viewed as my income potential in 2009. Relative to my own expectations, my earnings trajectory came up short. At one point in 2009, I estimated that I'd earn $1.5mn in my first five years of working; in fact, I earned about 30% less.

It's also worth keeping in mind that I was not making sound decisions in 2008-9. There is a good chance I would have lost anything extra I could have borrowed. It was only after I lost everything I could get my hands on that I started rebuilding.

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Re: A different approach to asset allocation

Post by oneleaf » Fri May 22, 2015 1:13 am

market timer wrote: Equity exposure: $200K
Net worth: $700K, up $910K since Q4 2008
I'm curious why you decided to set a relatively low equity exposure, even as an early retiree?

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market timer
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Re: A different approach to asset allocation

Post by market timer » Fri May 22, 2015 1:50 am

oneleaf wrote:I'm curious why you decided to set a relatively low equity exposure, even as an early retiree?
It is hard for me to get excited about owning equities at today's valuations. Instead, I'm using my capital for various trading strategies that have done well the past several years, and am looking to buy investment properties.

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Re: A different approach to asset allocation

Post by qwertyjazz » Tue Jun 14, 2016 10:40 am

This thread has been thrown out as a cautionary tale against leverage. The plural of anecdote is ... For the long time Bogleheads, how might the story have changed with a Taylor 3 fund (probably 2 fund given concept), a steady income stream, cheaper leaverage costs? I am not planning this explicitly but I am playing with the old pay off mortgage or new mortgage conundrum and I think in terms of extreme examples to clarify the issues in my head.

Thank you
QJ

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raven15
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Re: A different approach to asset allocation

Post by raven15 » Mon Sep 18, 2017 11:28 pm

market timer wrote:
Sun Sep 16, 2007 12:51 pm
Summary: Econ grad student applies Mortgage Your Retirement theory at the top of the last bull market, starting around 2x leverage, loses $210K of borrowed money, and is forced is to sell what's left of his portfolio at S&P 821 in November 2008. The complete wipeout results in a reflective period where he recollects the circumstances that led him to adopt this strategy, some of which will be included in a book. He spends five weeks in Asia and begins writing about how risk and progress can be framed. Returning to the US, he slashes his expenses, finds several ways to increase income, earns 914% on the IRBLTG Fund, and pays off all his high interest credit card debt. Net worth tracker continues to be updated.
Happy 10th anniversary Market Timer! (Darn missed by 2 days)
It's Time. Adding Interest.

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Re: A different approach to asset allocation

Post by Startled Cat » Tue Sep 19, 2017 12:10 am

Hard to believe it's been 10 years. I vividly remember watching the events in this thread unfold.

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market timer
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Re: A different approach to asset allocation

Post by market timer » Tue Sep 19, 2017 9:27 am

Thanks for the anniversary reminder!

I thought it would be interesting to go back to 2009 and see what I would have written around the time I stopped writing in this thread. Here it is, a 10th anniversary passage.

THE OUTLAW

Image

Giverny, France
June 9, 2009
Net worth: -$185K
Current position: Leveraged 20x long 30-year Treasuries

Camille Monet, first wife of Claude, died in 1879, when she was only 32. Claude, age 38 at the time, became obsessed with painting the French countryside and seaside. Four years later, he rented a house in Giverny where he would remain for the rest of his life, cultivating and painting his famous water lilies.

I’m overhearing many other details on this guided tour, but my attention is on the market—specifically, the current Treasury quotes on Bloomberg. Since the panic of last year, Treasury yields have risen relentlessly, over 200bps from 2.5% to 4.6%. I find myself once again on the wrong side of the trend and in the familiar position of receiving a margin call. There’s nothing for me to do but anxiously watch yields and wait for the email confirmations that I’ve been liquidated.

“Want to take a picture near the bridge?” Borte asks. Why is she still with me? Borte is also 32, and I wonder if I’ll be able to dig myself out of this hole and on suitable enough financial footing soon to start a family with her. We’ve been doing long distance for two years, during which time my life has become increasingly unwound by alcohol and gambling.

I jot some notes into my phone: Nature is a fractal. She is intelligible at many scales of length. The landscape artist applies a frame at an appropriate scale. Likewise, a trader discerns the technical patterns at an appropriate frame of time.

My phone is full of these sorts of notes, just waiting to be used…. where, exactly? Before I had an iPhone, I filled notebooks with these nuggets, material that a future, more determined, self might use for a dissertation. In less than two months, I’ll start my first job, where I must not bring attention to the fact that I haven’t written even the first page of my dissertation.

Maybe losing my job would be the best thing--just get back to nature, away from society. Maybe I could build a house with my bare hands, cultivate a garden, and teach my kids the freedom of living as an outlaw. The past few months have been a spiritual awakening for me. It occurred to me that happiness must be stolen, not just from the society that tries to make me a debt serf but also from my addictions. Here I am in Giverny, against all reason. Spending money on a trip I can’t afford as my other obligations pile up at home. Proving that the market has not defeated me yet.

If I could just be present in this moment, I type into my phone, look around, and try to see Giverny as Monet might have.

What I’d like most of all is a quiet place, away from everything, to hone my craft. Despite all evidence to the contrary, I believe there is something good and indestructible inside of me. If I could just focus, perhaps something worth this struggle will reveal itself.

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sergeant
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Re: A different approach to asset allocation

Post by sergeant » Tue Sep 19, 2017 2:36 pm

Net worth update? I was there for this entire journey. Glad you're doing ok.
Lincoln 3 EOW!

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market timer
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Re: A different approach to asset allocation

Post by market timer » Tue Sep 19, 2017 7:16 pm

Net worth: $1.2mn, not counting wife's assets
Equity exposure: $0
Children: 2

grok87
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Re: A different approach to asset allocation

Post by grok87 » Tue Sep 19, 2017 8:06 pm

market timer wrote:
Tue Sep 19, 2017 7:16 pm
Net worth: $1.2mn, not counting wife's assets
Equity exposure: $0
Children: 2
congrats!
Keep calm and Boglehead on. KCBO.

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sergeant
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Re: A different approach to asset allocation

Post by sergeant » Wed Sep 20, 2017 2:47 am

market timer wrote:
Tue Sep 19, 2017 7:16 pm
Net worth: $1.2mn, not counting wife's assets
Equity exposure: $0
Children: 2
Congrats for sure, on the net worth and more importantly the children!
Lincoln 3 EOW!

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Re: A different approach to asset allocation

Post by watchnerd » Sun Dec 31, 2017 12:57 pm

qwertyjazz wrote:
Tue Jun 14, 2016 10:40 am
This thread has been thrown out as a cautionary tale against leverage. The plural of anecdote is ... For the long time Bogleheads, how might the story have changed with a Taylor 3 fund (probably 2 fund given concept), a steady income stream, cheaper leaverage costs? I am not planning this explicitly but I am playing with the old pay off mortgage or new mortgage conundrum and I think in terms of extreme examples to clarify the issues in my head.

Thank you
QJ
I basically did that, but the leverage I chose was a mortgage and the mechanism was SF Bay Area real estate, bought at the bottom of the market in 2010, sold in 2017. Walked away with 7 figure profit after taxes.

Now financially independent, no debts, own house in the woods on 1 acre of land. Working for as long as I have fun, but could quit at any time. Didn't have to live apart from my wife for 7 years.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

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Re: A different approach to asset allocation

Post by Tamalak » Tue Apr 24, 2018 1:56 pm

qwertyjazz wrote:
Tue Jun 14, 2016 10:40 am
This thread has been thrown out as a cautionary tale against leverage. The plural of anecdote is ...
Yeah, I don't see it as a cautionary tale against leverage. There's a saying that "everyone is a genius in a bull market" - the obvious corollary is that everyone is a fool in a bear market.

The risk of failure for MT's plan was so low that it took a once-in-a-century systemic collapse timed EXACTLY right to knock it out, and even then just barely. And MT himself was not knocked out even by that, as we can see by his many successes less than a decade later. Given that, in retrospect, this plan seems like a very good idea.

I am impressed by MT's cojones and stoicism, especially in the face of shocking amounts of insults, paternalism, and open hopes of MT's future misery from the community here. He took all kinds of crap and just kept plugging along. That attitude is surely why he is where he is today. He 'stayed the course'.

ALL of us who were invested lost big in 2008. Those were not paper losses, they were real. Permabears bunkered down in cash and gold would have just as much reason to righteously sneer at us that our downfall is rooted in our own arrogance and to wonder aloud when we would learn from our betters.

It appears that MT never did "learn", and I couldn't be happier for him :sharebeer

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Re: A different approach to asset allocation

Post by HomerJ » Tue Apr 24, 2018 3:14 pm

Tamalak wrote:
Tue Apr 24, 2018 1:56 pm
qwertyjazz wrote:
Tue Jun 14, 2016 10:40 am
This thread has been thrown out as a cautionary tale against leverage. The plural of anecdote is ...
Yeah, I don't see it as a cautionary tale against leverage. There's a saying that "everyone is a genius in a bull market" - the obvious corollary is that everyone is a fool in a bear market.

The risk of failure for MT's plan was so low that it took a once-in-a-century systemic collapse timed EXACTLY right to knock it out, and even then just barely. And MT himself was not knocked out even by that, as we can see by his many successes less than a decade later. Given that, in retrospect, this plan seems like a very good idea.

I am impressed by MT's cojones and stoicism, especially in the face of shocking amounts of insults, paternalism, and open hopes of MT's future misery from the community here. He took all kinds of crap and just kept plugging along. That attitude is surely why he is where he is today. He 'stayed the course'.

ALL of us who were invested lost big in 2008. Those were not paper losses, they were real. Permabears bunkered down in cash and gold would have just as much reason to righteously sneer at us that our downfall is rooted in our own arrogance and to wonder aloud when we would learn from our betters.

It appears that MT never did "learn", and I couldn't be happier for him :sharebeer
Hmm... I'm afraid I have to disagree with some of your points. The cautionary tale is real. His plan, using leverage, although likely to work most of the time, maybe even almost ALL of the time, is still risky. Because you never know when a crash is coming (and they are not once-in-a-century).

You are completely incorrect that we lost money in 2008 like MT lost money in 2008. Ours absolutely were paper losses. Doing nothing, the losses disappeared, and turned into gains over time.

MT actually lost that money, and had to use part of his future yearly income to pay off the debt.

The only reason he recovered so well, and so quickly, is that he had a very high salary. Ironically, of course, his income was so high, that he had ZERO need to take this risk in 2007. He would have been rich just following standard Boglehead practices.

The only point I will agree with you is that MT showed amazing grace under fire, and a maturity beyond his years. I was and still am very impressed by him detailing his fall. Almost NO ONE does that. Most of the people who post here with a "smarter plan" slink away, never to be seen again if it fails.

I am also most pleased by his financial recovery and his embrace of family life being more important than money. I wish him the absolute best.

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Re: A different approach to asset allocation

Post by bling » Wed Apr 25, 2018 8:18 pm

wow, i'm so glad this thread got bumped. i read all 29 pages...

MT, you really should consider writing a book of some sort.

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Re: A different approach to asset allocation

Post by Independent George » Thu Apr 26, 2018 2:49 pm

So, I just spent about four hours reading this thread instead of working like I was supposed to. MT, if you're still reading this, I have one question that didn't seem to get addressed. It relates to the behavioral aspect of your investing.

It looks like you've been extremely successful as a trader independently, and you were starting from an income of $85k while still a grad student. So why did you feel the need to leverage yourself in the first place?

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Re: A different approach to asset allocation

Post by whodidntante » Thu Apr 26, 2018 10:48 pm

What if it had worked?

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Re: A different approach to asset allocation

Post by roymeo » Fri Apr 27, 2018 11:11 am

whodidntante wrote:
Thu Apr 26, 2018 10:48 pm
What if it had worked?
What if what had worked?
The sewer system is a form of welfare state. | -- "Libra", Don DeLillo

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whodidntante
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Re: A different approach to asset allocation

Post by whodidntante » Fri Apr 27, 2018 12:21 pm

roymeo wrote:
Fri Apr 27, 2018 11:11 am
whodidntante wrote:
Thu Apr 26, 2018 10:48 pm
What if it had worked?
What if what had worked?
The mortgage your retirement approach that the OP laid out. As I understand it, the fault was not his reasoning necessarily, but the decision to increase leverage on the way down into the worst market I've personally seen.

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Re: A different approach to asset allocation

Post by appleshampooid » Tue Aug 07, 2018 11:36 am

market timer wrote:
Tue Sep 19, 2017 7:16 pm
Net worth: $1.2mn, not counting wife's assets
Equity exposure: $0
Children: 2
I just read over this thread start to finish over the past few days. If anything, the most recent update is depressing me. I am roughly the same age as the OP (finished undergrad in 2006 so I think a couple years younger) and my combined net worth with my wife is ~$675k (one kid, roughly $427k equity exposure). I know that's still way above average and we're doing fine, but I am jealous of MT's hustle and skillset. I am in a high compensation field (started in software dev, now on the infrastructure/ops side) but took almost 2 years off in my 20s to be a lazy slacker...and I haven't exactly worked as hard as possible at my various positions. I guess If I had started Boglehead style investing from day 1 of my career and didn't take that time off (which was during prime years of the recent rally) I would probably be close. I would be well ahead if I hadn't sold all of my AMZN RSUs between 2007-2010 :oops: :oops: :oops: , but that's just hindsight.

If anything, the $210k debt to start his adult life seemed like a blessing in disguise as it was a super motivator for him. I have never had that kind of motivation, despite aspiring to retire early.
"If you aren't unhappy with part of your portfolio, you aren't diversified enough." -rudeboy

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