Should I use margin to buy a balanced fund?

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Re: Should I use margin to buy a balanced fund?

Post by long_gamma » Mon Dec 04, 2017 6:37 pm

Some what relevant article to this thread. ... y-getting/
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

Rob Bertram
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Re: Should I use margin to buy a balanced fund?

Post by Rob Bertram » Tue Dec 05, 2017 2:05 pm

Awesome read! It is very much in line with this thread.

I really do hope that leveraged portfolios becomes more popular. If one of the robo-advisers would offer leveraged portfolios as an investment option, I would definitely stop my manual stuff and move it over to their service. Rolling futures isn't time consuming, but it does require access to your account. That means I have to plan vacations around my portfolio which is mildly inconvenient.

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Re: Should I use margin to buy a balanced fund?

Post by Swelfie » Tue Dec 05, 2017 3:18 pm

Having been running a similar risk-parity portfolio for over a year now, one thing I was a bit caught off guard by was that, as Rob had discussed earlier in this thread, rising interest rates aren't really all that troublesome to the short term bonds. But what I am seeing in this current market is that combined with a flattening yield curve they are. The last few months interest rates have risen at the 2 year point, but they have risen faster at the 3 month point. This has pushed the implied repo rate up at a rate that my 2 year treasuries have the same expected return as they did 4 months ago, but they have lost a lot of value. My original assessment was that if interest rates rise I would expect to increase future returns, but I hadn't really accounted for the effect curve slope could have as a risk unto itself.

Not that I'm dissatisfied. My portfolio is behaving well overall. I am wondering if there is a diversification path here though. Here is my thought:

VIX doesn't really have any expected future growth, rather it spikes and returns to a baseline. The "insurance" aspect of holding VIX directly against an equity crash causes prices on future volatility to be higher than expected. This puts VIX futures in contago almost always (except during market crashes) and conversely, puts short VIX in near permanent backwardation, making a sliver of ZIV, for instance an attractive investment.

Yield curves have a similar story to VIX in that normally the curve is somewhat steep. At times it shallows or inverts but it later returns to normal (I can't see an economy that persisted in a state where long term investments always pay more than short term.) Since straight-forward investment in a positively sloped yield curve, such as this thread illustrates, is the norm, then insurance against curve flattening is likely at a premium. What is the combination of derivatives then that is shorts a flattening yield curve, as this should also in my mind be in a state of near permanent backwardation?

Rob Bertram
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Re: Should I use margin to buy a balanced fund?

Post by Rob Bertram » Thu Dec 07, 2017 12:20 pm

Yeah, the 2-year note futures have been fairly stagnant. I can check my history, but I believe that they are flat or at a slight loss year to date. Note that they are doing exactly what I want: providing an uncorrelated asset to the portfolio with a positive expected return. And, I agree, the portfolio is doing well which is what should be the ultimate focus.

An inverted yield curve is definitely a concern for a leveraged portfolio. It has happened, but it is a relatively rare event. Outside of keeping leverage within reason, I don't have a portfolio mitigation strategy. I don't want to abandon my total-market framework in order to add assets that are only relevant for a specific black swan event and create drag on the portfolio the rest of the time. I understand your original goal for including VIX futures in your portfolio, but it's not an approach that I would do. As you point out, VIX futures almost always in contango which makes it a losing choice for a buy-and-hold portfolio.

For anyone interested, there is a nice animated graph of the treasury yield curve here:

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