Interest rates low: leverage up?

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mikemikemike
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Interest rates low: leverage up?

Post by mikemikemike » Tue Aug 13, 2019 9:51 am

Interest rates are very low. That makes bonds less attractive to buy (although the ones I've held for a while have obviously made me a ton of money). It also makes it cheaper to borrow money to buy stocks.

I have around 30 years until retirement, so am thinking of following market timer, hedgefundie, et al., into the world of leverage, with the idea that I have a long time to recover if things go south.

Plan is just to start with UPRO for around 30% of my 401(K). That'll add 60% stock exposure above my current holdings (UPRO is 3x leveraged S&P 500 index fund, so the 30% that I hold equates to 90% worth of exposure. That will replace a current portion of my S&P 500 exposure, hence adding 60% more. I'll end up here with 140% stocks, and 20% bonds that I still hold. I have REITs in a different account, but let's not get into those for now).

My main question for this group is: do the low interest rates really favor leveraging up (in my case with UPRO), or have I missed something fundamental?

rascott
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Re: Interest rates low: leverage up?

Post by rascott » Tue Aug 13, 2019 9:58 am

mikemikemike wrote:
Tue Aug 13, 2019 9:51 am
Interest rates are very low. That makes bonds less attractive to buy (although the ones I've held for a while have obviously made me a ton of money). It also makes it cheaper to borrow money to buy stocks.

I have around 30 years until retirement, so am thinking of following market timer, hedgefundie, et al., into the world of leverage, with the idea that I have a long time to recover if things go south.

Plan is just to start with UPRO for around 30% of my 401(K). That'll add 60% stock exposure above my current holdings (UPRO is 3x leveraged S&P 500 index fund, so the 30% that I hold equates to 90% worth of exposure. That will replace a current portion of my S&P 500 exposure, hence adding 60% more. I'll end up here with 140% stocks, and 20% bonds that I still hold. I have REITs in a different account, but let's not get into those for now).

My main question for this group is: do the low interest rates really favor leveraging up (in my case with UPRO), or have I missed something fundamental?
Short term rates haven't dropped....so it's not helping the leveraged ETF at this point. I believe the LIBOR 3 month rate is what you need to look at.

I don't know if going 140/20 is really any better than going 140/0. You are upping the cost via UPRO vs holding 80% VOO/20% UPRO. And that buys you some insurance bonds....but not a lot.

I'd encourage you to read this:

https://papers.ssrn.com/sol3/papers.cfm ... id=2741701
Last edited by rascott on Tue Aug 13, 2019 10:05 am, edited 2 times in total.

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mikemikemike
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Re: Interest rates low: leverage up?

Post by mikemikemike » Tue Aug 13, 2019 10:02 am

That makes sense. UPRO is basically borrowing each day for their leverage (although they do it with swaps not actual borrowing, but premiums should still be determined by interest rates of the duration of the swap, which is short term).

So if I wanted to use interest rates as a marker of when leverage is "cheap", I should look at short term rates.

Thanks!

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Re: Interest rates low: leverage up?

Post by pkcrafter » Tue Aug 13, 2019 10:06 am

mikemikemike wrote:
Tue Aug 13, 2019 9:51 am
Interest rates are very low. That makes bonds less attractive to buy (although the ones I've held for a while have obviously made me a ton of money). It also makes it cheaper to borrow money to buy stocks.

I have around 30 years until retirement, so am thinking of following market timer, hedgefundie, et al., into the world of leverage, with the idea that I have a long time to recover if things go south.
I guess you are going to have to decide if you want to be a Boglehead or not.

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.

MotoTrojan
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Re: Interest rates low: leverage up?

Post by MotoTrojan » Tue Aug 13, 2019 10:09 am

I am a user of hedgefundie's adventure portfolio and still not sure how I feel about your plan. UPRO tracks 3x the S&P500s daily return but does not track it's longterm return. It really needs to be used to compliment an optimized portfolio.

I cannot share this link since it uses simulated UPRO data but here are the stats for what I believe is your portfolio options since 1987:

80% S&P500, 20% Total Bond: 9.43% CAGR, 42.4% drawdown, 0.56 sharpe

50% S&P500, 30% UPRO, 20% Total Bond: 11.32% CAGR, 67.1% drawdown, 0.48 sharpe

This is not enough extra return to be worth almost doubling your volatility. If you are really interested in getting some UPRO exposure I would suggest you build a separate portfolio, perhaps 30-40% UPRO and the rest in EDV (unless you want to give TMF a spin).

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Re: Interest rates low: leverage up?

Post by Cyclesafe » Tue Aug 13, 2019 10:22 am

If one is supercharging market timing with leverage, why would one want to do this when equity markets are close to all-time highs? Just because it is cheap to do so? I sincerely hope you reconsider.
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Re: Interest rates low: leverage up?

Post by mikemikemike » Tue Aug 13, 2019 10:54 am

MotoTrojan wrote:
Tue Aug 13, 2019 10:09 am
I am a user of hedgefundie's adventure portfolio and still not sure how I feel about your plan. UPRO tracks 3x the S&P500s daily return but does not track it's longterm return. It really needs to be used to compliment an optimized portfolio.

I cannot share this link since it uses simulated UPRO data but here are the stats for what I believe is your portfolio options since 1987:

80% S&P500, 20% Total Bond: 9.43% CAGR, 42.4% drawdown, 0.56 sharpe

50% S&P500, 30% UPRO, 20% Total Bond: 11.32% CAGR, 67.1% drawdown, 0.48 sharpe

This is not enough extra return to be worth almost doubling your volatility. If you are really interested in getting some UPRO exposure I would suggest you build a separate portfolio, perhaps 30-40% UPRO and the rest in EDV (unless you want to give TMF a spin).
This is helpful. One thing to note is that over the 32 years since 1987, the leveraged portfolio getting 11.32% CAGR grew to around 1.1132^32 = 31 times the original investment.

The unleveraged one grew to roughly 1.0943^32 = 18 times the original.

So the added leverage really did make a big difference (I'd rather have 31x growth than 18x).

As you say, that comes with a lot of added volatility, but I don't actually care if my balance swings around a lot. So I'm not sure that the volatility really matters. It also seems that, with interest rates lower now, the outperformance of the leveraged approach (vs unleveraged) should be larger than in the past.

All that being said, you are right that the TMF addition -- going full on hedgefundie -- might be the right approach.

I'll think of this some more.

As for the question of leveraging up with market near all-time highs: Presumably my inability to predict the future of the market means I shouldn't worry about this. At least that's what Bogle told me, and he seemed pretty sharp.

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Re: Interest rates low: leverage up?

Post by ryman554 » Tue Aug 13, 2019 11:06 am

pkcrafter wrote:
Tue Aug 13, 2019 10:06 am
mikemikemike wrote:
Tue Aug 13, 2019 9:51 am
Interest rates are very low. That makes bonds less attractive to buy (although the ones I've held for a while have obviously made me a ton of money). It also makes it cheaper to borrow money to buy stocks.

I have around 30 years until retirement, so am thinking of following market timer, hedgefundie, et al., into the world of leverage, with the idea that I have a long time to recover if things go south.
I guess you are going to have to decide if you want to be a Boglehead or not.

Paul
What does leverage have anything to do with being a Boglehead? Are folks who invest instead of paying down a mortgage somehow non-bogleheadish? It's the same thing, from a certain point of view.

Is it a three fund portfolio? No, but that is a rather strict definition.

Is it a diversified fund? To the degree the S&P/TSM are diversified, and this is what the OP will be leveraging into, yes.

Is it riskier than the 80/20 portfolio? Absolutely. More risk does not a non-boglehead make.

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Re: Interest rates low: leverage up?

Post by whodidntante » Tue Aug 13, 2019 11:14 am

I think you missed the best part of the party, friend. All the cool people already left and the host is starting to look at her watch and wonder if anyone will help clean up this mess. Most bogleheads insist they are immune to market timing, and robotically buy no matter what, and I believe them all. But I think most of us can feel a chill in the air, even if we don't want to wear a coat yet. I feel a chill in the air. Maybe it's a pleasant and lengthy and uneventful autumn and maybe winter is coming. We will see.

I already set a course to max all tax advantaged accounts by the end of the year, buying equities with every penny of it.
I am now shedding my most expensive debt, which is or is the same as deleveraging. This reduces my overall risk and is altogether fitting for my situation. If you feel differently and want to increase leverage, be my guest. I'm happy to give some ideas on what I would do, if I wanted to take more risk.

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Re: Interest rates low: leverage up?

Post by Charon » Tue Aug 13, 2019 12:04 pm

ryman554 wrote:
Tue Aug 13, 2019 11:06 am
What does leverage have anything to do with being a Boglehead?
...
More risk does not a non-boglehead make.
It actually does. https://www.bogleheads.org/wiki/Boglehe ... philosophy

More than 100% of your assets in stocks is "too much risk" by any Boglehead definition. OP is also trying to time the market.

That doesn't mean this approach is bad. Some people win with approaches like this, and some lose, and it's your call if you want the risk. But it does mean it's not a Boglehead approach.

Investing instead of paying down the mortgage is not the same thing, since the mortgage is backed by a physical asset (the house) and your downside exposure is limited to losing that asset.

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Re: Interest rates low: leverage up?

Post by LadyGeek » Tue Aug 13, 2019 12:11 pm

Have you read Market Timer's classic thread? A different approach to asset allocation (Sep 16, 2007)

Also, hedgefundie's approach is not recommended as a major component of your retirement portfolio. There were several posts suggesting to use no more than 5% of your portfolio. Here's why: Subject: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]
LadyGeek wrote:
Sat Jun 08, 2019 8:27 am
For background info, the 5% rule is from Jack Bogle. See the wiki: Variations on Bogleheads® investing (Having a play money account, Note 1)
John Bogle recommends setting aside no more than 5% of your investments as "funny money", which is the most you can afford to lose and not jeopardize your retirement.

Life is short. If you want to enjoy the fun, enjoy! But not with all of your hard-earned resources. Specifically, not with one penny more than 5% of your investment assets. At most! Have the fun of gambling, but not with your rent money - and certainly not with your retirement assets nor with your funds for your college education.
Note the last sentence.
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Re: Interest rates low: leverage up?

Post by rascott » Tue Aug 13, 2019 12:30 pm

I'm not opposed to leverage....the ideal leverage on the SP500 is probably around 1.5x for the long term. If you actually could manage to hold that for 30+ years you would most very likely end up with a lot more money. However it would be a wild ride and there is the tail risk of a Great Depression type market where you would be wiped out (or close). And even a "regular" bear market would take you down 75%....that would take serious stones.

However nobody (or very few crazy souls) would be looking at holding a leveraged portfoilo all the way into and during retirement. So what's your real time frame?

A trend following/momentum method like mentioned in the white paper I linked might be a good compromise. When in an up-trending market push the leverage button on....when not just go back to 100% equity. This has added a couple points to the SP500 over the last 4 decades as well, without the major drawdowns of leveraged buy and hold. I'm only looking at going 1.2-1.3x.
Last edited by rascott on Tue Aug 13, 2019 12:38 pm, edited 3 times in total.

MotoTrojan
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Re: Interest rates low: leverage up?

Post by MotoTrojan » Tue Aug 13, 2019 12:30 pm

LadyGeek wrote:
Tue Aug 13, 2019 12:11 pm
Have you read Market Timer's classic thread? A different approach to asset allocation (Sep 16, 2007)

Also, hedgefundie's approach is not recommended as a major component of your retirement portfolio. There were several posts suggesting to use no more than 5% of your portfolio. Here's why: Subject: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]
LadyGeek wrote:
Sat Jun 08, 2019 8:27 am
For background info, the 5% rule is from Jack Bogle. See the wiki: Variations on Bogleheads® investing (Having a play money account, Note 1)
John Bogle recommends setting aside no more than 5% of your investments as "funny money", which is the most you can afford to lose and not jeopardize your retirement.

Life is short. If you want to enjoy the fun, enjoy! But not with all of your hard-earned resources. Specifically, not with one penny more than 5% of your investment assets. At most! Have the fun of gambling, but not with your rent money - and certainly not with your retirement assets nor with your funds for your college education.
Note the last sentence.
I've always felt the 5% rule should be adjusted to be 5% of your contributions. If 5% of your portfolio goes to 0, what keeps you from reloading with the next 5% :twisted: .

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Re: Interest rates low: leverage up?

Post by MoneyMarathon » Tue Aug 13, 2019 12:43 pm

MotoTrojan wrote:
Tue Aug 13, 2019 10:09 am
80% S&P500, 20% Total Bond: 9.43% CAGR, 42.4% drawdown, 0.56 sharpe

50% S&P500, 30% UPRO, 20% Total Bond: 11.32% CAGR, 67.1% drawdown, 0.48 sharpe

This is not enough extra return to be worth almost doubling your volatility.
I disagree with the idea that leverage requires larger amounts of it to pay off, or more speculative portfolios with more long bonds. At low levels of leverage, the increase in return per unit of risk should be greater than at high levels of leverage. Your example seems to illustrate that.

Almost 2% CAGR, on the margins, is not small. That goes from doubling the money every 7.7 years to doubling it every 6.46 years. All without nearly the same risk (backtests chosen over time periods where the tail risk did not show up, do not mean there isn't more risk) as someone with 3x leverage.

That said, maybe the OP just wants to go 100% stocks, or 10% UPRO and drop the bonds, rather than 30% UPRO, given that it's a less effective way to get the return of the stock market than just buying 3x as much stocks, unleveraged.
Last edited by MoneyMarathon on Tue Aug 13, 2019 12:46 pm, edited 1 time in total.

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mikemikemike
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Re: Interest rates low: leverage up?

Post by mikemikemike » Tue Aug 13, 2019 12:44 pm

rascott wrote:
Tue Aug 13, 2019 12:30 pm
I'm not opposed to leverage....the ideal leverage on the SP500 is probably around 1.5x for the long term. If you actually could manage to hold that for 30+ years you would most very likely end up with a lot more money. However it would be a wild ride and there is the tail risk of a Great Depression type market where you would be wiped out (or close). And even a "regular" bear market would take you down 75%....that would take serious stones.

However nobody (or very few crazy souls) would be looking at holding a leveraged portfoilo all the way into and during retirement. So what's your real time frame?

A trend following/momentum method like mentioned in the white paper I linked might be a good compromise. When in an up-trending market push the leverage button on....when not just go back to 100% equity. This has added a couple points to the SP500 over the last 4 decades as well, without the major drawdowns of leveraged buy and hold. I'm only looking at going 1.2-1.3x.
Hmm. Lots to digest here.

You are right about "real time frame". I imagine that I'd wind down the leverage steadily starting about 15 years before retirement. So that puts the effective horizon at more like 20 years.

Trend following idea is intriguing. I'll check it out.

Thanks!

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Re: Interest rates low: leverage up?

Post by MotoTrojan » Tue Aug 13, 2019 12:49 pm

MoneyMarathon wrote:
Tue Aug 13, 2019 12:43 pm
MotoTrojan wrote:
Tue Aug 13, 2019 10:09 am
80% S&P500, 20% Total Bond: 9.43% CAGR, 42.4% drawdown, 0.56 sharpe

50% S&P500, 30% UPRO, 20% Total Bond: 11.32% CAGR, 67.1% drawdown, 0.48 sharpe

This is not enough extra return to be worth almost doubling your volatility.
I disagree with the idea that leverage requires larger amounts of it to pay off, or more speculative portfolios with more long bonds. At low levels of leverage, the increase in return per unit of risk should be greater than at high levels of leverage. Your example seems to illustrate that.

Almost 2% CAGR, on the margins, is not small. That goes from doubling the money every 7.7 years to doubling it every 6.46 years. All without nearly the same risk (backtests chosen over time periods where the tail risk did not show up, do not mean there isn't more risk) as someone with 3x leverage.

That said, maybe the OP just wants to go 100% stocks, or 10% UPRO and drop the bonds, rather than 30% UPRO, given that it's a less effective way to get the return of the stock market than just buying 3x as much stocks, unleveraged.
That 2% on the margins is a decade into a raging bull. Every downturn the two have converged; if you started during a high point that likely means you just break even at the end of every bull before trailing by 2% CAGR. The chart didn’t look to indicate a sustainable outperformance.

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Re: Interest rates low: leverage up?

Post by chevca » Tue Aug 13, 2019 12:58 pm

ryman554 wrote:
Tue Aug 13, 2019 11:06 am
pkcrafter wrote:
Tue Aug 13, 2019 10:06 am
mikemikemike wrote:
Tue Aug 13, 2019 9:51 am
Interest rates are very low. That makes bonds less attractive to buy (although the ones I've held for a while have obviously made me a ton of money). It also makes it cheaper to borrow money to buy stocks.

I have around 30 years until retirement, so am thinking of following market timer, hedgefundie, et al., into the world of leverage, with the idea that I have a long time to recover if things go south.
I guess you are going to have to decide if you want to be a Boglehead or not.

Paul
What does leverage have anything to do with being a Boglehead? Are folks who invest instead of paying down a mortgage somehow non-bogleheadish? It's the same thing, from a certain point of view.

Is it a three fund portfolio? No, but that is a rather strict definition.

Is it a diversified fund? To the degree the S&P/TSM are diversified, and this is what the OP will be leveraging into, yes.

Is it riskier than the 80/20 portfolio? Absolutely. More risk does not a non-boglehead make.
Ahh, ummmm... I'm almost speechless at this argument you tried to make. :shock:

Charon covered it, but, does never bear too much or too little risk ring a bell for you about being a BH?

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Re: Interest rates low: leverage up?

Post by Tyler Aspect » Tue Aug 13, 2019 1:05 pm

mikemikemike wrote:
Tue Aug 13, 2019 9:51 am
Interest rates are very low. That makes bonds less attractive to buy (although the ones I've held for a while have obviously made me a ton of money). It also makes it cheaper to borrow money to buy stocks.

I have around 30 years until retirement, so am thinking of following market timer, hedgefundie, et al., into the world of leverage, with the idea that I have a long time to recover if things go south.

Plan is just to start with UPRO for around 30% of my 401(K). That'll add 60% stock exposure above my current holdings (UPRO is 3x leveraged S&P 500 index fund, so the 30% that I hold equates to 90% worth of exposure. That will replace a current portion of my S&P 500 exposure, hence adding 60% more. I'll end up here with 140% stocks, and 20% bonds that I still hold. I have REITs in a different account, but let's not get into those for now).

My main question for this group is: do the low interest rates really favor leveraging up (in my case with UPRO), or have I missed something fundamental?
Investing is not gambling. Anytime you are borrowing money to invest you set up a situation where it becomes possible to lose all of your money.

Keep in mind you are proposing to leverage up in the middle of an inverted yield curve situation. That is practically asking for trouble.
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mikemikemike
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Re: Interest rates low: leverage up?

Post by mikemikemike » Tue Aug 13, 2019 1:10 pm

I appreciate the concern about excessive losses and ending up in debt. That is what happened to market timer and was obviously a disaster.

Note that the way I'm implementing this is by buying a 3x leverage ETF with a fraction (30%) of one of my retirement accounts. The worst case for this investment is that it goes to zero (I can't end up in debt through this mechanism), and I lose that 30% of this account. That would be bad but not life-changing.

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Re: Interest rates low: leverage up?

Post by mikemikemike » Tue Aug 13, 2019 1:15 pm

I think I'll go with the leveraged rotation strategy from Gayed and Billelo (thanks, Rascott for sharing that great paper!)

Only remaining question: where to park my yacht(s) once this succeeds?

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Re: Interest rates low: leverage up?

Post by chevca » Tue Aug 13, 2019 1:27 pm

Interest rates were low like this not long ago. Why didn't you do this then?

MoneyMarathon
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Re: Interest rates low: leverage up?

Post by MoneyMarathon » Tue Aug 13, 2019 1:29 pm

MotoTrojan wrote:
Tue Aug 13, 2019 12:49 pm
MoneyMarathon wrote:
Tue Aug 13, 2019 12:43 pm
MotoTrojan wrote:
Tue Aug 13, 2019 10:09 am
80% S&P500, 20% Total Bond: 9.43% CAGR, 42.4% drawdown, 0.56 sharpe

50% S&P500, 30% UPRO, 20% Total Bond: 11.32% CAGR, 67.1% drawdown, 0.48 sharpe

This is not enough extra return to be worth almost doubling your volatility.
I disagree with the idea that leverage requires larger amounts of it to pay off, or more speculative portfolios with more long bonds. At low levels of leverage, the increase in return per unit of risk should be greater than at high levels of leverage. Your example seems to illustrate that.

Almost 2% CAGR, on the margins, is not small. That goes from doubling the money every 7.7 years to doubling it every 6.46 years. All without nearly the same risk (backtests chosen over time periods where the tail risk did not show up, do not mean there isn't more risk) as someone with 3x leverage.

That said, maybe the OP just wants to go 100% stocks, or 10% UPRO and drop the bonds, rather than 30% UPRO, given that it's a less effective way to get the return of the stock market than just buying 3x as much stocks, unleveraged.
That 2% on the margins is a decade into a raging bull. Every downturn the two have converged; if you started during a high point that likely means you just break even at the end of every bull before trailing by 2% CAGR. The chart didn’t look to indicate a sustainable outperformance.
That may be true. I'm thinking more about the 90% stocks / 10% UPRO suggestion for light leverage overall.

Starting from 2008, using 90% SPY / 10% UPRO crossed paths with 100% SPY in April 2013.

Starting from 2000, it crossed paths in November 2016.

Starting from 1987, it crossed paths in December 1991.

Since these are some of the worst cases, it seems reasonable.

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Re: Interest rates low: leverage up?

Post by mikemikemike » Tue Aug 13, 2019 1:30 pm

chevca wrote:
Tue Aug 13, 2019 1:27 pm
Interest rates were low like this not long ago. Why didn't you do this then?
Didn't think of it at that time. Reading some of the hedgefundie etc. stuff here got this brilliant idea percolating.

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Re: Interest rates low: leverage up?

Post by ohai » Tue Aug 13, 2019 1:34 pm

Leverage in equities is not irrational. If some people can tolerate 100% equities, then surely others can tolerate higher than 100%.

The greater risk is underestimating your risk tolerance and leveraging more than your utility optimizing level, similar to lottery buyers, who increase risk irrationally.

Keep in mind that leveraging more and more with these ETFs is increasingly risk inefficient, due to expense ratio and volatility drag. Every next dollar you invest in UPRO is less risk efficient than the previous dollar.

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Re: Interest rates low: leverage up?

Post by MotoTrojan » Tue Aug 13, 2019 1:41 pm

ohai wrote:
Tue Aug 13, 2019 1:34 pm
Leverage in equities is not irrational. If some people can tolerate 100% equities, then surely others can tolerate higher than 100%.

The greater risk is underestimating your risk tolerance and leveraging more than your utility optimizing level, similar to lottery buyers, who increase risk irrationally.

Keep in mind that leveraging more and more with these ETFs is increasingly risk inefficient, due to expense ratio and volatility drag. Every next dollar you invest in UPRO is less risk efficient than the previous dollar.
That was my point. And for this amount of leverage I figured there were better ways to implement it (margin loan, etc...) that won't have the same daily-resetting ETF drag. Futures is another interesting avenue. I have been very intrigued by Pimco's StocksPLUS options which give 100% S&P500 exposure via futures and then invest the cash in various bond strategies to generate a higher return. PSLDX will make it's way into my portfolio via next year's Roth contributions.

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Re: Interest rates low: leverage up?

Post by CurlyDave » Tue Aug 13, 2019 2:11 pm

MotoTrojan wrote:
Tue Aug 13, 2019 10:09 am
I am a user of hedgefundie's adventure portfolio and still not sure how I feel about your plan. UPRO tracks 3x the S&P500s daily return but does not track it's longterm return. It really needs to be used to compliment an optimized portfolio.

I cannot share this link since it uses simulated UPRO data but here are the stats for what I believe is your portfolio options since 1987:

80% S&P500, 20% Total Bond: 9.43% CAGR, 42.4% drawdown, 0.56 sharpe

50% S&P500, 30% UPRO, 20% Total Bond: 11.32% CAGR, 67.1% drawdown, 0.48 sharpe

This is not enough extra return to be worth almost doubling your volatility. If you are really interested in getting some UPRO exposure I would suggest you build a separate portfolio, perhaps 30-40% UPRO and the rest in EDV (unless you want to give TMF a spin).
While the percentage drawdowns are certainly higher, does the extra growth of portfolio 2 mean that the absolute value of portfolio 2 does not go below that of portfolio 1?

That would certainly help me hold on.

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Re: Interest rates low: leverage up?

Post by abyan » Tue Aug 13, 2019 2:20 pm

Charon wrote:
Tue Aug 13, 2019 12:04 pm
More than 100% of your assets in stocks is "too much risk" by any Boglehead definition.
With 30 years to go to retirement? Presuming the person doesn’t freak out when the market plummets 40%, why would 100% equity be any risk at all if you aren’t touching your money for 30 years, even from a Boglehead perspective?

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Re: Interest rates low: leverage up?

Post by MotoTrojan » Tue Aug 13, 2019 3:03 pm

CurlyDave wrote:
Tue Aug 13, 2019 2:11 pm
MotoTrojan wrote:
Tue Aug 13, 2019 10:09 am
I am a user of hedgefundie's adventure portfolio and still not sure how I feel about your plan. UPRO tracks 3x the S&P500s daily return but does not track it's longterm return. It really needs to be used to compliment an optimized portfolio.

I cannot share this link since it uses simulated UPRO data but here are the stats for what I believe is your portfolio options since 1987:

80% S&P500, 20% Total Bond: 9.43% CAGR, 42.4% drawdown, 0.56 sharpe

50% S&P500, 30% UPRO, 20% Total Bond: 11.32% CAGR, 67.1% drawdown, 0.48 sharpe

This is not enough extra return to be worth almost doubling your volatility. If you are really interested in getting some UPRO exposure I would suggest you build a separate portfolio, perhaps 30-40% UPRO and the rest in EDV (unless you want to give TMF a spin).
While the percentage drawdowns are certainly higher, does the extra growth of portfolio 2 mean that the absolute value of portfolio 2 does not go below that of portfolio 1?

That would certainly help me hold on.
If returns are lower overall the volatility drag and costs will prevent that. Also if you choose a bad start date you may never catch back up.

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Re: Interest rates low: leverage up?

Post by Olemiss540 » Tue Aug 13, 2019 7:22 pm

Sounds like gambling to me.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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Re: Interest rates low: leverage up?

Post by market timer » Tue Aug 13, 2019 7:37 pm

chevca wrote:
Tue Aug 13, 2019 1:27 pm
Interest rates were low like this not long ago. Why didn't you do this then?
Long term rates have only been this low briefly in the days following the 2016 Brexit vote. Personally, I am not interested in taking on more than 100% equities, but I am in favor of a long equities / short Treasuries pair trade.

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Re: Interest rates low: leverage up?

Post by Tyler Aspect » Tue Aug 13, 2019 7:41 pm

abyan wrote:
Tue Aug 13, 2019 2:20 pm
Charon wrote:
Tue Aug 13, 2019 12:04 pm
More than 100% of your assets in stocks is "too much risk" by any Boglehead definition.
With 30 years to go to retirement? Presuming the person doesn’t freak out when the market plummets 40%, why would 100% equity be any risk at all if you aren’t touching your money for 30 years, even from a Boglehead perspective?
Leveraged investments behave differently than unleveraged investments. Unleveraged stock funds can bounce back after a down-turn. Leveraged investments can go to zero net asset value in a down-turn and never bounce back. Indeed UPRO's prospectus says that an investor in the Fund could potentially lose the full principal value of his/her investment within a single day.

How it could play out is that when the market is very volatile and coupled to a down-turn at the same time, then UPRO would lose too much net asset value that ProShares could be forced to liquidate the ETF with nearly total loss.
Last edited by Tyler Aspect on Tue Aug 13, 2019 7:48 pm, edited 1 time in total.
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Re: Interest rates low: leverage up?

Post by HawkeyePierce » Tue Aug 13, 2019 7:46 pm

OP might be interested in NTSX, a 90/60 fund with reasonable cost.

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Re: Interest rates low: leverage up?

Post by MotoTrojan » Tue Aug 13, 2019 8:45 pm

market timer wrote:
Tue Aug 13, 2019 7:37 pm
chevca wrote:
Tue Aug 13, 2019 1:27 pm
Interest rates were low like this not long ago. Why didn't you do this then?
Long term rates have only been this low briefly in the days following the 2016 Brexit vote. Personally, I am not interested in taking on more than 100% equities, but I am in favor of a long equities / short Treasuries pair trade.

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Put your money where your mouth is and hold TMV :).

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Re: Interest rates low: leverage up?

Post by market timer » Tue Aug 13, 2019 8:47 pm

MotoTrojan wrote:
Tue Aug 13, 2019 8:45 pm
market timer wrote:
Tue Aug 13, 2019 7:37 pm
chevca wrote:
Tue Aug 13, 2019 1:27 pm
Interest rates were low like this not long ago. Why didn't you do this then?
Long term rates have only been this low briefly in the days following the 2016 Brexit vote. Personally, I am not interested in taking on more than 100% equities, but I am in favor of a long equities / short Treasuries pair trade.

Image
Put your money where your mouth is and hold TMV :).
I am short over $600K of long term Treasuries: viewtopic.php?f=10&t=275865&start=750#p4680934

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Re: Interest rates low: leverage up?

Post by MotoTrojan » Tue Aug 13, 2019 8:52 pm

market timer wrote:
Tue Aug 13, 2019 8:47 pm
MotoTrojan wrote:
Tue Aug 13, 2019 8:45 pm
market timer wrote:
Tue Aug 13, 2019 7:37 pm
chevca wrote:
Tue Aug 13, 2019 1:27 pm
Interest rates were low like this not long ago. Why didn't you do this then?
Long term rates have only been this low briefly in the days following the 2016 Brexit vote. Personally, I am not interested in taking on more than 100% equities, but I am in favor of a long equities / short Treasuries pair trade.

Image
Put your money where your mouth is and hold TMV :).
I am short over $600K of long term Treasuries: viewtopic.php?f=10&t=275865&start=750#p4680934
Good luck.

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Re: Interest rates low: leverage up?

Post by ryman554 » Wed Aug 14, 2019 9:22 am

Charon wrote:
Tue Aug 13, 2019 12:04 pm
ryman554 wrote:
Tue Aug 13, 2019 11:06 am
What does leverage have anything to do with being a Boglehead?
...
More risk does not a non-boglehead make.
It actually does. https://www.bogleheads.org/wiki/Boglehe ... philosophy

More than 100% of your assets in stocks is "too much risk" by any Boglehead definition. OP is also trying to time the market.

That doesn't mean this approach is bad. Some people win with approaches like this, and some lose, and it's your call if you want the risk. But it does mean it's not a Boglehead approach.

Investing instead of paying down the mortgage is not the same thing, since the mortgage is backed by a physical asset (the house) and your downside exposure is limited to losing that asset.
I do not consider it "too much risk" by any Boglehead definition, even if I would personally not do it. You will find others disagree, and I see that you reflect that sentiment and have at least listened.

IMO, I do agree with the market timing question, and *that* makes one distinctly non-bogleheadish, particularly if one is trying to leverage up and down.

I could also be persuaded that borrowing on margin is not "low cost", which would also violate a tenent.

However, being a boglehead is not about being conservative. It's about understanding that "nobody knows nothin", so a diversified, low cost, portfolio is the *safest* strategy to wealth. You have to ask yourself what is "too much risk" For some, it's more than 50% stocks. For others, it's 100% stock. For others still, it's 140% stock... (apparently a sweet spot, but I haven't really looked). Unless you can show me (with data) a rigorous definition of too much risk, then you can't tell them they are not a boglehead. And i think we start with what risk is, since that term is really overloaded around here...

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Re: Interest rates low: leverage up?

Post by ryman554 » Wed Aug 14, 2019 9:28 am

chevca wrote:
Tue Aug 13, 2019 12:58 pm
ryman554 wrote:
Tue Aug 13, 2019 11:06 am
pkcrafter wrote:
Tue Aug 13, 2019 10:06 am
mikemikemike wrote:
Tue Aug 13, 2019 9:51 am
Interest rates are very low. That makes bonds less attractive to buy (although the ones I've held for a while have obviously made me a ton of money). It also makes it cheaper to borrow money to buy stocks.

I have around 30 years until retirement, so am thinking of following market timer, hedgefundie, et al., into the world of leverage, with the idea that I have a long time to recover if things go south.
I guess you are going to have to decide if you want to be a Boglehead or not.

Paul
What does leverage have anything to do with being a Boglehead? Are folks who invest instead of paying down a mortgage somehow non-bogleheadish? It's the same thing, from a certain point of view.

Is it a three fund portfolio? No, but that is a rather strict definition.

Is it a diversified fund? To the degree the S&P/TSM are diversified, and this is what the OP will be leveraging into, yes.

Is it riskier than the 80/20 portfolio? Absolutely. More risk does not a non-boglehead make.
Ahh, ummmm... I'm almost speechless at this argument you tried to make. :shock:

Charon covered it, but, does never bear too much or too little risk ring a bell for you about being a BH?
I'm speechless in return. Please provide your definition of "too much risk" using data. Just because it's too risky for you (and me, by the way!) shouldn't invalidate someone else's risk profile.

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Re: Interest rates low: leverage up?

Post by chevca » Wed Aug 14, 2019 9:57 am

Is there data to prove any of the Boglhead rules and philosophies? Probably not, or we wouldn't be so cult like, right?

I don't think many would agree that using leverage fits within the too much or too little guideline though. It's all personal, of course, and if someone wants to do that, go for it. But, to argue for them they're still within Boglehead philosophies.... you're really reaching there.

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Re: Interest rates low: leverage up?

Post by Tyler Aspect » Wed Aug 14, 2019 12:29 pm

ryman554 wrote:
Wed Aug 14, 2019 9:28 am
I'm speechless in return. Please provide your definition of "too much risk" using data. Just because it's too risky for you (and me, by the way!) shouldn't invalidate someone else's risk profile.
You can search for the best risk-adjusted return of a potential portfolio using historical return figures. I did that using the portfolio optimization tool on PortfolioVisualizer.com. I have included VTSAX, VBTLX, UPRO, SSO, and UST as the potential investments. Now, I do not know if their chart implementation has any flaws, but among all the efficient frontier charts I have seen in the past always included a small portion of bonds. Indeed, their results recommended 80% VTSAX and 20% VBTLX as the one with best risk-adjusted return for the period of the recorded performance data.

If the highest consistent performance can be obtained around 80% stock / 20% bond, then there is no need to leverage in the first place.
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Re: Interest rates low: leverage up?

Post by mikemikemike » Wed Aug 14, 2019 1:08 pm

Try backtesting your 80/20 stocks/bonds against something like 50% VOO, 30% UPRO, and 20% BND.

You should see the leveraged thing come out ahead.

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Re: Interest rates low: leverage up?

Post by MotoTrojan » Wed Aug 14, 2019 1:14 pm

mikemikemike wrote:
Wed Aug 14, 2019 1:08 pm
Try backtesting your 80/20 stocks/bonds against something like 50% VOO, 30% UPRO, and 20% BND.

You should see the leveraged thing come out ahead.
Risk-adjusted return.

FWIW I would use treasuries, ideally long-term (such as EDV) if I were setting up a portfolio like this. Without something like that to improve efficiency with some uncorrelated volatility, you'd be better off just going 100% VOO IMHO. Holding BND and UPRO just doesn't make sense to me. Compared to VOO/UPRO BND is just standing still in terms of price change, so you are really just offsetting the expense ratio and short-term borrowing costs of UPRO when you could just be holding more VOO directly (and less UPRO, if you still want >100/0).

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Re: Interest rates low: leverage up?

Post by nisiprius » Wed Aug 14, 2019 5:03 pm

mikemikemike, I'm just going to ask this as a reality check.

Can you confirm that you have read the material from ProShares, including the basic material on the web page for UPRO and their guide, Geared Investing?

In particular:
  • Do you understand that "ProShares' returns over periods other than one day will likely differ in amount" (i.e. not 3X, and probably less than 3X going up and more than 3X going down) "and possibly direction" (i.e. might even go down when the stock market has gone up) "from the target return?"
  • ProShares says "Investors should monitor their holdings as frequently as daily." How, exactly, do you plan to do this and what actions will you be taking?
  • ProShares says "Investors holding a leveraged or inverse fund longer than a single day are unlikely to continue to receive the fund’s stated objective." Do you understand this, and have you already taken it into account in your plans?
Also, you could be getting overoptimistic results in backtesting with 3X vehicles, because as far as I know they none of them antedate 2009 and therefore your historical returns are limited to a long bull market.
Last edited by nisiprius on Wed Aug 14, 2019 7:34 pm, edited 2 times in total.
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Re: Interest rates low: leverage up?

Post by MotoTrojan » Wed Aug 14, 2019 5:27 pm

nisiprius wrote:
Wed Aug 14, 2019 5:03 pm
mikemikemike, I'm just going to ask this as a reality check.

Can you confirm that you have read the material from ProShares, including the basic material on the web page for UPRO and their guide, Geared Investing?

In particular:
  • Do you understand that "ProShares' returns over periods other than one day will likely differ in amount" (i.e. not 3X, and probably less than 3X going up and more than 3X going down) "and possibly direction" (i.e. might even go down when the stock market has gone up) "from the target return?"
  • ProShares says "Investors should monitor their holdings as frequently as daily." How, exactly, do you plan to do this and what actions will you be taking?
  • ProShares says "Investors holding a leveraged or inverse fund longer than a single day are unlikely to continue to receive the fund’s stated objective." Do you understand this, and have you already taken it into account in your plans?
Also, you could be getting overoptimistic results in backtesting with 3X vehicles, because as far as I know they none of the antedate 2009 and therefore you only history during a long bull market.
There is simulated data out there for UPRO going back to 1955 to be fair. Also the daily rebalancing does indeed cause tracking error from a true 3x long-term return, but it works both ways (during this bull market UPRO has returned closer to 5x the S&P500).

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Re: Interest rates low: leverage up?

Post by ryman554 » Wed Aug 14, 2019 5:42 pm

Tyler Aspect wrote:
Wed Aug 14, 2019 12:29 pm
ryman554 wrote:
Wed Aug 14, 2019 9:28 am
I'm speechless in return. Please provide your definition of "too much risk" using data. Just because it's too risky for you (and me, by the way!) shouldn't invalidate someone else's risk profile.
You can search for the best risk-adjusted return of a potential portfolio using historical return figures. I did that using the portfolio optimization tool on PortfolioVisualizer.com. I have included VTSAX, VBTLX, UPRO, SSO, and UST as the potential investments. Now, I do not know if their chart implementation has any flaws, but among all the efficient frontier charts I have seen in the past always included a small portion of bonds. Indeed, their results recommended 80% VTSAX and 20% VBTLX as the one with best risk-adjusted return for the period of the recorded performance data.

If the highest consistent performance can be obtained around 80% stock / 20% bond, then there is no need to leverage in the first place.
I do know that chart, but also thought I saw something similar with leverage showing about a 140% sweet spot. I can't be certain.

Still,.I have wondered what "risk adjusted return" really means...

Clearly 100/0 will give you a larger expected return than 80/20 (or 0/100)! Over the long run.

So, how does one adjust for risk? Is it defined as portfolio volatility? And then how does one adjust for withdrawal (I guess) when it's down? Or is risk defined in another way?

Thanks for the great discussion!

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Re: Interest rates low: leverage up?

Post by MotoTrojan » Wed Aug 14, 2019 6:01 pm

ryman554 wrote:
Wed Aug 14, 2019 5:42 pm
Tyler Aspect wrote:
Wed Aug 14, 2019 12:29 pm
ryman554 wrote:
Wed Aug 14, 2019 9:28 am
I'm speechless in return. Please provide your definition of "too much risk" using data. Just because it's too risky for you (and me, by the way!) shouldn't invalidate someone else's risk profile.
You can search for the best risk-adjusted return of a potential portfolio using historical return figures. I did that using the portfolio optimization tool on PortfolioVisualizer.com. I have included VTSAX, VBTLX, UPRO, SSO, and UST as the potential investments. Now, I do not know if their chart implementation has any flaws, but among all the efficient frontier charts I have seen in the past always included a small portion of bonds. Indeed, their results recommended 80% VTSAX and 20% VBTLX as the one with best risk-adjusted return for the period of the recorded performance data.

If the highest consistent performance can be obtained around 80% stock / 20% bond, then there is no need to leverage in the first place.
I do know that chart, but also thought I saw something similar with leverage showing about a 140% sweet spot. I can't be certain.

Still,.I have wondered what "risk adjusted return" really means...

Clearly 100/0 will give you a larger expected return than 80/20 (or 0/100)! Over the long run.

So, how does one adjust for risk? Is it defined as portfolio volatility? And then how does one adjust for withdrawal (I guess) when it's down? Or is risk defined in another way?

Thanks for the great discussion!
There are different ways but the most widely accepted is sharpe ratio which is the ratio of return/volatility. Generally when you leverage things your volatility will increase more than your return, thus reducing your sharpe ratio. This is why people will often take portfolios with very high sharpe ratios (but low returns) and then leverage them, such as hedgefundies risk-parity portfolio.

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Re: Interest rates low: leverage up?

Post by Wanderingwheelz » Wed Aug 14, 2019 8:39 pm

mikemikemike wrote:
Tue Aug 13, 2019 1:10 pm
I appreciate the concern about excessive losses and ending up in debt. That is what happened to market timer and was obviously a disaster.

Note that the way I'm implementing this is by buying a 3x leverage ETF with a fraction (30%) of one of my retirement accounts. The worst case for this investment is that it goes to zero (I can't end up in debt through this mechanism), and I lose that 30% of this account. That would be bad but not life-changing.
Wouldn’t you rather “gamble” with money that has a high possibility of severe losses in a taxable account where the losses will be of some use?

I’d never roll the dice inside a tax deferred account.

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Re: Interest rates low: leverage up?

Post by nisiprius » Wed Aug 14, 2019 8:54 pm

ryman554 wrote:
Wed Aug 14, 2019 5:42 pm
...I thought I saw something similar with leverage showing about a 140% sweet spot. I can't be certain...
This is likely a reference to the "Kelly criterion." The Kelly criterion applies to gambling situations with repeated bets. The best thing I've read about it is a book by William Poundstone, Fortune's Formula. It is quite subtle and I can't remember it all for more than about six months. So I'm not going to get this exactly right.

Assume you have a limited amount of money to gamble with, and are playing a gambling game that is in your favor, aIt deals with how large a bet you should make on every turn. Your first thought is that if the game is in your favor, you should bet as much as possible, but this is wrong because if you bet too much over time you will encounter catastrophic losses. Even if they don't wipe you out, they reduce your exponential growth rate.

A naive analysis suggests that if you simply want the largest possible expected return from the stock market, you should use as much leverage as possible. The "140%" comes from a claim that I haven't tracked down that says the Kelly criterion for stock market investments is equivalent to about 140% leverage. That is, no matter how risk-tolerant you are, you shouldn't go past 140%. Or something like that.

Eureka! I have found it! 140% Stocks (or why the Kelly criterion is cool).

To say that the use of the Kelly criterion in investing is controversial is an understatement.
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Re: Interest rates low: leverage up?

Post by MotoTrojan » Wed Aug 14, 2019 8:59 pm

nisiprius wrote:
Wed Aug 14, 2019 8:54 pm
ryman554 wrote:
Wed Aug 14, 2019 5:42 pm
...I thought I saw something similar with leverage showing about a 140% sweet spot. I can't be certain...
This is likely a reference to the "Kelly criterion." The Kelly criterion applies to gambling situations with repeated bets. The best thing I've read about it is a book by William Poundstone, Fortune's Formula. It is quite subtle and I can't remember it all for more than about six months. So I'm not going to get this exactly right.

Assume you have a limited amount of money to gamble with, and are playing a gambling game that is in your favor, aIt deals with how large a bet you should make on every turn. Your first thought is that if the game is in your favor, you should bet as much as possible, but this is wrong because if you bet too much over time you will encounter catastrophic losses. Even if they don't wipe you out, they reduce your exponential growth rate.

A naive analysis suggests that if you simply want the largest possible expected return from the stock market, you should use as much leverage as possible. The "140%" comes from a claim that I haven't tracked down that says the Kelly criterion for stock market investments is equivalent to about 140% leverage. That is, no matter how risk-tolerant you are, you shouldn't go past 140%. Or something like that.

Eureka! I have found it! 140% Stocks (or why the Kelly criterion is cool).

To say that the use of the Kelly criterion in investing is controversial is an understatement.
For a balanced or risk parity leveraged portfolio would the 140% apply to the equity side only or total leverage?

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Re: Interest rates low: leverage up?

Post by CurlyDave » Wed Aug 14, 2019 10:17 pm

MotoTrojan wrote:
Wed Aug 14, 2019 8:59 pm
nisiprius wrote:
Wed Aug 14, 2019 8:54 pm
ryman554 wrote:
Wed Aug 14, 2019 5:42 pm
...I thought I saw something similar with leverage showing about a 140% sweet spot. I can't be certain...
This is likely a reference to the "Kelly criterion." The Kelly criterion applies to gambling situations with repeated bets. The best thing I've read about it is a book by William Poundstone, Fortune's Formula. It is quite subtle and I can't remember it all for more than about six months. So I'm not going to get this exactly right.

Assume you have a limited amount of money to gamble with, and are playing a gambling game that is in your favor, aIt deals with how large a bet you should make on every turn. Your first thought is that if the game is in your favor, you should bet as much as possible, but this is wrong because if you bet too much over time you will encounter catastrophic losses. Even if they don't wipe you out, they reduce your exponential growth rate.

A naive analysis suggests that if you simply want the largest possible expected return from the stock market, you should use as much leverage as possible. The "140%" comes from a claim that I haven't tracked down that says the Kelly criterion for stock market investments is equivalent to about 140% leverage. That is, no matter how risk-tolerant you are, you shouldn't go past 140%. Or something like that.

Eureka! I have found it! 140% Stocks (or why the Kelly criterion is cool).

To say that the use of the Kelly criterion in investing is controversial is an understatement.
For a balanced or risk parity leveraged portfolio would the 140% apply to the equity side only or total leverage?
Or even more interesting, think about a $1M portfolio, a $500k house and a $400k mortgage. Somehow I see $400k of leverage in there, and It is possible to use the portfolio to pay down the mortgage. I have no problem with that situation, although a lot of us would say "pay it off!"

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Re: Interest rates low: leverage up?

Post by MoneyMarathon » Thu Aug 15, 2019 12:29 am

MotoTrojan wrote:
Wed Aug 14, 2019 8:59 pm
For a balanced or risk parity leveraged portfolio would the 140% apply to the equity side only or total leverage?
Neither, I think. You'd have to redo the whole analysis.

Or perhaps compute both sides as individual bets and ignore the way they (might) work together. If looking at them as individual bets, for example, then 50% of the cash used is leveraged 1.4x when it provides 0.7x exposure to its index ... not 1.4x. I think I would prefer the individual bet way of looking at it, rather than seeing if we can use more leverage with a balanced portfolio, because we're already skating on thin ice here.

The Kelly criterion assumes a very idealized model of financial returns. One issue is that it ignores the phenomenon of autocorrelation; it assumes that returns are always just a roll of the dice. Autocorrelation can be devastating (when it's not helping): like, say, 1965-1981 for someone going long 10-year treasury bonds, or 1981-2018 for someone going short the 30 year treasury bond. A distribution that is independent and identically distributed won't be likely to spit out the returns on treasury bonds that we've seen. Someone applying leverage on the assumption that they're just rolling dice will end up disappointed. Another issue is that of fat tails (showing up as big drawdowns, e.g. in stocks). Returns aren't normally distributed.

Since the ways in which the Kelly criterion approach fails to model financial returns are generally in favor of using less leverage, the Kelly criterion doesn't so much establish an upper bound, as much as it may establish an upper bound on the true upper bound. The true upper bound is lower still.

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