Lifecycle Investing - Leveraging when young

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rascott
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Re: Lifecycle Investing - Leveraging when young

Post by rascott »

RandomWord wrote: Mon Sep 16, 2019 11:25 am
rascott wrote: Sun Sep 15, 2019 11:02 pm
RandomWord wrote: Sun Sep 15, 2019 10:50 pm
rascott wrote: Sun Sep 15, 2019 1:45 pm
comeinvest wrote: Sun Sep 15, 2019 3:24 am

What you said is not true. IB provides customers several options for how to automatically sweep between the futures margin and the equities margin of the account. One of them is to minimize the cash deposit for the futures margin. The algorithm moves money in small increments whenever the maintenance margin is violated.

I'm going off of what others posted about here and also found this:

https://www.optionsbro.com/best-futures-brokers/

And

https://www.optionsbro.com/interactive- ... s-trading/

This article alone has crossed IB from my list.
I think you're misinterpreting the article. They didn't close him out because his futures account went negative, they closed him out because the maintenance margin (set by the exchange, not by IB) changed and he could no longer meet it, even with borrowing the maximum margin from his equities account. So, a straightforward margin call. I guess they could have been nicer and given him some extra time to deposit more money, but you shouldn't count on that, just like I wouldn't count on my bank to give me extra time to deposit cash if I bounce a check.

Mostly it sounds like that writer got in trouble with some risky trading strategies like shorting oil futures and complicated options trades. I've never had that sort of problem in my experience of holding regular futures contracts at IB. They borrow just enough to meet the maintenance margin, and adjust accordingly each day. It's just like comeinvest said. They certainly don't close you out whenever your futures account has a negative cash balance, that would be terrible.

I was going off of comments here, including yours... does IB use instantaneous liquidation or no?


viewtopic.php?f=10&t=289144&p=4724263&h ... r#p4724263

Regardless, don't see what they offer me as someone just looking to hold Treasury futures, that isn't available elsewhere with better reviews.
My comment in that other thread was referring to a specific incident when they closed futures in people's IRAs. That didn't personally affect me, but it does sound bad the way they handled it. Still, that was only for IRAs, normal accounts weren't affected at all.

They do use instantaneous liquidation if you hit the margin limit in your overall account (ie, you run out of money). I've never had that happen so I don't know what that's like, but I think every broker is going to liquidate you pretty quickly when you hit the margin limit.

The main advantage for me personally with IB is that they have much lower margin rates, so the money I'm borrowing as maintenance margin for the futures doesn't cost me as much. It's currently 3.64% for the lowest bracket at IB, compared to 8% at the tastyworks site that article recommends, so that's a pretty big difference! It's more important for e-minis than for treasury futures, because the maintenance requirements are higher. But sure, you don't have to use IB, the actual futures contracts are all run by CME regardless of which broker you use to buy them, so you can use any other broker and get mostly the same deal.

Thanks for the clarification....I might give them a test run. They seem to have some inactivity fees that are kind of annoying.... My setup will only be trades roughly once per quarter. Perhaps the cost savings elsewhere would make up for this.
UberGrub
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Re: Lifecycle Investing - Leveraging when young

Post by UberGrub »

RandomWord wrote: Wed Sep 18, 2019 11:35 am
305pelusa wrote: Wed Sep 18, 2019 8:32 am So out of curiosity, who else is using temporal diversification in their investments to some degree? By that I mean taking future savings contributions into account somewhat to guide how much to invest in risky assets today.

Anyone?
I don't have any formal plan like what you're doing or what that book suggests. But I'm using a lot of leverage right now while I'm young and don't have too much to lose, and I'll probably decrease it as I get older and build wealth.
Same here. No formal plan, just leveraging since I have years of future income left and will delever when closer to retirement
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Another 3 months.

Nov 2019
Stock Exposure = 412k
Effective Debt = 233k
Equity in the exposure = 179k
Leverage = 2.29

These numbers now include the leverage from the four options positions. Since I hit my equity target with the options, the strategy now forces me to buy when stocks drop (like beginning of Oct) and pay back debt once it rises (I've paid back around 10k already in debt). It is a very soothing feeling to diversify temporally and get to participate in this 2019 Bull market that I would've missed out otherwise.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
UberGrub
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Re: Lifecycle Investing - Leveraging when young

Post by UberGrub »

305pelusa wrote: Sat Nov 02, 2019 9:08 am Another 3 months.

Nov 2019
Stock Exposure = 412k
Effective Debt = 233k
Equity in the exposure = 179k
Leverage = 2.29

These numbers now include the leverage from the four options positions. Since I hit my equity target with the options, the strategy now forces me to buy when stocks drop (like beginning of Oct) and pay back debt once it rises (I've paid back around 10k already in debt). It is a very soothing feeling to diversify temporally and get to participate in this 2019 Bull market that I would've missed out otherwise.
That seems like high leverage. How easily would it be to get a margin call from a market downturn?

Also, your returns must have been very good thus far. What is your rate of return thus far? Must be very high to go all-in with this strategy.

Thanks.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

UberGrub wrote: Sat Nov 02, 2019 9:26 pm
305pelusa wrote: Sat Nov 02, 2019 9:08 am Another 3 months.

Nov 2019
Stock Exposure = 412k
Effective Debt = 233k
Equity in the exposure = 179k
Leverage = 2.29

These numbers now include the leverage from the four options positions. Since I hit my equity target with the options, the strategy now forces me to buy when stocks drop (like beginning of Oct) and pay back debt once it rises (I've paid back around 10k already in debt). It is a very soothing feeling to diversify temporally and get to participate in this 2019 Bull market that I would've missed out otherwise.
That seems like high leverage. How easily would it be to get a margin call from a market downturn?

Also, your returns must have been very good thus far. What is your rate of return thus far? Must be very high to go all-in with this strategy.

Thanks.
Using deltas of put options, I estimate close to a 4.5% chance of getting a margin call. Market would have to drop to ~1500. That ignores me buying/contributing to the account as the market drops, cushioning the fall. I'm ok with those odds.

Idk my rate of return because I contribute periodically. I can tell you that I've gotten some really solid returns in terms of money invested vs money contributed.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
Lee_WSP
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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

305pelusa wrote: Sun Nov 03, 2019 10:33 am
UberGrub wrote: Sat Nov 02, 2019 9:26 pm
305pelusa wrote: Sat Nov 02, 2019 9:08 am Another 3 months.

Nov 2019
Stock Exposure = 412k
Effective Debt = 233k
Equity in the exposure = 179k
Leverage = 2.29

These numbers now include the leverage from the four options positions. Since I hit my equity target with the options, the strategy now forces me to buy when stocks drop (like beginning of Oct) and pay back debt once it rises (I've paid back around 10k already in debt). It is a very soothing feeling to diversify temporally and get to participate in this 2019 Bull market that I would've missed out otherwise.
That seems like high leverage. How easily would it be to get a margin call from a market downturn?

Also, your returns must have been very good thus far. What is your rate of return thus far? Must be very high to go all-in with this strategy.

Thanks.
Using deltas of put options, I estimate close to a 4.5% chance of getting a margin call. Market would have to drop to ~1500. That ignores me buying/contributing to the account as the market drops, cushioning the fall. I'm ok with those odds.

Idk my rate of return because I contribute periodically. I can tell you that I've gotten some really solid returns in terms of money invested vs money contributed.
How much of your leverage is in margins though?
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Lee_WSP wrote: Sun Nov 03, 2019 10:48 am
305pelusa wrote: Sun Nov 03, 2019 10:33 am
UberGrub wrote: Sat Nov 02, 2019 9:26 pm
305pelusa wrote: Sat Nov 02, 2019 9:08 am Another 3 months.

Nov 2019
Stock Exposure = 412k
Effective Debt = 233k
Equity in the exposure = 179k
Leverage = 2.29

These numbers now include the leverage from the four options positions. Since I hit my equity target with the options, the strategy now forces me to buy when stocks drop (like beginning of Oct) and pay back debt once it rises (I've paid back around 10k already in debt). It is a very soothing feeling to diversify temporally and get to participate in this 2019 Bull market that I would've missed out otherwise.
That seems like high leverage. How easily would it be to get a margin call from a market downturn?

Also, your returns must have been very good thus far. What is your rate of return thus far? Must be very high to go all-in with this strategy.

Thanks.
Using deltas of put options, I estimate close to a 4.5% chance of getting a margin call. Market would have to drop to ~1500. That ignores me buying/contributing to the account as the market drops, cushioning the fall. I'm ok with those odds.

Idk my rate of return because I contribute periodically. I can tell you that I've gotten some really solid returns in terms of money invested vs money contributed.
How much of your leverage is in margins though?
If you look at my taxable account that I use with options, it contains a leverage of 1.64. So that's what sets the possibility of the above margin call. If you account for all of my wealth (ex: accounts in tax-deferred that won't help against margin calls/credit card debt which doesn't count for margin calls/etc), then the leverage is more like 2.29 total.

So for every point drop in the market, I would lose 2.29 of net worth.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
UberGrub
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Re: Lifecycle Investing - Leveraging when young

Post by UberGrub »

305pelusa wrote: Sun Nov 03, 2019 10:33 am
UberGrub wrote: Sat Nov 02, 2019 9:26 pm
305pelusa wrote: Sat Nov 02, 2019 9:08 am Another 3 months.

Nov 2019
Stock Exposure = 412k
Effective Debt = 233k
Equity in the exposure = 179k
Leverage = 2.29

These numbers now include the leverage from the four options positions. Since I hit my equity target with the options, the strategy now forces me to buy when stocks drop (like beginning of Oct) and pay back debt once it rises (I've paid back around 10k already in debt). It is a very soothing feeling to diversify temporally and get to participate in this 2019 Bull market that I would've missed out otherwise.
That seems like high leverage. How easily would it be to get a margin call from a market downturn?

Also, your returns must have been very good thus far. What is your rate of return thus far? Must be very high to go all-in with this strategy.

Thanks.
Using deltas of put options, I estimate close to a 4.5% chance of getting a margin call. Market would have to drop to ~1500. That ignores me buying/contributing to the account as the market drops, cushioning the fall. I'm ok with those odds.

Idk my rate of return because I contribute periodically. I can tell you that I've gotten some really solid returns in terms of money invested vs money contributed.
Thank you for the response.

Do you currently use a factor-tilted portfolio? How does that work with options?
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

UberGrub wrote: Mon Nov 04, 2019 11:14 pm
305pelusa wrote: Sun Nov 03, 2019 10:33 am
UberGrub wrote: Sat Nov 02, 2019 9:26 pm
305pelusa wrote: Sat Nov 02, 2019 9:08 am Another 3 months.

Nov 2019
Stock Exposure = 412k
Effective Debt = 233k
Equity in the exposure = 179k
Leverage = 2.29

These numbers now include the leverage from the four options positions. Since I hit my equity target with the options, the strategy now forces me to buy when stocks drop (like beginning of Oct) and pay back debt once it rises (I've paid back around 10k already in debt). It is a very soothing feeling to diversify temporally and get to participate in this 2019 Bull market that I would've missed out otherwise.
That seems like high leverage. How easily would it be to get a margin call from a market downturn?

Also, your returns must have been very good thus far. What is your rate of return thus far? Must be very high to go all-in with this strategy.

Thanks.
Using deltas of put options, I estimate close to a 4.5% chance of getting a margin call. Market would have to drop to ~1500. That ignores me buying/contributing to the account as the market drops, cushioning the fall. I'm ok with those odds.

Idk my rate of return because I contribute periodically. I can tell you that I've gotten some really solid returns in terms of money invested vs money contributed.
Thank you for the response.

Do you currently use a factor-tilted portfolio? How does that work with options?
My current portfolio loadings have very little tilt because so much of my leverage comes from options on the SPY.

I think temporal diversification is far more important than factor exposure so I've had to compromise for the time being.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
guyinlaw
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Re: Lifecycle Investing - Leveraging when young

Post by guyinlaw »

305pelusa wrote: Tue Nov 05, 2019 10:32 am
My current portfolio loadings have very little tilt because so much of my leverage comes from options on the SPY.

I think temporal diversification is far more important than factor exposure so I've had to compromise for the time being.
Is there a reason why you prefer options on SPY instead of futures? I think micro E-mini futures might be cheaper.

What is your stock-bond allocation?

I assume by temporal diversification you mean, leveraging when young. Another article used it w.r.t. Berkshire Hathaway when they buy stocks/companies when they are cheap and keep cash in hand.
Time is your friend; impulse is your enemy. - John C. Bogle
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

guyinlaw wrote: Tue Nov 05, 2019 2:59 pm
305pelusa wrote: Tue Nov 05, 2019 10:32 am
My current portfolio loadings have very little tilt because so much of my leverage comes from options on the SPY.

I think temporal diversification is far more important than factor exposure so I've had to compromise for the time being.
Is there a reason why you prefer options on SPY instead of futures? I think micro E-mini futures might be cheaper.

What is your stock-bond allocation?

I assume by temporal diversification you mean, leveraging when young. Another article used it w.r.t. Berkshire Hathaway when they buy stocks/companies when they are cheap and keep cash in hand.
Reasons for options over futures are scattered throughout the thread.
Some of the biggest reasons:
- Options had a lower borrowing rate
- Options don't require cash collateral (I can use my own ETFs as collateral) and are not marked-to-market. This let me establish the position and I can leave it by itself as-is ofr months with little oversight.
- The cash drag if using futures in IB would be significant IMO.

Options don't have as good of a tax treatment (the short are all ST capital gains) but it comes out to be similar borrowing cost accounting for it, but much easier/less oversight.

I own no bonds. I'm already overweight in "bonds" because of my life human capital (aka wages) in the future. That's the point of temporal diversification; I overinvest in stocks now to make up for it.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
guyinlaw
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Re: Lifecycle Investing - Leveraging when young

Post by guyinlaw »

Thank you
Time is your friend; impulse is your enemy. - John C. Bogle
EfficientInvestor
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Re: Lifecycle Investing - Leveraging when young

Post by EfficientInvestor »

305pelusa wrote: Sat Nov 02, 2019 9:08 am Nov 2019
Stock Exposure = 412k
Effective Debt = 233k
Equity in the exposure = 179k
Leverage = 2.29
Would there be any scenario where you would consider using bonds or other assets in addition to stocks? Because right now, you have all of your risk in equities that are capable of losing over 50% and thus leaving you with a loss of over 100%, as you are well aware. Based on our previous exchanges, I have a feeling I will not be able to convince you to move more towards a leveraged risk parity portfolio. However, I want to point out that you are willingly investing in a way (229% stock) that has shown to have the capacity (because it has happened before) of losing everything and has the capacity of having a 10-year rolling return of -18%. I know the expected return over the next several years of a leveraged risk parity portfolio doesn't resonate with you due to low yields and the partial inversion of the yield curve. However, over an extended period of time, a leveraged risk parity strategy has shown that it has the capacity of delivering more return than 229% stocks while having considerably less drawdown.

Note that my backtests below for Portfolio 2 just uses the oldest bond mutual fund I could find a ticker symbol for. I implement my actual strategy with treasury futures.

Image

Image
source: https://www.portfoliovisualizer.com/bac ... on4_2=-300
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

EfficientInvestor wrote: Wed Nov 06, 2019 2:21 pm Would there be any scenario where you would consider using bonds or other assets in addition to stocks? Because right now, you have all of your risk in equities that are capable of losing over 50% and thus leaving you with a loss of over 100%, as you are well aware. Based on our previous exchanges, I have a feeling I will not be able to convince you to move more towards a leveraged risk parity portfolio. However, I want to point out that you are willingly investing in a way (229% stock) that has shown to have the capacity (because it has happened before) of losing everything and has the capacity of having a 10-year rolling return of -18%. I know the expected return over the next several years of a leveraged risk parity portfolio doesn't resonate with you due to low yields and the partial inversion of the yield curve. However, over an extended period of time, a leveraged risk parity strategy has shown that it has the capacity of delivering more return than 229% stocks while having considerably less drawdown.

Note that my backtests below for Portfolio 2 just uses the oldest bond mutual fund I could find a ticker symbol for. I implement my actual strategy with treasury futures.

Image

Image
source: https://www.portfoliovisualizer.com/bac ... on4_2=-300
I appreciate the time for your response. Let me explain my viewpoint because I think it's really different than things like the Excellent Adventure and your leverage of IT bonds.

Note in the portfolios you show how they grow with time. More money is invested later on than early on. This makes the portfolios specially susceptible to the final years. Note how portfolio 1 gets hit hard in the last 10 years.

This represent an ideosyncratic risk in time. It is Sequence of Return Risk. If portfolio 1 had systematically decreased its stock allocation as it grew (deleveraging) to keep a more constant real dollar exposure each year, it wouldn't have been hit much by that last 2 decades. My allocation would've been 30/70 stocks/bonds by then, barely affected.

Lifecycle Investing is about temporal diversification. It is exposing itself more to stocks on years when you have little capital with leverage (young), and much less when you have all your capital (old). This diversification is VERY powerful. You get to participate equally in all bulls and bears and avoid outcomes like your graph (when the bull comes before the bear). In that context, your graphs aren't representative of my lifetime: They start with some initial sum and don't delever.

With that in mind, my current allocation isn't really that risky. Stocks are currently but a third of my entire lifetime wealth once you consider futures savings and SS. A 50% drop in stocks would be a mere 80% drop in my lifetime wealth. In other words, my future savings are like fixed-income and I'm already overinvested in them.

Now you might say "ok yes, but do that with a more efficient allocation". And you'd be correct. The problem is that the amount of leverage you need to make a portfolio similar in returns to 2.29 in stocks with bonds/gold/etc is quite HIGH.
I think your graph is a little misleading. It includes a fantastic bond bull market. I judge fundamental returns. So stock returns between periods with equal initial/final PEs, or bond returns with initial/final rates. Any other comparison is unfair IMO.


I crudely estimate that I'd need more than 4 times as much leverage as I currently use in a 40/60 stock/bond portfolio to have the same returns (and a lower risk of course due to improved efficiency). I find that really high. Too high. Idk exactly how it could go wrong but it feels imprudent to me.

So I compromise: I only leverage stocks. So I diversify temporally with the absolute minimum amount of leverage I need to do it.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
rascott
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Re: Lifecycle Investing - Leveraging when young

Post by rascott »

I'm a little confused by a few things..... your equity exposure continues to increase.... now at roughly $400k.

Are you still actively increasing it? I thought the idea was you were looking to maintain your target equity exposure throughout your life.... so why would it have gone up so much in the last 8 months or so? And then if a bear market comes, do you increase your leverage or does it have a limit, which means you then fall below your your lifelong equity target?

Also orginally you said you were using a family loan to get your leverage.... but then later on you are using options. Did you pay off your 3.xx% family loan?

What if you had started this in 2007.... where a 2x+ leveraged position would have gone to zero somewhere in early 2009. Does the system just call for you to start from scratch at that point?
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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

I think he may well be fine because nearly all his leverage is in an un-callable family loan. But to do this with margin would probably be violating the Kelly Criterion.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

rascott wrote: Wed Nov 06, 2019 3:21 pm I'm a little confused by a few things..... your equity exposure continues to increase.... now at roughly $400k.

Are you still actively increasing it? I thought the idea was you were looking to maintain your target equity exposure throughout your life.... so why would it have gone up so much in the last 8 months or so? And then if a bear market comes, do you increase your leverage or does it have a limit, which means you then fall below your your lifelong equity target?

Also orginally you said you were using a family loan to get your leverage.... but then later on you are using options. Did you pay off your 3.xx% family loan?

What if you had started this in 2007.... where a 2x+ leveraged position would have gone to zero somewhere in early 2009. Does the system just call for you to start from scratch at that point?
The first two updates represented leverage only with a family loan. That got me to my minimum equity target without accounting for SS.

Soon after that second update, I decided to account for SS and increase my allocation to the median target. I achieved that with options.

I'm not increasing it further and have in fact paid back 6k to family member and 3k to a CC in the past 2 months. I'm deleveraging now.

My goal is constant % of lifetime wealth in stocks. So the dollar exposure will keep increasing little by little as stocks grow and I convert more of my human capital to financial capital.

If a Bear market hits, my leverage will go up by itself (that's what happens with options and futures leverage). I will then redirect contributions back to stocks to try to maintain my equity % target. If the fall is hard enough, I might fall below my equity target, yes. I suppose I could then re-borrow from family member haha. That sounds tedious but it would be buying low and selling high. We'll see when/if we get there.

2008 would not have wiped me out. Remember I currently need a 50% drop for the first margin call, without considering contributions. A year of contribution is almost 25% of my portfolio so I would've easily stabilized in 2008. That's why this only works with small portfolios compared to contributions.

If the drop is hard enough to trigger wipe outs and liquidations, it would mean starting back up. I believe that systematic sell-low liquidation is the ONLY way this strategy could backfire. It's why I stay away from LETFs that do it automatically. I'm hoping my contributions and reasonable leverage are such that this risk is minimal.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
rascott
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Re: Lifecycle Investing - Leveraging when young

Post by rascott »

305pelusa wrote: Wed Nov 06, 2019 3:40 pm
rascott wrote: Wed Nov 06, 2019 3:21 pm I'm a little confused by a few things..... your equity exposure continues to increase.... now at roughly $400k.

Are you still actively increasing it? I thought the idea was you were looking to maintain your target equity exposure throughout your life.... so why would it have gone up so much in the last 8 months or so? And then if a bear market comes, do you increase your leverage or does it have a limit, which means you then fall below your your lifelong equity target?

Also orginally you said you were using a family loan to get your leverage.... but then later on you are using options. Did you pay off your 3.xx% family loan?

What if you had started this in 2007.... where a 2x+ leveraged position would have gone to zero somewhere in early 2009. Does the system just call for you to start from scratch at that point?
The first two updates represented leverage only with a family loan. That got me to my minimum equity target without accounting for SS.

Soon after that second update, I decided to account for SS and increase my allocation to the median target. I achieved that with options.

I'm not increasing it further and have in fact paid back 6k to family member and 3k to a CC in the past 2 months. I'm deleveraging now.

My goal is constant % of lifetime wealth in stocks. So the dollar exposure will keep increasing little by little as stocks grow and I convert more of my human capital to financial capital.

If a Bear market hits, my leverage will go up by itself (that's what happens with options and futures leverage). I will then redirect contributions back to stocks to try to maintain my equity % target. If the fall is hard enough, I might fall below my equity target, yes. I suppose I could then re-borrow from family member haha. That sounds tedious but it would be buying low and selling high. We'll see when/if we get there.

2008 would not have wiped me out. Remember I currently need a 50% drop for the first margin call, without considering contributions. A year of contribution is almost 25% of my portfolio so I would've easily stabilized in 2008. That's why this only works with small portfolios compared to contributions.

If the drop is hard enough to trigger wipe outs and liquidations, it would mean starting back up. I believe that systematic sell-low liquidation is the ONLY way this strategy could backfire. It's why I stay away from LETFs that do it automatically. I'm hoping my contributions and reasonable leverage are such that this risk is minimal.

Good point about contributions..... when you are contributing 25% of the portfolio balance annually you can withstand a lot of shock fairly easily.
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Re: Lifecycle Investing - Leveraging when young

Post by EfficientInvestor »

305pelusa wrote: Wed Nov 06, 2019 3:04 pm I appreciate the time for your response. Let me explain my viewpoint because I think it's really different than things like the Excellent Adventure and your leverage of IT bonds.

Note in the portfolios you show how they grow with time. More money is invested later on than early on. This makes the portfolios specially susceptible to the final years. Note how portfolio 1 gets hit hard in the last 10 years.

This represent an ideosyncratic risk in time. It is Sequence of Return Risk. If portfolio 1 had systematically decreased its stock allocation as it grew (deleveraging) to keep a more constant real dollar exposure each year, it wouldn't have been hit much by that last 2 decades. My allocation would've been 30/70 stocks/bonds by then, barely affected.

Lifecycle Investing is about temporal diversification. It is exposing itself more to stocks on years when you have little capital with leverage (young), and much less when you have all your capital (old). This diversification is VERY powerful. You get to participate equally in all bulls and bears and avoid outcomes like your graph (when the bull comes before the bear). In that context, your graphs aren't representative of my lifetime: They start with some initial sum and don't delever.

With that in mind, my current allocation isn't really that risky. Stocks are currently but a third of my entire lifetime wealth once you consider futures savings and SS. A 50% drop in stocks would be a mere 80% drop in my lifetime wealth. In other words, my future savings are like fixed-income and I'm already overinvested in them.

Now you might say "ok yes, but do that with a more efficient allocation". And you'd be correct. The problem is that the amount of leverage you need to make a portfolio similar in returns to 2.29 in stocks with bonds/gold/etc is quite HIGH.
I think your graph is a little misleading. It includes a fantastic bond bull market. I judge fundamental returns. So stock returns between periods with equal initial/final PEs, or bond returns with initial/final rates. Any other comparison is unfair IMO.

I crudely estimate that I'd need more than 4 times as much leverage as I currently use in a 40/60 stock/bond portfolio to have the same returns (and a lower risk of course due to improved efficiency). I find that really high. Too high. Idk exactly how it could go wrong but it feels imprudent to me.

So I compromise: I only leverage stocks. So I diversify temporally with the absolute minimum amount of leverage I need to do it.
The image below is based on historical data since 1955 and we can both agree that the future won't look like the past. So let's just use this image to discuss theory. I'm not trying to imply that the future will look like the past.

In the image, the blue curve represents the efficient frontier that shows various mixes of stocks, ITT, and gold. The red dot represents the unleveraged risk parity portfolio or "optimal portfolio" that has the highest Sharpe Ratio. The way I understand it is that you are saying that you are currently invested at the blue dot in the image because you are borrowing cash at the risk free rate (average of just under 5% since 1955) to invest in stocks. As you get older, you will move along the black dashed line until you get to retirement. At that point, let's just assume you will want to be in the unleveraged risk parity portfolio or somewhere near the optimal point of the efficient frontier curve. I'm currently investing at the green dot. Over time, I will reduce my risk along the orange line until I reach the red dot. So I'm also implementing lifecycle investing principles to keep comparable amounts of equity invested over my lifetime, but I'm trying to do so in a more efficient manner. My belief is that over the long term, the risk parity portfolio will have a higher sharpe ratio than 100% stocks and the orange line will always be steeper than the grey line.

To the point about using more leverage...stocks have leverage built in already because the companies borrow money. As interest rates fall, they borrow more money, as they rise, they borrow less money. Regardless of where the interest rates are, the volatility of unleveraged stocks always seem to hover around 15%. Also, how is 2.29X on something that can drop 50% any different than 5X on something that can drop 22.9%?

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

305pelusa wrote: Wed Nov 06, 2019 3:40 pm 2008 would not have wiped me out. Remember I currently need a 50% drop for the first margin call, without considering contributions. A year of contribution is almost 25% of my portfolio so I would've easily stabilized in 2008. That's why this only works with small portfolios compared to contributions.

If the drop is hard enough to trigger wipe outs and liquidations, it would mean starting back up. I believe that systematic sell-low liquidation is the ONLY way this strategy could backfire. It's why I stay away from LETFs that do it automatically. I'm hoping my contributions and reasonable leverage are such that this risk is minimal.
If you're putting 100k per year away, why even bother with leverage? It's not going to change the outcome for you.
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Re: Lifecycle Investing - Leveraging when young

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EfficientInvestor wrote: Wed Nov 06, 2019 5:40 pm The red dot represents the unleveraged risk parity portfolio or "optimal portfolio" that has the highest Sharpe Ratio.
To be clear, the risk parity portfolio does not have the highest Sharpe. That honor goes to the mean-variant portfolio.

Risk parity becomes mean-variance optimal (highest Sharpe) under a set of very specific conditions (one of which is that the assets have identical returns).
EfficientInvestor wrote: Wed Nov 06, 2019 5:40 pm My belief is that over the long term, the risk parity portfolio will have a higher sharpe ratio than 100% stocks and the orange line will always be steeper than the grey line.
It probably will, yeah. I don't disagree.
EfficientInvestor wrote: Wed Nov 06, 2019 5:40 pm Also, how is 2.29X on something that can drop 50% any different than 5X on something that can drop 22.9%?
The latter has more leverage. Whether you want to admit it or not, that gives a lower margin of safety in the face of truly adverse conditions. If stocks drop 50%, I know I can handle it in my portfolio. That's a 114% loss in net worth (bringing me into negative territory, which is fine due to non callable debt). If stocks drop 50% and bonds drop 25% (like LT bonds would if rates rise by a measly 1%), can YOU handle the 175% loss a 40/60 portfolio leveraged x5 would suffer? I know i would be wiped out

If i may ask, how much leverage and what asset allocation do you currently have?
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Re: Lifecycle Investing - Leveraging when young

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Lee_WSP wrote: Wed Nov 06, 2019 5:56 pm
305pelusa wrote: Wed Nov 06, 2019 3:40 pm 2008 would not have wiped me out. Remember I currently need a 50% drop for the first margin call, without considering contributions. A year of contribution is almost 25% of my portfolio so I would've easily stabilized in 2008. That's why this only works with small portfolios compared to contributions.

If the drop is hard enough to trigger wipe outs and liquidations, it would mean starting back up. I believe that systematic sell-low liquidation is the ONLY way this strategy could backfire. It's why I stay away from LETFs that do it automatically. I'm hoping my contributions and reasonable leverage are such that this risk is minimal.
If you're putting 100k per year away, why even bother with leverage? It's not going to change the outcome for you.
A year of contributions is almost 25% of my *net worth in the portfolio. As in, if the market dropped 50%, wiping out my net worth, one year of contributions would repair 25% of that. Wasn't very clear above.

To be clear though, if I was saving 100k, then I should be even more leveraged to hit my target.

Remember I'm not leveraging to make more money by taking more risk. If that were so, one could just save more and, like you said, not need as much leverage. I plan to take the same amount of lifetime stock market risk. Leverage is just a wide to spread it out more.
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Re: Lifecycle Investing - Leveraging when young

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305pelusa wrote: Wed Nov 06, 2019 6:22 pm If i may ask, how much leverage and what asset allocation do you currently have?
My Roth and Traditional IRAs, which represent about 2/3 of my investable assets, are around 120% S&P 500, 1,200% 2-year treasuries, and 40% gold. For these retirement accounts, I'm using futures contracts and investing any extra cash in JPST. The bond leverage fluctuates based on current interest rates and I reassess every quarter when I roll the futures contract. The cost to borrow is relatively low right now, so I want my 2-year treasuries to be 10x the stock. If the fed fund rate starts to rise, I will decrease leverage on the bonds accordingly. I'm ultimately trying to adjust leverage of the 2-year treasuries to match the volatility of stocks according to my chart below.

The other 1/3 of my investable assets are in a taxable account. My house appreciated pretty nicely over the last several years, so I refinanced and pulled out a lump sum of money to invest. So I'm borrowing that money at 3.75% over the next 30-years and investing it in a way that should most likely beat the borrow cost. This is my "retire early" fund that I am extremely aggressive with. If it all gets wiped out, my worst case scenario is I'm paying a little extra on my mortgage (about 5% of my monthly budget) every month for the next 30 years. With this account, I'm buying LEAP call options on SPY, TLT, and GLD. I buy long positions around the .70 delta that are more than 365 days in the future. That way, when I roll them, I can get long term cap gains rates. I am using TLT in this case instead of short term treasuries because it's the most liquid bond ETF that far out in time. In order to offset the premium I'm paying for the long options, I sell shorter term (1-month) call options against my long positions. This is also known as a poor-mans covered call. But, since the theta decay is greater on these shorter term options, I only need to sell 1 short option for every 2 long options in order to stay theta-neutral. Overall, my long exposure is somewhere around 300% stock, 450% LTT, and 100% gold if you just multiply my number of contracts in each ETF by the value of the underlying. But between buying .70 delta calls and selling calls against the position, I'm somewhere more around 100% stock, 150% LTT, and 33% gold from a delta perspective. With this account, I'm up about 40% since Dec 2017. 2018 was really bad (-35%) and 2019 has been really good (+115%). Over that same time, the S&P 500 is up 20%. With this account, I always leave about 15-20% in cash on the side to limit my max drawdown and to have cash available to roll options that are underwater. The nice thing about buying the call options for long exposure (in addition to better tax treatment) is that in any given year, you can cap the losses on your losers since you are buying them 10-20% ITM and then let your winners ride. In other words, I can never lose more than what I put in to buy the LEAPS, but there is no limit to how much I can make (at least not on the 1/2 of contracts that don't have a covered call against them).

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Re: Lifecycle Investing - Leveraging when young

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EfficientInvestor wrote: Wed Nov 06, 2019 9:31 pm
305pelusa wrote: Wed Nov 06, 2019 6:22 pm If i may ask, how much leverage and what asset allocation do you currently have?
My Roth and Traditional IRAs, which represent about 2/3 of my investable assets, are around 120% S&P 500, 1,200% 2-year treasuries, and 40% gold. For these retirement accounts, I'm using futures contracts and investing any extra cash in JPST. The bond leverage fluctuates based on current interest rates and I reassess every quarter when I roll the futures contract. The cost to borrow is relatively low right now, so I want my 2-year treasuries to be 10x the stock. If the fed fund rate starts to rise, I will decrease leverage on the bonds accordingly. I'm ultimately trying to adjust leverage of the 2-year treasuries to match the volatility of stocks according to my chart below.

The other 1/3 of my investable assets are in a taxable account. My house appreciated pretty nicely over the last several years, so I refinanced and pulled out a lump sum of money to invest. So I'm borrowing that money at 3.75% over the next 30-years and investing it in a way that should most likely beat the borrow cost. This is my "retire early" fund that I am extremely aggressive with. If it all gets wiped out, my worst case scenario is I'm paying a little extra on my mortgage (about 5% of my monthly budget) every month for the next 30 years. With this account, I'm buying LEAP call options on SPY, TLT, and GLD. I buy long positions around the .70 delta that are more than 365 days in the future. That way, when I roll them, I can get long term cap gains rates. I am using TLT in this case instead of short term treasuries because it's the most liquid bond ETF that far out in time. In order to offset the premium I'm paying for the long options, I sell shorter term (1-month) call options against my long positions. This is also known as a poor-mans covered call. But, since the theta decay is greater on these shorter term options, I only need to sell 1 short option for every 2 long options in order to stay theta-neutral. Overall, my long exposure is somewhere around 300% stock, 450% LTT, and 100% gold if you just multiply my number of contracts in each ETF by the value of the underlying. But between buying .70 delta calls and selling calls against the position, I'm somewhere more around 100% stock, 150% LTT, and 33% gold from a delta perspective. With this account, I'm up about 40% since Dec 2017. 2018 was really bad (-35%) and 2019 has been really good (+115%). Over that same time, the S&P 500 is up 20%. With this account, I always leave about 15-20% in cash on the side to limit my max drawdown and to have cash available to roll options that are underwater. The nice thing about buying the call options for long exposure (in addition to better tax treatment) is that in any given year, you can cap the losses on your losers since you are buying them 10-20% ITM and then let your winners ride. In other words, I can never lose more than what I put in to buy the LEAPS, but there is no limit to how much I can make (at least not on the 1/2 of contracts that don't have a covered call against them).

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Thanks for sharing. Interesting stuff.

As for your retirement accounts, is that around 14x leverage? How does it compare returns-wise to the more brute, less efficient 229% that I'm using?
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

305pelusa wrote: Wed Nov 06, 2019 8:48 pm
Lee_WSP wrote: Wed Nov 06, 2019 5:56 pm
305pelusa wrote: Wed Nov 06, 2019 3:40 pm 2008 would not have wiped me out. Remember I currently need a 50% drop for the first margin call, without considering contributions. A year of contribution is almost 25% of my portfolio so I would've easily stabilized in 2008. That's why this only works with small portfolios compared to contributions.

If the drop is hard enough to trigger wipe outs and liquidations, it would mean starting back up. I believe that systematic sell-low liquidation is the ONLY way this strategy could backfire. It's why I stay away from LETFs that do it automatically. I'm hoping my contributions and reasonable leverage are such that this risk is minimal.
If you're putting 100k per year away, why even bother with leverage? It's not going to change the outcome for you.
A year of contributions is almost 25% of my *net worth in the portfolio. As in, if the market dropped 50%, wiping out my net worth, one year of contributions would repair 25% of that. Wasn't very clear above.

To be clear though, if I was saving 100k, then I should be even more leveraged to hit my target.

Remember I'm not leveraging to make more money by taking more risk. If that were so, one could just save more and, like you said, not need as much leverage. I plan to take the same amount of lifetime stock market risk. Leverage is just a wide to spread it out more.
That makes more sense. Although, I'd disagree that if you had enough income to sock away 100k per year, you need to take on any leverage risk whatsoever as you've more or less won the game of saving for retirement.
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Re: Lifecycle Investing - Leveraging when young

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305pelusa wrote: Wed Nov 06, 2019 9:50 pm As for your retirement accounts, is that around 14x leverage? How does it compare returns-wise to the more brute, less efficient 229% that I'm using?
Yes, it's around 14x. But you have to remember that 12x of that 14x is in an asset that has had a max drawdown of -4% or so since 1955 and the current borrow rate is only 1.8% (or whatever it is right now). If borrow rates were up at 10%, I would only have about a 4x total leverage.

The image below is a comparison of returns since 1969. Portfolio 1 uses a data set I created that changes the amount of leverage needed against 2-year treasuries (SHY as proxy) to match the volatility of stocks. So even though it says "120% allocation", it really ranges from 240% (120% x 2) to 1,440% (120% x 12) depending on the libor rate at the beginning of each quarter (I have a "Q" in the name because I change leverage every quarter). Portfolio 2 uses a static 720% bonds (6x stocks) because that would have been the average amount of leverage needed to match stock volatility over the time period. The max drawdown of -72.8% for Portfolio 2 occurred in 1980 when rates were over 10%. Portfolio 1 max drawdown of -52% was also in 1980, but it was less due to lower amounts being borrowed.

For me, the thing I really focus on is Sharpe ratio because it's the slope of the line I am trying to invest along (the orange line from my "Risk Parity vs Stock" chart). If you had leveraged my portfolio up further to match the 40.95% SD that the 229% stock experienced since 1969, you would have outperformed Portfolio 3 by 40.95 x (0.71-0.34) = 15.15%/year (average return, not CAGR). However, in the case of my retirement accounts, I want to keep it closer to a 25% SD.

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Re: Lifecycle Investing - Leveraging when young

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EfficientInvestor wrote: Wed Nov 06, 2019 10:29 pm
305pelusa wrote: Wed Nov 06, 2019 9:50 pm As for your retirement accounts, is that around 14x leverage? How does it compare returns-wise to the more brute, less efficient 229% that I'm using?
Yes, it's around 14x. But you have to remember that 12x of that 14x is in an asset that has had a max drawdown of -4% or so since 1955
Oh well I hope that continues to be the case. If the drawdown was only a little worse (say 6%), that would be an increased 24% drop on your portfolio. That's why I keep talking about trying to stay away from leverage. It magnifies any small uncertainty. It's a higher margin of error.
EfficientInvestor wrote: Wed Nov 06, 2019 10:29 pm
The image below is a comparison of returns since 1969. Portfolio 1 uses a data set I created that changes the amount of leverage needed against 2-year treasuries (SHY as proxy) to match the volatility of stocks. So even though it says "120% allocation", it really ranges from 240% (120% x 2) to 1,440% (120% x 12) depending on the libor rate at the beginning of each quarter (I have a "Q" in the name because I change leverage every quarter). Portfolio 2 uses a static 720% bonds (6x stocks) because that would have been the average amount of leverage needed to match stock volatility over the time period. The max drawdown of -72.8% for Portfolio 2 occurred in 1980 when rates were over 10%. Portfolio 1 max drawdown of -52% was also in 1980, but it was less due to lower amounts being borrowed.

For me, the thing I really focus on is Sharpe ratio because it's the slope of the line I am trying to invest along (the orange line from my "Risk Parity vs Stock" chart). If you had leveraged my portfolio up further to match the 40.95% SD that the 229% stock experienced since 1969, you would have outperformed Portfolio 3 by 40.95 x (0.71-0.34) = 15.15%/year (average return, not CAGR). However, in the case of my retirement accounts, I want to keep it closer to a 25% SD.

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I appreciate the historical analysis. However, I have no reason to believe things will look like that again. You agreed on your previous post (and your efficient frontier graph was purely for illustration) so it's a little surprising that you'd bring up historical results.

Here's what I believe is a more reasonable return expectation for the portfolios:
Stock returns = 6%
IT bonds = 2% (it's 1.6% now but let's be kind)
Gold = 1.7% (inflation)
CASHX = 1.5% (obviously underestimated but, once again, I'll be kind to extra leverage)

So your portfolio returns:
1.2*6% + 12*2% + 0.4*1.7% - 12.6*1.5% = 12.98%

My portfolio returns:
2.29*6% - 1.29*1.5% = 11.8%

Perhaps historically, with the amazing performance of gold once leaving the gold standard, and the excellent bond bull market that drove rates to the ground, your portfolio looks far superior. But if you make what I believe are more realistic expectations of future returns, they're on the same ballpark.

And that's my whole point. By using 14x more leverage you achieve close to the same return. Now, your portfolio is more efficient. So it's the same return at a much likely lower volatility. Note that I say "volatility" and not "risk"; a balanced portfolio leveraged 14x is IMO riskier than an all-stock portfolio leveraged much less.

Once again, because the leverage magnifies any small error. Ex: if cash was 1.6% instead or, God forbid, IT returned 1.6% (based on its current yield), your portfolio above would massively underperform mine. Similarly, small changes in the other direction would be large outperformances (which you see historically). That incredibly wide range of possible results from such minimal errors in inputs is true risk for me personally.

That's why I'd rather avoid it. If I can achieve ballpark similar returns with far less leverage, I will gladly take the additional volatility in order to avoid the more unpredictable risk nature of heavy leverage.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

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Lee_WSP wrote: Wed Nov 06, 2019 10:24 pm
305pelusa wrote: Wed Nov 06, 2019 8:48 pm
Lee_WSP wrote: Wed Nov 06, 2019 5:56 pm
305pelusa wrote: Wed Nov 06, 2019 3:40 pm 2008 would not have wiped me out. Remember I currently need a 50% drop for the first margin call, without considering contributions. A year of contribution is almost 25% of my portfolio so I would've easily stabilized in 2008. That's why this only works with small portfolios compared to contributions.

If the drop is hard enough to trigger wipe outs and liquidations, it would mean starting back up. I believe that systematic sell-low liquidation is the ONLY way this strategy could backfire. It's why I stay away from LETFs that do it automatically. I'm hoping my contributions and reasonable leverage are such that this risk is minimal.
If you're putting 100k per year away, why even bother with leverage? It's not going to change the outcome for you.
A year of contributions is almost 25% of my *net worth in the portfolio. As in, if the market dropped 50%, wiping out my net worth, one year of contributions would repair 25% of that. Wasn't very clear above.

To be clear though, if I was saving 100k, then I should be even more leveraged to hit my target.

Remember I'm not leveraging to make more money by taking more risk. If that were so, one could just save more and, like you said, not need as much leverage. I plan to take the same amount of lifetime stock market risk. Leverage is just a wide to spread it out more.
That makes more sense. Although, I'd disagree that if you had enough income to sock away 100k per year, you need to take on any leverage risk whatsoever as you've more or less won the game of saving for retirement.
With what I save nowadays, I also don't need to take any leverage risk at all to retire on time.

I only leverage to decrease risk.
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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

305pelusa wrote: Wed Nov 06, 2019 11:03 pm I only leverage to decrease risk.
What risk exactly are you hedging against anyway? You keep saying that to leverage is to decrease risk, but risk of what?

It seems counter intuitive that to increase one's short term risk, you are actually decreasing one's long term risk? But risk of what? Not having enough in retirement?
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Re: Lifecycle Investing - Leveraging when young

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Lee_WSP wrote: Wed Nov 06, 2019 11:30 pm
305pelusa wrote: Wed Nov 06, 2019 11:03 pm I only leverage to decrease risk.
What risk exactly are you hedging against anyway? You keep saying that to leverage is to decrease risk, but risk of what?

It seems counter intuitive that to increase one's short term risk, you are actually decreasing one's long term risk? But risk of what? Not having enough in retirement?
Imagine I don't leverage.

If the stock market drops right now (I would have little money invested) and then goes up in the future (near my retirement), I will do really well. if the opposite occurs (it goes up now when I don't have much invested) and then drops right by my retirement, I will do fairly badly.

By leveraging right now, I protect against the latter. That's the risk I'm hedging; that a poor sequence of returns leads to significantly lower terminal wealth. What I sacrifice is the excellent returns I would get in the first scenario. Clearly if the market drops right now, I will lose more having leveraged.

So now, instead of half of the time ending up with a lot more money than I targeted, and half of the time ending up much tigher than I wanted, I will end up more towards the middle. I have decreased the extreme (good and bad) terminal wealth scenarios.

The traditional way to deal with the above is to save even more so that even in the worst cases (bad sequence), you're still OK. And I COULD do that if I wanted to. But it's inefficient right? I'd rather use leverage to hedge against those bad outcomes by forfeiting the really good ones instead.
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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

305pelusa wrote: Wed Nov 06, 2019 11:55 pm If the stock market drops right now (I would have little money invested) and then goes up in the future (near my retirement), I will do really well. if the opposite occurs (it goes up now when I don't have much invested) and then drops right by my retirement, I will do fairly badly.
I understand the logic, but have you modeled the two scenarios? If so, what does it actually look like? Ie, can you post your research?

I'm still hanging up on the losing more today if the market tanks because you are leveraged. I suppose that if you are not wiped out, you will come out okay, but will you actually be just as well off vs if you didn't lever?

I can accept that the strategy trades off more risk today for less risk tomorrow. But I cannot currently agree without further evidence that the strategy is less risky overall.
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Re: Lifecycle Investing - Leveraging when young

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Lee_WSP wrote: Thu Nov 07, 2019 10:09 am
305pelusa wrote: Wed Nov 06, 2019 11:55 pm If the stock market drops right now (I would have little money invested) and then goes up in the future (near my retirement), I will do really well. if the opposite occurs (it goes up now when I don't have much invested) and then drops right by my retirement, I will do fairly badly.
I understand the logic, but have you modeled the two scenarios? If so, what does it actually look like? Ie, can you post your research?

I'm still hanging up on the losing more today if the market tanks because you are leveraged. I suppose that if you are not wiped out, you will come out okay, but will you actually be just as well off vs if you didn't lever?

I can accept that the strategy trades off more risk today for less risk tomorrow. But I cannot currently agree without further evidence that the strategy is less risky overall.
Not personally but the original post has a link to the research paper by the Professors who applied this strategy to the historic US market and the leveraged strategy always came out ahead. In every retirement cohort. Higher returns with lower uncertainty of terminal wealth (risk).

They then repeated it for British stocks. And Japanese stocks. And US stocks but with an artificially higher volatility. And US stocks with artificially lower returns. And Monte Carlo simulations. In every instance, it offered improvements.

I've never seen anything backtest so excellently. Temporal diversification is as good and pervasive as asset diversification.

I don't make a big deal about those historical returns and simulations because I don't follow it BECAUSE of that. I'm very wary of data mining. I follow it because it's very logical, intuitive and sensible way to reduce risk. Seeing that historical analysis overwhelmingly approves of it is just the cherry on top
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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

Given that the stock market moves upwards 2/3 of the time, I would imagine that any strategy that employs leverage in a strategic manner would come out on top over the same strategy that doesn't employ leverage.

I'm not sure I agree with using the term risk for having lower terminal wealth, but we'll just not agree about that one.
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Re: Lifecycle Investing - Leveraging when young

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Lee_WSP wrote: Thu Nov 07, 2019 10:56 am Given that the stock market moves upwards 2/3 of the time, I would imagine that any strategy that employs leverage in a strategic manner would come out on top over the same strategy that doesn't employ leverage.
If both comparisons spend the same number of (dollar)(years), then why would one come out on top of the other?
Ex: Portfolio A leveraged 2:1 for the first 10 years, then goes 50/50 for the next 10 years.
Portfolio B is 100/0 the entire 20 years.

Why would A outperform B? They both spend the same amount of dollar-years so they both benefit equally from markets going up 2/3rd of the time.

Their results are not an artifact of employing leverage with markets that are more likely to go up. They're already accounting for that
Lee_WSP wrote: Thu Nov 07, 2019 10:56 am I'm not sure I agree with using the term risk for having lower terminal wealth, but we'll just not agree about that one.
Scenario A: You either end up far richer than you need to be, or far poorer than you want to be.
Scenario B: You always end up with exactly the amount of money that is ok for you.

The former is clearly risky. We all buy insurance precisely to give up a little money (great results) in order to avoid the truly terrible ones. Lifecycle Investing is insurance that doesn't cost anything; it's a free lunch from diversification.
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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

I'm just saying that I think the comparison of leverage while young vs no leverage is not a fair comparison. I think it should be compared to leverage for the same period of time during other periods of the accumulation phase. I think that would be a more robust comparison than zero leverage.
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Re: Lifecycle Investing - Leveraging when young

Post by UberGrub »

Lee_WSP wrote: Thu Nov 07, 2019 12:03 pm I'm just saying that I think the comparison of leverage while young vs no leverage is not a fair comparison. I think it should be compared to leverage for the same period of time during other periods of the accumulation phase. I think that would be a more robust comparison than zero leverage.
If leveraging while young is superior because it diversifies over time (more equal stock exposure throughout life) then leveraging when older/middle age and not when young would be even worse than no leverage because then you'd be further concentrated in stock exposure to later years. You'd have more capital inlater years AND you'd be leveraged to boot!

So if you take the analysis to it's logical conclusion you'd find:
Leverage when young (even stock exposure) > No leverage (stock exposure grows as you accumulate) > Leverage when middle age/older/retired (even MORE lopsided and uneven stock exposure).
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Lee_WSP wrote: Thu Nov 07, 2019 12:03 pm I'm just saying that I think the comparison of leverage while young vs no leverage is not a fair comparison. I think it should be compared to leverage for the same period of time during other periods of the accumulation phase. I think that would be a more robust comparison than zero leverage.
Have you even read the paper ?
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

305pelusa wrote: Thu Nov 07, 2019 12:19 pm
Lee_WSP wrote: Thu Nov 07, 2019 12:03 pm I'm just saying that I think the comparison of leverage while young vs no leverage is not a fair comparison. I think it should be compared to leverage for the same period of time during other periods of the accumulation phase. I think that would be a more robust comparison than zero leverage.
Have you even read the paper ?
It's not a topic I'm interested in. You believe in it, so I'll just question you. If you can't defend the idea, then I really have no need to read the paper.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Lee_WSP wrote: Thu Nov 07, 2019 12:25 pm
305pelusa wrote: Thu Nov 07, 2019 12:19 pm
Lee_WSP wrote: Thu Nov 07, 2019 12:03 pm I'm just saying that I think the comparison of leverage while young vs no leverage is not a fair comparison. I think it should be compared to leverage for the same period of time during other periods of the accumulation phase. I think that would be a more robust comparison than zero leverage.
Have you even read the paper ?
It's not a topic I'm interested in. You believe in it, so I'll just question you. If you can't defend the idea, then I really have no need to read the paper.
Ah right I forgot you like to be spoon-fed information. You're right, I can't defend it. Don't read it. Let's leave it at that :thumbsup
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by rascott »

Ther theory makes perfect sense to me.... however I'm likely past the point as to where it would be effective much for me (even stretching things to the max in every way, my annual contributions are a good bit under 10% of my current portfolio balance).

..... it seems like something that makes a lot of sense when in your first 10 years or so. I do question how many people of that age would have the knowledge and inclination to attempt this. I'm guessing OP is far out on edge of the bell curve with this.

Another thing that I can't quite grasp..... when you are in your 20s/ early 30s... you often have no idea where your career will end up, what kind of income you'll obtain, what kind of lifestyle you'll have 20-40 years later. So the whole process seems a bit of a guess as to what your ideal equity exposure should really be.

I may still grab the book and see how it would fit for me.. if at all
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

rascott wrote: Thu Nov 07, 2019 12:38 pm Ther theory makes perfect sense to me.... however I'm likely past the point as to where it would be effective much for me (even stretching things to the max in every way, my annual contributions are a good bit under 10% of my current portfolio balance).

..... it seems like something that makes a lot of sense when in your first 10 years or so. I do question how many people of that age would have the knowledge and inclination to attempt this. I'm guessing OP is far out on edge of the bell curve with this.

Another thing that I can't quite grasp..... when you are in your 20s/ early 30s... you often have no idea where your career will end up, what kind of income you'll obtain, what kind of lifestyle you'll have 20-40 years later. So the whole process seems a bit of a guess as to what your ideal equity exposure should really be.

I may still grab the book and see how it would fit for me.. if at all
It absolutely will still apply. You might not have to leverage since you might have enough capital to hit your desired exposure today. But your AA might be changed.

Ben Matthews was a poster here took their theory and applied it but without leverage. That means he's been 100/0 in stocks thus far and continues to be. That's fine too, he's still reaping time diversification benefits that way.

As for the uncertainty, when young, even very conservative estimates of future salary will require 2:1 leverage. The average cohort had 2:1 leverage for like the first 15 years 0_o

That's why the authors say "at first, don't worry too much about what your target is. You can't reach it any ways."

I'm planning on a very early retirement (45 years old), which compresses the lifecycle, leveraged more than they recommended, and have a much more conservative allocation (only 30% stocks) than they use. So I reached my target much early. I'm an uncommon case though
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

305pelusa wrote: Thu Nov 07, 2019 12:30 pm
Lee_WSP wrote: Thu Nov 07, 2019 12:25 pm
305pelusa wrote: Thu Nov 07, 2019 12:19 pm
Lee_WSP wrote: Thu Nov 07, 2019 12:03 pm I'm just saying that I think the comparison of leverage while young vs no leverage is not a fair comparison. I think it should be compared to leverage for the same period of time during other periods of the accumulation phase. I think that would be a more robust comparison than zero leverage.
Have you even read the paper ?
It's not a topic I'm interested in. You believe in it, so I'll just question you. If you can't defend the idea, then I really have no need to read the paper.
Ah right I forgot you like to be spoon-fed information. You're right, I can't defend it. Don't read it. Let's leave it at that :thumbsup
I just don't like wasting time. Although, it's a fair point to say that I'm wasting time posting on this forum. But it's more enjoyable than reading a paper.
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Re: Lifecycle Investing - Leveraging when young

Post by UberGrub »

OP has probably been making out like a bandit these past few weeks and today also.

The options position I established has done really well. Glad I did it.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

UberGrub wrote: Thu Nov 07, 2019 12:52 pm OP has probably been making out like a bandit these past few weeks and today also.

The options position I established has done really well. Glad I did it.
Yes, I've done very well. This is precisely what I am hedging against. It's like I'm claiming on an insurance policy that was free to buy.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

UberGrub wrote: Thu Nov 07, 2019 12:52 pm OP has probably been making out like a bandit these past few weeks and today also.

The options position I established has done really well. Glad I did it.
Everyone who isn't a bond bull is doing well.
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Re: Lifecycle Investing - Leveraging when young

Post by UberGrub »

Lee_WSP wrote: Thu Nov 07, 2019 12:58 pm
UberGrub wrote: Thu Nov 07, 2019 12:52 pm OP has probably been making out like a bandit these past few weeks and today also.

The options position I established has done really well. Glad I did it.
Everyone who isn't a bond bull is doing well.
That's true of course. But out of all of the leveraged BH investors (EfficientInvestor, Hedgefundie, etc), I think 305pelusa is the only one leveraging his entire portolio with a 229% stock exposure.

His returns thus far must be especially outstanding I imagine.
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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

UberGrub wrote: Thu Nov 07, 2019 1:01 pm
Lee_WSP wrote: Thu Nov 07, 2019 12:58 pm
UberGrub wrote: Thu Nov 07, 2019 12:52 pm OP has probably been making out like a bandit these past few weeks and today also.

The options position I established has done really well. Glad I did it.
Everyone who isn't a bond bull is doing well.
That's true of course. But out of all of the leveraged BH investors (EfficientInvestor, Hedgefundie, etc), I think 305pelusa is the only one leveraging his entire portolio with a 229% stock exposure.

His returns thus far must be especially outstanding I imagine.
https://www.portfoliovisualizer.com/bac ... tion4_3=45

It's exactly what you'd expect. 2x the s&p 500.
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Re: Lifecycle Investing - Leveraging when young

Post by UberGrub »

Lee_WSP wrote: Thu Nov 07, 2019 1:18 pm
UberGrub wrote: Thu Nov 07, 2019 1:01 pm
Lee_WSP wrote: Thu Nov 07, 2019 12:58 pm
UberGrub wrote: Thu Nov 07, 2019 12:52 pm OP has probably been making out like a bandit these past few weeks and today also.

The options position I established has done really well. Glad I did it.
Everyone who isn't a bond bull is doing well.
That's true of course. But out of all of the leveraged BH investors (EfficientInvestor, Hedgefundie, etc), I think 305pelusa is the only one leveraging his entire portolio with a 229% stock exposure.

His returns thus far must be especially outstanding I imagine.
https://www.portfoliovisualizer.com/bac ... tion4_3=45

It's exactly what you'd expect. 2x the s&p 500.
1) He/she didn't establish that leverage until Aug 21. That's why I said "these past few weeks". Since then TMF has only been losses upon losses. The only thing carrying TMF/UPRO is UPRO since then. And 305pelusa has much more exposure to the market than just 120%.

2) Once again, I don't know any poster who has leveraged his entire portolio this way. So even if TMF/UPRO had kept pace for the past few weeks (and it hasn't) most have like 5% of their wealth in it.

So I reiterate, 305pelusa's him/herself, considering her entire portolio, has been making out like a bandit these past few weeks
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

The conversation about me making money is making me uncomfortable.

Yes, high returns short term but these will be cancelled out by the lower future returns from reinvesting at higher prices. I'm a long term investor and this is just pure noise.

Once more, I'm not in it for the money. I just want to immunize myself so that I will end up right about the same whether the market goes up first then down or vice versa.

So far, it's doing its job. If the market was dropping (and some day it WILL!), I would say the same thing: it's just doing its job.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

UberGrub wrote: Thu Nov 07, 2019 1:36 pm
Lee_WSP wrote: Thu Nov 07, 2019 1:18 pm
UberGrub wrote: Thu Nov 07, 2019 1:01 pm
Lee_WSP wrote: Thu Nov 07, 2019 12:58 pm
UberGrub wrote: Thu Nov 07, 2019 12:52 pm OP has probably been making out like a bandit these past few weeks and today also.

The options position I established has done really well. Glad I did it.
Everyone who isn't a bond bull is doing well.
That's true of course. But out of all of the leveraged BH investors (EfficientInvestor, Hedgefundie, etc), I think 305pelusa is the only one leveraging his entire portolio with a 229% stock exposure.

His returns thus far must be especially outstanding I imagine.
https://www.portfoliovisualizer.com/bac ... tion4_3=45

It's exactly what you'd expect. 2x the s&p 500.
1) He/she didn't establish that leverage until Aug 21. That's why I said "these past few weeks". Since then TMF has only been losses upon losses. The only thing carrying TMF/UPRO is UPRO since then. And 305pelusa has much more exposure to the market than just 120%.

2) Once again, I don't know any poster who has leveraged his entire portolio this way. So even if TMF/UPRO had kept pace for the past few weeks (and it hasn't) most have like 5% of their wealth in it.

So I reiterate, 305pelusa's him/herself, considering her entire portolio, has been making out like a bandit these past few weeks
It's actually even worse going back only to August. Only 2% CAGR above the SP500.

https://www.portfoliovisualizer.com/bac ... tion4_3=45



But if you only do September on, it's better than a Hedgefundie portfolio, but not much better than the unleveraged since so little time has passed.

https://www.portfoliovisualizer.com/bac ... tion4_3=45

Also, apparently it's worse than 130/90. Who knew....

https://www.portfoliovisualizer.com/bac ... tion5_3=90

But seriously, it's 2 months.... a blip on the timeline.
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