Lifecycle Investing - Leveraging when young

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Uncorrelated
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Re: Lifecycle Investing - Leveraging when young

Post by Uncorrelated »

redstar wrote: Mon Jul 27, 2020 10:01 pm
Uncorrelated wrote: Sun Jul 26, 2020 12:30 am I have attempted to calculate optimal asset allocations for different utility functions. I tried optimizing for the fastest (on average) way to reach a certain number, or maximize the number of retirement years. You can view it in this topic. I don't know how well this utility function matches your goals, but the point is that a different utility function results in very different asset allocations. These scenario's were calculated without leverage.
This thread was very informative and interesting, thank you. I think my utility function is not well defined, and I probably should spend some time thinking about what an appropriate one is. I really enjoyed the AA charts you generated. Would you be willing to share any of that code to mess with other possible scenarios?
I can do that, but the code is pretty complicated and computationally intensive. If you want a specific utility function calculated, you can always ask me. I think this is a very interesting and under-studied research subject, but it's hard to come up with utility functions that actually reflect actual investor goals. My best guess is that utility is approximately linear to the expected retirement years, that approach results in quite aggressive asset allocations.

I am confident that the desire to retire earlier results in an asset allocation that is more aggressive than lifestyle investing with a fixed retirement date suggests, but I'm not sure how much more aggressive.

Steve Reading wrote: Mon Jul 27, 2020 10:27 pm
redstar wrote: Mon Jul 27, 2020 9:59 pm For the sake of completeness, and because I find this topic fun, what would a better design method be? Would it be similar to Uncorrelated's approach in their linked thread?
Uncorrelated will answer that better, he showed me once a paper that used a specific strategy to target a specific nest egg. It still uses leverage and everything but ramps down differently. That might be a better fit for you. I seem to recall it was complex, not as simple as just an equation you plug into at any time, regardless of time horizon or current assets.

I only brought up a nest egg target as a rough estimate as to when you might be done with Phase 1 and then could sit down and actually factor in SS, future wages, etc. But the above strategy might ramp you down before so if that's what you prefer and ultimately want to use, I would use that strategy since the beginning.

Hopefully he'll link the paper, I never saved it :/
I think I know that paper you're talking about. But it's not particularly relevant to this user, as it didn't investigate early retirement motives.

As far as I'm aware of, the topic I linked is the only place on the internet that discusses optimal portfolio models in the context of early retirement goals...
redstar wrote: Fri Jul 31, 2020 10:36 am Would anyone be able to check my math on computing the Samuelson Share? I'm looking for a 55% US / 45% Intl. weight of equity (close to market weight). My initial guess at an RRA is 3.

For risk/reward inputs into calculation, the authors suggest CAPE and VIX, but this tells me to have a 0% stock allocation? So I looked at Vanguard's August 2020 estimates for equity returns and volatility instead. Are these reasonable to use or are there better numbers here?

US Stock Return: 4% - 6% (I'll use 5%)
US Stock Volatility: 16.4%
Intl. Stock Return: 7% - 9% (I'll use 8%)
Intl. Stock Volatility: 18.3%

So now I need the equity risk premium for each asset class. What should I be comparing to? The t-bill rate is 0.10%, I can earn 1% in the savings account I have, or should I be comparing to bonds in general? (I'll use 1% below for now)

Leverage Amount: 150%
Borrowing Cost above 100% at IB: 1.59%

Effective US ERP after borrowing = (5%+(5%-1.59%)*(50%))/150% - 1% = 3.47%
Effective Intl. ERP after borrowing = (8%+(8%-1.59%)*(50%))/150% - 1% = 6.47%

US Samuelson Share = 3.47% / ((16.4% ^ 2)*3) * 55% US equity ratio = 23.65%
Intl. Samuelson Share = 6.47% / ((18.3% ^ 2)*3) * 45% Intl equity ratio = 28.98%
Total Samuelson Share (all equity) = 52.63%

I think I'm failing to account for expense ratios and stuff here, but overall does this look right for factoring in multiple equity types, borrowing cost, and some risk-free rate?
I use 16% for volatility and 5-6% for future ERP. I don't think there are good reasons to use different estimates for different geographic regions. If you want an active sector or geographic region tilt, you can use mean variance optimization to determine the optimal ratio. This is too difficult to do by hand.

IIRC Ayres and Nalebuff use the 10-year t-bill rate for the risk free rate as some sort of compromise. I usually use 1 or 3 month t-bills. I have not read the book so I don't know what the exact definition of samuelson share is, your math looks reasonable.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

redstar wrote: Fri Jul 31, 2020 10:36 am For risk/reward inputs into calculation, the authors suggest CAPE and VIX, but this tells me to have a 0% stock allocation?
Yeah that spreadsheet is useless. Just ignore their CAPE timing allocation.
redstar wrote: Fri Jul 31, 2020 10:36 am So I looked at Vanguard's August 2020 estimates for equity returns and volatility instead. Are these reasonable to use or are there better numbers here?
I think those numbers come from simulations at March 31, 2020. So they don't take into account the nearly 35% stock price rise since then. I personally just use the historical ERP of 7.5% and volatility of 19.76% since 1929. If you use the numbers from 1970 onwards, the ERP is reduced to 5.68% but so is the volatility (17.39%) and they actually even out to the point where it doesn't matter much.

The reason I use these numbers is that I don't think I can predict stock returns or T-Bill returns. But the difference between them seems more reasonable. The ERP is simply how much people are willing to pay to avoid market risk and that seems like a more consistent value through time since it comes in large part from human psychology. Just my opinion, feel free to tweak based on your own outlook.
redstar wrote: Fri Jul 31, 2020 10:36 am US Stock Return: 4% - 6% (I'll use 5%)
US Stock Volatility: 16.4%
Intl. Stock Return: 7% - 9% (I'll use 8%)
Intl. Stock Volatility: 18.3%

So now I need the equity risk premium for each asset class. What should I be comparing to? The t-bill rate is 0.10%, I can earn 1% in the savings account I have, or should I be comparing to bonds in general? (I'll use 1% below for now)
I personally compare it to T-Bills by virtue of using the numbers I showed you before. Because I am leveraged right now, I then further subtract the IBKR margin added cost. If you were in the unleveraged phase and used T-Bills, then if there were savings accounts yielding more, I think it would be fair game to use those savings accounts instead. You'd incorporate that by reducing the ERP by whatever much the savings accounts give you over current T-Bills.
redstar wrote: Fri Jul 31, 2020 10:36 am Leverage Amount: 150%
Borrowing Cost above 100% at IB: 1.59%

Effective US ERP after borrowing = (5%+(5%-1.59%)*(50%))/150% - 1% = 3.47%
Effective Intl. ERP after borrowing = (8%+(8%-1.59%)*(50%))/150% - 1% = 6.47%
Ok, there's two errors here:
1) Vanguard is providing annualized, compound returns. But the number that you need in the numerator is the arithmetic mean returns. You can add half the variance (volatility squared) to CAGR to get a rough estimate of arithmetic mean since stock yearly returns are roughly gaussian.
2) The ERP is simply pitting your two investment choices. Stocks or paying down margin. If you're unleveraged, the ERP is:
(Mean stock) - T-Bill (0.1%)

Since you're leveraged, the ERP is just:
(Mean stock) - IBKR margin cost (1.59%)

Note that if you're leveraged, it doesn't matter what the T-Bill rate is. As long as your borrowing cost is higher, the borrowing cost is, for all intents and purposes, the risk-free rate available to you.
Also note nowhere in the equation are you putting in that you're 150% leveraged. The Samuelson Share is an equation to figure out how much you'd like to invest in stocks today. It shouldn't depend on your current leverage. It's much more general than that.

I don't separate things by regions. But if I did, I would simply get the weighted average of your stock portfolio returns first, their volatility (which is technically less than their weighted average because of diversification), and use those parameters directly in the Samuelson equation.
"... 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
Count of Notre Dame
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Re: Lifecycle Investing - Leveraging when young

Post by Count of Notre Dame »

Steve Reading wrote: Wed Jul 29, 2020 10:30 am
Count of Notre Dame wrote: Wed Jul 29, 2020 9:58 am
Steve Reading wrote: Tue Jul 28, 2020 12:57 pm
Count of Notre Dame wrote: Tue Jul 28, 2020 12:38 pm
Steve Reading wrote: Mon Mar 04, 2019 10:23 am

My debt is not callable so there is no wipe-out, no liquidation. I just pay the interest (like a mortgage). My plan is the same as every Boglehead. I buy and I hold through the downturns. I can leverage all I want (say 5:1) and there's no issues on that front. It's basically a mortgage except the money bought stocks instead of real estate.
If I face a margin call, I have a HELOC for ~$200k interest only for 10 years available to use. I of course would need to transfer money a few days before if the margin % was getting close to the callable territory. I suppose a 90% flash crash in one day could trigger automatic portfolio sell offs, but have we ever had that large of a drop in one day?
Absolutely, we have. VTI traded for 15 cents during the 2010 Flash Crash, losing 99%+ of its value in seconds. A lot of trades below specific values were canceled retrospectively but I don't know to what extent.

At the time, we didn't have circuit breakers for specific ETFs. Only for futures (instituted due to 1987's Black Monday). Now exchanges do have circuit breakers for ETFs. It's a dicey situation and I honestly don't know how effective such circuit breakers could be. Personally, I'm hoping that circuit breakers for my ETFs, combined with exchanges willing to cancel trades below the breakers (provided the breakers don't kick in), will be enough to deal with any potential future Flash Crashes. But I'm not a huge fan of the situation.
I'm not a fan of ETFs and was planning on investing in mutual funds. Did that flash crash end the day down 99% or 9%? There's a pretty big difference there:

"Stock indices, such as the S&P 500, Dow Jones Industrial Average and Nasdaq Composite, collapsed and rebounded very rapidly.[5] The Dow Jones Industrial Average had its second biggest intraday point decline (from the opening) up to that point,[5] plunging 998.5 points (about 9%), most within minutes, only to recover a large part of the loss.[6][7] It was also the second-largest intraday point swing (difference between intraday high and intraday low) up to that point, at 1,010.14 points.[5][6][8][9] The prices of stocks, stock index futures, options and exchange-traded funds (ETFs) were volatile, thus trading volume spiked.[5]:3 A CFTC 2014 report described it as one of the most turbulent periods in the history of financial markets.[5]:1"
I'm confused, I thought you were asking about using margin? Mutual funds cannot be purchased on margin.
Sorry I thought you meant leveraged ETFs. Do you have any recommendation for solid index ETFs besides the total stock market index? I already hold the total stock market index in my IRA and 401ks so I wouldn't be able to hold it in my brokerage account and also do tax loss harvesting (I would have buys of the total stock market index every month since i'm DCA'ing).

Additionally, besides my HELOC @ 5% as my emergency fund to avoid margin calls I was also able to obtain a $100k personal line of credit @ 3.5% which is interest only for 2 years and then amortizes over the next 13.

Finally, I ran my own simulation of dollar cost averaging monthly into the S&P 500 at 2x leverage over every 10-year period the S&P 500 was in existence with no rebalancing (no selling period only buying). My simulation showed it took nearly 12 years in some instances for the leveraged strategy, after accounting for cumulative margin interest, to beat the unleveraged one, but with some patience it seems the 2x leverage wins out every time. During these stretches there would be at least 2 margin calls if you were required to keep 25%, although it sounds like for some accounts Interactive Brokers allows you to go to as low as 8-10%? Also, since Interactive Brokers allows only 2x leverage for initial margin, is there a way to DCA in at 3x after that or do all initial cash contributions have to be 2x?
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Re: Lifecycle Investing - Leveraging when young

Post by Uncorrelated »

Count of Notre Dame wrote: Sun Aug 02, 2020 2:43 pm Sorry I thought you meant leveraged ETFs. Do you have any recommendation for solid index ETFs besides the total stock market index? I already hold the total stock market index in my IRA and 401ks so I wouldn't be able to hold it in my brokerage account and also do tax loss harvesting (I would have buys of the total stock market index every month since i'm DCA'ing).

Additionally, besides my HELOC @ 5% as my emergency fund to avoid margin calls I was also able to obtain a $100k personal line of credit @ 3.5% which is interest only for 2 years and then amortizes over the next 13.

Finally, I ran my own simulation of dollar cost averaging monthly into the S&P 500 at 2x leverage over every 10-year period the S&P 500 was in existence with no rebalancing (no selling period only buying). My simulation showed it took nearly 12 years in some instances for the leveraged strategy, after accounting for cumulative margin interest, to beat the unleveraged one, but with some patience it seems the 2x leverage wins out every time. During these stretches there would be at least 2 margin calls if you were required to keep 25%, although it sounds like for some accounts Interactive Brokers allows you to go to as low as 8-10%? Also, since Interactive Brokers allows only 2x leverage for initial margin, is there a way to DCA in at 3x after that or do all initial cash contributions have to be 2x?
Using high-interest HELOC and personal credit lines to avoid margin calls is a terrible idea. If your risk tolerance supports a maximum leverage of 2, use a maximum leverage of 2. If the market goes down and your effective leverage increases, don't take a loan to prevent a margin call. Rebalance back to 2x leverage (or whatever your maximum leverage is).

2x leverage does not always win out over large periods of time. It may be true in historical data, but it is not guaranteed. Using leverage increases the average outcome, but it also worsens the worst possible outcome. This is not a problem within lifecycle investing because it strategically uses leverage to obtain the a higher expected outcome with the same amount of risk you'd usually take, but this requires quite complicated math to show. A backtest will not be able to give you an accurate overview of the expected outcomes.

With "DCA", I hope that you mean investing income as soon as possible, also known as lump sum investing. Not DCA, spreading out the investment of liquid capital. The latter is irrational.
Count of Notre Dame
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Re: Lifecycle Investing - Leveraging when young

Post by Count of Notre Dame »

Uncorrelated wrote: Sun Aug 02, 2020 4:48 pm
Count of Notre Dame wrote: Sun Aug 02, 2020 2:43 pm Sorry I thought you meant leveraged ETFs. Do you have any recommendation for solid index ETFs besides the total stock market index? I already hold the total stock market index in my IRA and 401ks so I wouldn't be able to hold it in my brokerage account and also do tax loss harvesting (I would have buys of the total stock market index every month since i'm DCA'ing).

Additionally, besides my HELOC @ 5% as my emergency fund to avoid margin calls I was also able to obtain a $100k personal line of credit @ 3.5% which is interest only for 2 years and then amortizes over the next 13.

Finally, I ran my own simulation of dollar cost averaging monthly into the S&P 500 at 2x leverage over every 10-year period the S&P 500 was in existence with no rebalancing (no selling period only buying). My simulation showed it took nearly 12 years in some instances for the leveraged strategy, after accounting for cumulative margin interest, to beat the unleveraged one, but with some patience it seems the 2x leverage wins out every time. During these stretches there would be at least 2 margin calls if you were required to keep 25%, although it sounds like for some accounts Interactive Brokers allows you to go to as low as 8-10%? Also, since Interactive Brokers allows only 2x leverage for initial margin, is there a way to DCA in at 3x after that or do all initial cash contributions have to be 2x?
Using high-interest HELOC and personal credit lines to avoid margin calls is a terrible idea. If your risk tolerance supports a maximum leverage of 2, use a maximum leverage of 2. If the market goes down and your effective leverage increases, don't take a loan to prevent a margin call. Rebalance back to 2x leverage (or whatever your maximum leverage is).

2x leverage does not always win out over large periods of time. It may be true in historical data, but it is not guaranteed. Using leverage increases the average outcome, but it also worsens the worst possible outcome. This is not a problem within lifecycle investing because it strategically uses leverage to obtain the a higher expected outcome with the same amount of risk you'd usually take, but this requires quite complicated math to show. A backtest will not be able to give you an accurate overview of the expected outcomes.

With "DCA", I hope that you mean investing income as soon as possible, also known as lump sum investing. Not DCA, spreading out the investment of liquid capital. The latter is irrational.
Why is it a bad idea if my cash flow can support the interest + principal payments (less than 1% of my monthly cash flow) and it would force me to buy low when the market is tanking? My plan is to fund $100k at first for portfolio margin, then $10k per month thereafter. I want to avoid timing the market, especially this year.

I think of this investing strategy as my path to earlier financial independence - before age 60 - and my X factor to take a more aggressive swing for the fences. If it doesn't work out and I trail the market, it won't blowup my financial future. My time horizon is about 15 years. I have $1M in retirement accounts that I am already maxing out each year. I understand I am not applying the concepts of temporal diversification but rather trying to end up with the most money possible.
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Re: Lifecycle Investing - Leveraging when young

Post by Uncorrelated »

Count of Notre Dame wrote: Mon Aug 03, 2020 10:14 am
Uncorrelated wrote: Sun Aug 02, 2020 4:48 pm
Count of Notre Dame wrote: Sun Aug 02, 2020 2:43 pm Sorry I thought you meant leveraged ETFs. Do you have any recommendation for solid index ETFs besides the total stock market index? I already hold the total stock market index in my IRA and 401ks so I wouldn't be able to hold it in my brokerage account and also do tax loss harvesting (I would have buys of the total stock market index every month since i'm DCA'ing).

Additionally, besides my HELOC @ 5% as my emergency fund to avoid margin calls I was also able to obtain a $100k personal line of credit @ 3.5% which is interest only for 2 years and then amortizes over the next 13.

Finally, I ran my own simulation of dollar cost averaging monthly into the S&P 500 at 2x leverage over every 10-year period the S&P 500 was in existence with no rebalancing (no selling period only buying). My simulation showed it took nearly 12 years in some instances for the leveraged strategy, after accounting for cumulative margin interest, to beat the unleveraged one, but with some patience it seems the 2x leverage wins out every time. During these stretches there would be at least 2 margin calls if you were required to keep 25%, although it sounds like for some accounts Interactive Brokers allows you to go to as low as 8-10%? Also, since Interactive Brokers allows only 2x leverage for initial margin, is there a way to DCA in at 3x after that or do all initial cash contributions have to be 2x?
Using high-interest HELOC and personal credit lines to avoid margin calls is a terrible idea. If your risk tolerance supports a maximum leverage of 2, use a maximum leverage of 2. If the market goes down and your effective leverage increases, don't take a loan to prevent a margin call. Rebalance back to 2x leverage (or whatever your maximum leverage is).

2x leverage does not always win out over large periods of time. It may be true in historical data, but it is not guaranteed. Using leverage increases the average outcome, but it also worsens the worst possible outcome. This is not a problem within lifecycle investing because it strategically uses leverage to obtain the a higher expected outcome with the same amount of risk you'd usually take, but this requires quite complicated math to show. A backtest will not be able to give you an accurate overview of the expected outcomes.

With "DCA", I hope that you mean investing income as soon as possible, also known as lump sum investing. Not DCA, spreading out the investment of liquid capital. The latter is irrational.
Why is it a bad idea if my cash flow can support the interest + principal payments (less than 1% of my monthly cash flow) and it would force me to buy low when the market is tanking? My plan is to fund $100k at first for portfolio margin, then $10k per month thereafter. I want to avoid timing the market, especially this year.

I think of this investing strategy as my path to earlier financial independence - before age 60 - and my X factor to take a more aggressive swing for the fences. If it doesn't work out and I trail the market, it won't blowup my financial future. My time horizon is about 15 years. I have $1M in retirement accounts that I am already maxing out each year.
The idea that you can buy low is a form of market timing. You can't buy low, or high. You can only buy at the price that best reflects market expectations of the future. Don't try to time the markets, invest according to the theory of lifecycle investing.

If you hold a constant leverage of 2x during the leverage constrained phase, you will obtain better results than if you switch between 1.5x leverage and 2.5x leverage (average 2x). If you increase your leverage during a downturn, that is suboptimal behavior.
I understand I am not applying the concepts of temporal diversification but rather trying to end up with the most money possible.
Lifecycle investing is the optimal approach to end up with the most money possible (for individuals with a planned retirement date and CRRA). If you would like to end up with even more money, you should work longer or use a lower coefficient of relative risk aversion. If you stray from lifecycle investing, you will take more risk than necessary for a given expected return.
Count of Notre Dame
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Re: Lifecycle Investing - Leveraging when young

Post by Count of Notre Dame »

Uncorrelated wrote: Mon Aug 03, 2020 10:42 am
Count of Notre Dame wrote: Mon Aug 03, 2020 10:14 am
Uncorrelated wrote: Sun Aug 02, 2020 4:48 pm
Count of Notre Dame wrote: Sun Aug 02, 2020 2:43 pm Sorry I thought you meant leveraged ETFs. Do you have any recommendation for solid index ETFs besides the total stock market index? I already hold the total stock market index in my IRA and 401ks so I wouldn't be able to hold it in my brokerage account and also do tax loss harvesting (I would have buys of the total stock market index every month since i'm DCA'ing).

Additionally, besides my HELOC @ 5% as my emergency fund to avoid margin calls I was also able to obtain a $100k personal line of credit @ 3.5% which is interest only for 2 years and then amortizes over the next 13.

Finally, I ran my own simulation of dollar cost averaging monthly into the S&P 500 at 2x leverage over every 10-year period the S&P 500 was in existence with no rebalancing (no selling period only buying). My simulation showed it took nearly 12 years in some instances for the leveraged strategy, after accounting for cumulative margin interest, to beat the unleveraged one, but with some patience it seems the 2x leverage wins out every time. During these stretches there would be at least 2 margin calls if you were required to keep 25%, although it sounds like for some accounts Interactive Brokers allows you to go to as low as 8-10%? Also, since Interactive Brokers allows only 2x leverage for initial margin, is there a way to DCA in at 3x after that or do all initial cash contributions have to be 2x?
Using high-interest HELOC and personal credit lines to avoid margin calls is a terrible idea. If your risk tolerance supports a maximum leverage of 2, use a maximum leverage of 2. If the market goes down and your effective leverage increases, don't take a loan to prevent a margin call. Rebalance back to 2x leverage (or whatever your maximum leverage is).

2x leverage does not always win out over large periods of time. It may be true in historical data, but it is not guaranteed. Using leverage increases the average outcome, but it also worsens the worst possible outcome. This is not a problem within lifecycle investing because it strategically uses leverage to obtain the a higher expected outcome with the same amount of risk you'd usually take, but this requires quite complicated math to show. A backtest will not be able to give you an accurate overview of the expected outcomes.

With "DCA", I hope that you mean investing income as soon as possible, also known as lump sum investing. Not DCA, spreading out the investment of liquid capital. The latter is irrational.
Why is it a bad idea if my cash flow can support the interest + principal payments (less than 1% of my monthly cash flow) and it would force me to buy low when the market is tanking? My plan is to fund $100k at first for portfolio margin, then $10k per month thereafter. I want to avoid timing the market, especially this year.

I think of this investing strategy as my path to earlier financial independence - before age 60 - and my X factor to take a more aggressive swing for the fences. If it doesn't work out and I trail the market, it won't blowup my financial future. My time horizon is about 15 years. I have $1M in retirement accounts that I am already maxing out each year.
The idea that you can buy low is a form of market timing. You can't buy low, or high. You can only buy at the price that best reflects market expectations of the future. Don't try to time the markets, invest according to the theory of lifecycle investing.

If you hold a constant leverage of 2x during the leverage constrained phase, you will obtain better results than if you switch between 1.5x leverage and 2.5x leverage (average 2x). If you increase your leverage during a downturn, that is suboptimal behavior.
I understand I am not applying the concepts of temporal diversification but rather trying to end up with the most money possible.
Lifecycle investing is the optimal approach to end up with the most money possible (for individuals with a planned retirement date and CRRA). If you would like to end up with even more money, you should work longer or use a lower coefficient of relative risk aversion. If you stray from lifecycle investing, you will take more risk than necessary for a given expected return.
What I was thinking of doing is always buying in with new purchases at 2x, but otherwise letting the portfolio float unless I reach a level that could trigger a margin call in which I would use the lines of credit as a cash influx to avoid that. The monthly cash influxes would be pushing the portfolio always to 50% equity.
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Re: Lifecycle Investing - Leveraging when young

Post by bumbojumbo »

Steve Reading wrote: Wed Mar 13, 2019 9:24 pm I guess just to conclude, here's the plan I settled on:

The one thing I dislike about lifecycle investing is the "buy high, sell low" attitude when leveraging in Phase 1. It adds a feedback mechanism to the strategy that makes you invest more/less based on market conditions (not a fan of this).

So instead, I will opt for a range of leverage allowed (similar to rebalancing bands). My ideal leverage level will be 1.5:1. That way, even if stocks drop a massive 50% and I don't contribute any savings that year, the leverage will only rise to ~3:1 (which I feel comfortable with). I do expect to save significantly though.

This way, I believe I can keep the leverage controlled to levels that I think are very reasonable, purely with savings contributions (without a need to sell during market downturns). I accept this might be less ideal than 2:1 with rebalancing to sell at losses (the true lifecycle investing strategy of the book). I also accept it will take me longer to hit my lifetime stock allocation by targeting 1.5:1 leverage instead. But the upside is that by keeping the leverage much more conservative than 2:1, I have a much wider range of higher leverage such that I don't have to sell during extreme market downturns. Feels like a good blend between lifecycle investing and something I feel comfortable with.

I appreciate the help from everyone here. Perhaps I'll update/bump the thread in the future.
Having just discovered this thread, the above strategy is almost the one I decided on a couple of years ago. Having to perpetually adjust the 2:1 leverage leaves far too much room for emotions to take over. One step further, instead of targeting 1.5:1, I only leverage 1.5:1 initially at the time of contribution and it floats. This seems like the most unemotional way to go about it.
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Re: Lifecycle Investing - Leveraging when young

Post by Stef »

So I just upgraded my IBKR account to margin and thinking about leveraging as I'm only 29 years old. My issue is that 2/3 of my assets are currently in tax-deferred accounts with no option for leveraging up and the other 1/3 on IBKR.

There is no safe way to approach this. If I want 125% overall stock exposure, I'll need to go for 175% in IBKR which could be quite dangerous. A -57% crash would wipe out my taxable account! This is very likely to happen within the next 2 decades.

So should I use leverage in such a situation at all?
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Re: Lifecycle Investing - Leveraging when young

Post by whtmyid99 »

Great thread and thank you all for sharing your research into this topic.

For the folks who are using IB to implement this strategy, I am assuming you are either meeting the monthly $10 minimum commission on your IB Pro account or paying the difference to IB.

Is this $120 per year minimum commission considered into your margin rate calculation? The fact that you are paying extra $120 per year to get a better margin rate using pro account, tilt the scale towards using options (with LITE account)?
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Re: Lifecycle Investing - Leveraging when young

Post by Uncorrelated »

Count of Notre Dame wrote: Mon Aug 03, 2020 11:14 am
What I was thinking of doing is always buying in with new purchases at 2x, but otherwise letting the portfolio float unless I reach a level that could trigger a margin call in which I would use the lines of credit as a cash influx to avoid that. The monthly cash influxes would be pushing the portfolio always to 50% equity.
There is no good reason to treat "new" money different from old money. Don't "float" your allocation. If your max leverage is 2x, then you should never go above 2x leverage.

Misunderstanding this may result in the loss of your entire brokerage account, that's what happened to Market Timer. Ayres and Nalebuff went through the trouble of calculating what the best approach is, I suggest you follow it to the letter.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Stef wrote: Tue Aug 04, 2020 12:47 am So I just upgraded my IBKR account to margin and thinking about leveraging as I'm only 29 years old. My issue is that 2/3 of my assets are currently in tax-deferred accounts with no option for leveraging up and the other 1/3 on IBKR.

There is no safe way to approach this. If I want 125% overall stock exposure, I'll need to go for 175% in IBKR which could be quite dangerous. A -57% crash would wipe out my taxable account! This is very likely to happen within the next 2 decades.

So should I use leverage in such a situation at all?
I personally don't consider my tax-advantaged space for purposes of leverage since I can't move money between each other. So my overall leverage is a little lower than my ideal leverage target. So be it.
whtmyid99 wrote: Tue Aug 04, 2020 1:19 am Great thread and thank you all for sharing your research into this topic.

For the folks who are using IB to implement this strategy, I am assuming you are either meeting the monthly $10 minimum commission on your IB Pro account or paying the difference to IB.

Is this $120 per year minimum commission considered into your margin rate calculation? The fact that you are paying extra $120 per year to get a better margin rate using pro account, tilt the scale towards using options (with LITE account)?
IBKR doesn't charge the $10 monthly fee at all if your account is larger than $100k. That's the case for me so i don't worry about this.
"... 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 whtmyid99 »

Steve Reading wrote: Tue Aug 04, 2020 8:17 amIBKR doesn't charge the $10 monthly fee at all if your account is larger than $100k. That's the case for me so i don't worry about this.
Awesome. Didn’t know this. Thanks
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Re: Lifecycle Investing - Leveraging when young

Post by Count of Notre Dame »

Uncorrelated wrote: Tue Aug 04, 2020 2:54 am
Count of Notre Dame wrote: Mon Aug 03, 2020 11:14 am
What I was thinking of doing is always buying in with new purchases at 2x, but otherwise letting the portfolio float unless I reach a level that could trigger a margin call in which I would use the lines of credit as a cash influx to avoid that. The monthly cash influxes would be pushing the portfolio always to 50% equity.
There is no good reason to treat "new" money different from old money. Don't "float" your allocation. If your max leverage is 2x, then you should never go above 2x leverage.

Misunderstanding this may result in the loss of your entire brokerage account, that's what happened to Market Timer. Ayres and Nalebuff went through the trouble of calculating what the best approach is, I suggest you follow it to the letter.
That makes sense. So would the strategy be as the market dips and my equity % is lower, I buy more shares? As the market increases, do I necessarily have to sell to maintain the 2x leverage? Is that what the monthly rebalancing means in portfolio visualizer? There seems to be a dramatic difference in returns when I select monthly rebalancing vs. when I do not.
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Re: Lifecycle Investing - Leveraging when young

Post by redstar »

Steve Reading wrote: Tue Aug 04, 2020 8:17 am
Quick question, are you using the normal Margin account at IB or their Portfolio Margin account? It seems like if you are operating under 2x leverage then the normal account should be fine, right?
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Re: Lifecycle Investing - Leveraging when young

Post by Mickelous »

Stef wrote: Tue Aug 04, 2020 12:47 am So I just upgraded my IBKR account to margin and thinking about leveraging as I'm only 29 years old. My issue is that 2/3 of my assets are currently in tax-deferred accounts with no option for leveraging up and the other 1/3 on IBKR.

There is no safe way to approach this. If I want 125% overall stock exposure, I'll need to go for 175% in IBKR which could be quite dangerous. A -57% crash would wipe out my taxable account! This is very likely to happen within the next 2 decades.

So should I use leverage in such a situation at all?
You could use Leveraged ETFs like UPRO / TQQQ/ TMF to get the job done.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

redstar wrote: Tue Aug 04, 2020 2:37 pm
Steve Reading wrote: Tue Aug 04, 2020 8:17 am
Quick question, are you using the normal Margin account at IB or their Portfolio Margin account? It seems like if you are operating under 2x leverage then the normal account should be fine, right?
Just the normal margin. Portfolio Margin allows more leverage (less equity required) but it's variable and dependent on many complicated factors so just beware if you go that route.
"... 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 Steve Reading »

Steve Reading wrote: Fri Mar 01, 2019 12:11 am August 2020
Total Stock Exposure = 540k
Effective Debt = 300k
Equity in the exposure = 241k
Leverage (@ IBKR) = 1.5
Figured I'd give an update. I'll just do these twice a year, there's really nothing exciting about them. Just slowly saving and going through the lifecycle.
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Re: Lifecycle Investing - Leveraging when young

Post by Impatience »

Stef wrote: Tue Aug 04, 2020 12:47 am So I just upgraded my IBKR account to margin and thinking about leveraging as I'm only 29 years old. My issue is that 2/3 of my assets are currently in tax-deferred accounts with no option for leveraging up and the other 1/3 on IBKR.

There is no safe way to approach this. If I want 125% overall stock exposure, I'll need to go for 175% in IBKR which could be quite dangerous. A -57% crash would wipe out my taxable account! This is very likely to happen within the next 2 decades.

So should I use leverage in such a situation at all?
Why 125%? Or 175%? You’ve never even used leverage. It seems like everyone immediately leaps to using 20% or 25% leverage and it’s NOT a smart move if you’re doing so on margin.

First of all I’m pretty sure you couldn’t go to 175% exposure (using margin) as Reg T margin is 50% overnight. Even at 150% you would be margin called much sooner than a -57% crash. I’m not sure how you’re getting these numbers.

I recommend you start with 5% leverage on your taxable account. 5% leverage compounded year over year will have a big impact on your gains and you almost certainly won’t get wiped out. It will also give you an opportunity to learn your way around the mechanics and terminology of margin and see how your account reacts to changes in the market.

Crawl before you walk.
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Re: Lifecycle Investing - Leveraging when young

Post by Count of Notre Dame »

Impatience wrote: Tue Aug 04, 2020 9:21 pm
Stef wrote: Tue Aug 04, 2020 12:47 am So I just upgraded my IBKR account to margin and thinking about leveraging as I'm only 29 years old. My issue is that 2/3 of my assets are currently in tax-deferred accounts with no option for leveraging up and the other 1/3 on IBKR.

There is no safe way to approach this. If I want 125% overall stock exposure, I'll need to go for 175% in IBKR which could be quite dangerous. A -57% crash would wipe out my taxable account! This is very likely to happen within the next 2 decades.

So should I use leverage in such a situation at all?
Why 125%? Or 175%? You’ve never even used leverage. It seems like everyone immediately leaps to using 20% or 25% leverage and it’s NOT a smart move if you’re doing so on margin.

First of all I’m pretty sure you couldn’t go to 175% exposure (using margin) as Reg T margin is 50% overnight. Even at 150% you would be margin called much sooner than a -57% crash. I’m not sure how you’re getting these numbers.

I recommend you start with 5% leverage on your taxable account. 5% leverage compounded year over year will have a big impact on your gains and you almost certainly won’t get wiped out. It will also give you an opportunity to learn your way around the mechanics and terminology of margin and see how your account reacts to changes in the market.

Crawl before you walk.
Agree with your sentiment but horribly confused by the percentages. Didn't he just mean 1.25x 1.75x without the percentage signs? I'm considering going 2x which would translate to 50%?
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Re: Lifecycle Investing - Leveraging when young

Post by sfmurph »

Count of Notre Dame wrote: Tue Aug 04, 2020 10:02 pm
Impatience wrote: Tue Aug 04, 2020 9:21 pm
Stef wrote: Tue Aug 04, 2020 12:47 am So I just upgraded my IBKR account to margin and thinking about leveraging as I'm only 29 years old. My issue is that 2/3 of my assets are currently in tax-deferred accounts with no option for leveraging up and the other 1/3 on IBKR.

There is no safe way to approach this. If I want 125% overall stock exposure, I'll need to go for 175% in IBKR which could be quite dangerous. A -57% crash would wipe out my taxable account! This is very likely to happen within the next 2 decades.

So should I use leverage in such a situation at all?
Why 125%? Or 175%? You’ve never even used leverage. It seems like everyone immediately leaps to using 20% or 25% leverage and it’s NOT a smart move if you’re doing so on margin.

First of all I’m pretty sure you couldn’t go to 175% exposure (using margin) as Reg T margin is 50% overnight. Even at 150% you would be margin called much sooner than a -57% crash. I’m not sure how you’re getting these numbers.

I recommend you start with 5% leverage on your taxable account. 5% leverage compounded year over year will have a big impact on your gains and you almost certainly won’t get wiped out. It will also give you an opportunity to learn your way around the mechanics and terminology of margin and see how your account reacts to changes in the market.

Crawl before you walk.
Agree with your sentiment but horribly confused by the percentages. Didn't he just mean 1.25x 1.75x without the percentage signs? I'm considering going 2x which would translate to 50%?
Yes, Impatience has something confused. It's like how a 20% down payment means you are 5x leveraged. So to get 1.25x, you need 1/1.25, or 80% "down."

However, using the leveraged ETFs is safer and cheaper. The ER is about 1% vs 3+% for a margin loan, and you can't get margin called for holding UPRO.

In Stef's case, getting to 130% stock and 0% bonds with the account restrictions called out, and given $100,000 in total assets:

In tax-deferred:
VOO: $66,000

In taxable:
VOO: $19,000
UPRO: $15,000

So that would be $85,000 in VOO and $15,000 in UPRO. That's 3x leveraged, so it "counts" as $45,000. Adding that to the total VOO holdings "counts" as $130,000, so 1.3x, with an "excess ER" of 0.89 on the $15,000 for $135. That would compare to a margin loan on $30,000 at 2.6% which would cost $780.
Costs matter ;)
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Re: Lifecycle Investing - Leveraging when young

Post by RayKeynes »

sfmurph wrote: Tue Aug 04, 2020 11:40 pm
Count of Notre Dame wrote: Tue Aug 04, 2020 10:02 pm
Impatience wrote: Tue Aug 04, 2020 9:21 pm
Stef wrote: Tue Aug 04, 2020 12:47 am So I just upgraded my IBKR account to margin and thinking about leveraging as I'm only 29 years old. My issue is that 2/3 of my assets are currently in tax-deferred accounts with no option for leveraging up and the other 1/3 on IBKR.

There is no safe way to approach this. If I want 125% overall stock exposure, I'll need to go for 175% in IBKR which could be quite dangerous. A -57% crash would wipe out my taxable account! This is very likely to happen within the next 2 decades.

So should I use leverage in such a situation at all?
Why 125%? Or 175%? You’ve never even used leverage. It seems like everyone immediately leaps to using 20% or 25% leverage and it’s NOT a smart move if you’re doing so on margin.

First of all I’m pretty sure you couldn’t go to 175% exposure (using margin) as Reg T margin is 50% overnight. Even at 150% you would be margin called much sooner than a -57% crash. I’m not sure how you’re getting these numbers.

I recommend you start with 5% leverage on your taxable account. 5% leverage compounded year over year will have a big impact on your gains and you almost certainly won’t get wiped out. It will also give you an opportunity to learn your way around the mechanics and terminology of margin and see how your account reacts to changes in the market.

Crawl before you walk.
Agree with your sentiment but horribly confused by the percentages. Didn't he just mean 1.25x 1.75x without the percentage signs? I'm considering going 2x which would translate to 50%?
That would compare to a margin loan on $30,000 at 2.6% which would cost $780.
Costs matter ;)
IBKR does currently charge 1.6% on a yearly Basis on USD loans ;)
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Re: Lifecycle Investing - Leveraging when young

Post by Stef »

sfmurph wrote: Tue Aug 04, 2020 11:40 pm Yes, Impatience has something confused. It's like how a 20% down payment means you are 5x leveraged. So to get 1.25x, you need 1/1.25, or 80% "down."

However, using the leveraged ETFs is safer and cheaper. The ER is about 1% vs 3+% for a margin loan, and you can't get margin called for holding UPRO.

In Stef's case, getting to 130% stock and 0% bonds with the account restrictions called out, and given $100,000 in total assets:

In tax-deferred:
VOO: $66,000

In taxable:
VOO: $19,000
UPRO: $15,000

So that would be $85,000 in VOO and $15,000 in UPRO. That's 3x leveraged, so it "counts" as $45,000. Adding that to the total VOO holdings "counts" as $130,000, so 1.3x, with an "excess ER" of 0.89 on the $15,000 for $135. That would compare to a margin loan on $30,000 at 2.6% which would cost $780.
Costs matter ;)
You are right, that's a great idea and you're not risking a margin call. Will look into it, thanks.
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Re: Lifecycle Investing - Leveraging when young

Post by Uncorrelated »

Count of Notre Dame wrote: Tue Aug 04, 2020 9:54 am
Uncorrelated wrote: Tue Aug 04, 2020 2:54 am
Count of Notre Dame wrote: Mon Aug 03, 2020 11:14 am
What I was thinking of doing is always buying in with new purchases at 2x, but otherwise letting the portfolio float unless I reach a level that could trigger a margin call in which I would use the lines of credit as a cash influx to avoid that. The monthly cash influxes would be pushing the portfolio always to 50% equity.
There is no good reason to treat "new" money different from old money. Don't "float" your allocation. If your max leverage is 2x, then you should never go above 2x leverage.

Misunderstanding this may result in the loss of your entire brokerage account, that's what happened to Market Timer. Ayres and Nalebuff went through the trouble of calculating what the best approach is, I suggest you follow it to the letter.
That makes sense. So would the strategy be as the market dips and my equity % is lower, I buy more shares? As the market increases, do I necessarily have to sell to maintain the 2x leverage? Is that what the monthly rebalancing means in portfolio visualizer? There seems to be a dramatic difference in returns when I select monthly rebalancing vs. when I do not.
Suppose that you have $100k in your brokerage account. Your desired leverage is 2x, so you purchase $200k in equity exposure.

The market drops 25%. Your equity exposure is now $150k and your account is worth $50k. Your effective leverage is 3x, you sell some equity exposure to put the leverage back at 2x.

The market increases 25%. Your equity exposure is now $250k and your account is worth $150k. Your effective leverage is 1.66x, you purchase some equity exposure to put the leverage back at 2x.

If something happens, you rebalance back to 2x leverage. The only hard part is figuring out which rebalancing frequency optimizes tax and transaction costs.
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Re: Lifecycle Investing - Leveraging when young

Post by Stef »

Uncorrelated wrote: Wed Aug 05, 2020 3:17 am Suppose that you have $100k in your brokerage account. Your desired leverage is 2x, so you purchase $200k in equity exposure.

The market drops 25%. Your equity exposure is now $150k and your account is worth $50k. Your effective leverage is 3x, you sell some equity exposure to put the leverage back at 2x.
What if the market drops 51%? Wiped out.
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Re: Lifecycle Investing - Leveraging when young

Post by Uncorrelated »

Stef wrote: Wed Aug 05, 2020 5:31 am
Uncorrelated wrote: Wed Aug 05, 2020 3:17 am Suppose that you have $100k in your brokerage account. Your desired leverage is 2x, so you purchase $200k in equity exposure.

The market drops 25%. Your equity exposure is now $150k and your account is worth $50k. Your effective leverage is 3x, you sell some equity exposure to put the leverage back at 2x.
What if the market drops 51%? Wiped out.
The market doesn't drop 51% in one day. In theory, with the current circuit breakers and if you rebalance every day, it is impossible to get wiped out.

But if you don't rebalance often enough, then you can indeed get wiped out. That's a calculated risk. If you don't want to take that risk, use less leverage.
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Re: Lifecycle Investing - Leveraging when young

Post by sfmurph »

RayKeynes wrote: Wed Aug 05, 2020 12:21 am IBKR does currently charge 1.6% on a yearly Basis on USD loans ;)
At the "IBKR Pro" level, yes. At the "Lite" level, it's 2.6%. Both are higher than the ERs in the 3x ETFs, but you do get more flexibility with a margin loan. There's no 3x version of VT, for example.
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Re: Lifecycle Investing - Leveraging when young

Post by Count of Notre Dame »

Uncorrelated wrote: Wed Aug 05, 2020 3:17 am
Count of Notre Dame wrote: Tue Aug 04, 2020 9:54 am
Uncorrelated wrote: Tue Aug 04, 2020 2:54 am
Count of Notre Dame wrote: Mon Aug 03, 2020 11:14 am
What I was thinking of doing is always buying in with new purchases at 2x, but otherwise letting the portfolio float unless I reach a level that could trigger a margin call in which I would use the lines of credit as a cash influx to avoid that. The monthly cash influxes would be pushing the portfolio always to 50% equity.
There is no good reason to treat "new" money different from old money. Don't "float" your allocation. If your max leverage is 2x, then you should never go above 2x leverage.

Misunderstanding this may result in the loss of your entire brokerage account, that's what happened to Market Timer. Ayres and Nalebuff went through the trouble of calculating what the best approach is, I suggest you follow it to the letter.
That makes sense. So would the strategy be as the market dips and my equity % is lower, I buy more shares? As the market increases, do I necessarily have to sell to maintain the 2x leverage? Is that what the monthly rebalancing means in portfolio visualizer? There seems to be a dramatic difference in returns when I select monthly rebalancing vs. when I do not.
Suppose that you have $100k in your brokerage account. Your desired leverage is 2x, so you purchase $200k in equity exposure.

The market drops 25%. Your equity exposure is now $150k and your account is worth $50k. Your effective leverage is 3x, you sell some equity exposure to put the leverage back at 2x.

The market increases 25%. Your equity exposure is now $250k and your account is worth $150k. Your effective leverage is 1.66x, you purchase some equity exposure to put the leverage back at 2x.

If something happens, you rebalance back to 2x leverage. The only hard part is figuring out which rebalancing frequency optimizes tax and transaction costs.
Why by definition would be buying high, selling low, hoping the leverage overwhelms that effect? I would really hope to avoid maintaining constant leverage, but it seems without rebalancing the results compared to the index aren't as convincing.
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Re: Lifecycle Investing - Leveraging when young

Post by Uncorrelated »

Count of Notre Dame wrote: Wed Aug 05, 2020 11:16 am
Uncorrelated wrote: Wed Aug 05, 2020 3:17 am
Count of Notre Dame wrote: Tue Aug 04, 2020 9:54 am
Uncorrelated wrote: Tue Aug 04, 2020 2:54 am
Count of Notre Dame wrote: Mon Aug 03, 2020 11:14 am
What I was thinking of doing is always buying in with new purchases at 2x, but otherwise letting the portfolio float unless I reach a level that could trigger a margin call in which I would use the lines of credit as a cash influx to avoid that. The monthly cash influxes would be pushing the portfolio always to 50% equity.
There is no good reason to treat "new" money different from old money. Don't "float" your allocation. If your max leverage is 2x, then you should never go above 2x leverage.

Misunderstanding this may result in the loss of your entire brokerage account, that's what happened to Market Timer. Ayres and Nalebuff went through the trouble of calculating what the best approach is, I suggest you follow it to the letter.
That makes sense. So would the strategy be as the market dips and my equity % is lower, I buy more shares? As the market increases, do I necessarily have to sell to maintain the 2x leverage? Is that what the monthly rebalancing means in portfolio visualizer? There seems to be a dramatic difference in returns when I select monthly rebalancing vs. when I do not.
Suppose that you have $100k in your brokerage account. Your desired leverage is 2x, so you purchase $200k in equity exposure.

The market drops 25%. Your equity exposure is now $150k and your account is worth $50k. Your effective leverage is 3x, you sell some equity exposure to put the leverage back at 2x.

The market increases 25%. Your equity exposure is now $250k and your account is worth $150k. Your effective leverage is 1.66x, you purchase some equity exposure to put the leverage back at 2x.

If something happens, you rebalance back to 2x leverage. The only hard part is figuring out which rebalancing frequency optimizes tax and transaction costs.
Why by definition would be buying high, selling low, hoping the leverage overwhelms that effect? I would really hope to avoid maintaining constant leverage, but it seems without rebalancing the results compared to the index aren't as convincing.
By definition in order to sell "low" more often than you sell "high", you must know when whether the price is going to rise or fall in the near future. But you don't know that. If you did knew that, you would be a day trader not a passive index investor.

If I try your second backtest without contributions, the portfolio goes to zero in 2009. That is the price of not rebalancing. Coincidentally that is exactly what happened to Market Timer.

Using portfoliovisualizer to answer these questions is a terrible idea. Portfoliovisualizer tells you what has happened in the past, but you want to know which method has the best probability distribution of outcomes. Lifecycle investing tells you what method is the best under the specific modeling assumptions they have used. If you disagree with those modeling assumptions, don't use portfolio visualizer, build a better model. (or more probable, spend 5-10 years to become an expert in optimization, and then build a better model).
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Re: Lifecycle Investing - Leveraging when young

Post by zhuyz05 »

Steve Reading wrote: Tue Aug 04, 2020 7:14 pm
redstar wrote: Tue Aug 04, 2020 2:37 pm
Steve Reading wrote: Tue Aug 04, 2020 8:17 am
Quick question, are you using the normal Margin account at IB or their Portfolio Margin account? It seems like if you are operating under 2x leverage then the normal account should be fine, right?
Just the normal margin. Portfolio Margin allows more leverage (less equity required) but it's variable and dependent on many complicated factors so just beware if you go that route.
Thank you, OP, for sharing the idea of life cycle investing. It really makes sense to me. I have a quick question: for small leverages (e.g., 1 ~ 1.5), would it better to just go with margin account at IB or M1 if the IRA space is too small? Currently I only have 50K in Roth and 30K in traditional. So it seems hard to achieve much leverage there. I have about 200K in taxable. So do you think that the best way to go would be to transfer the taxable to IB and leverage it up to say 1.5? (I am only 200K away from my desired equity allocation).
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

zhuyz05 wrote: Sun Aug 09, 2020 9:44 pm Thank you, OP, for sharing the idea of life cycle investing. It really makes sense to me. I have a quick question: for small leverages (e.g., 1 ~ 1.5), would it better to just go with margin account at IB or M1 if the IRA space is too small?
I don't think you can trade on margin with an IRA. You can use futures, options and Leveraged ETFs though.
zhuyz05 wrote: Sun Aug 09, 2020 9:44 pm I have about 200K in taxable. So do you think that the best way to go would be to transfer the taxable to IB and leverage it up to say 1.5? (I am only 200K away from my desired equity allocation).
I want to be very wary of recommending things to folks. I want this thread to read as "hey, this is the research I've done on the subject, here are the options I had available, here's what I chose and why". I also want the thread to be living proof that one can use these strategies properly, prudently and effectively.

So the following is NOT a recommendation as to what you should do. I will simply say what I might do given your circumstances. Reader beware:

If I had 80k in tax-protected space, 200k in taxable and needed another 200k in exposure, I probably would utilize futures on the tax-advantaged space (~2x leverage) and then would complete it with a margin loan of 120K in the taxable at IBKR (1.6x leverage). This would let me proceed to stage 2 (using cash flows to deleverage). Futures are a cheaper form of borrowing if taxes are not a concern, which is why I would prioritize leverage in retirement accounts. 2x leverage is a bit outside of my personal comfort zone and hasn't been much better than 1.5x historically but I probably would just do it if I was so close to reaching Phase 2.

I could also consider just using 2x leverage on IBKR taxable and none in the retirement accounts. That would also get me to the additional 200k exposure. It's a little more expensive but it is simply easier to manage one leveraged account than 3 of them so it might be something I'd do from a simplification standpoint.

Using less leverage than that is totally acceptable as well of course.
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Re: Lifecycle Investing - Leveraging when young

Post by RayKeynes »

I am interested in getting feedback to my leverage strategy explained below:

I'd like to present my current leverage strategy that I'm driving:
Image

Simple Moving Average as Leverage Safety Line
- As you can see, my portfolio does currenty have an Asset Leverage of around 128.5% and a Return Leverage of around 160%. This leads to a total leverage ratio of something around 200%.
- The Asset Leverage is achieved by using debt from Interactive Brokers 1.6%
- Further, Return Leverage is achieved by using both SSO and UPRO. You might now ask yourself why I am using both SSO and UPRO to generate Leverage. The reason is the following.
- I have implemented the Simple Moving Average as a tool to decide when to cancel Asset Leverage. For example, if GSPC (S&P 500) falls below SMA-230 (which sits currently around 3045, thus around 8.5% to fall), I will sell my whole UPRO position. I will, however, still hold my SSO position. This will lead to 0 Asset Leverage (cancellation) and a Return Leverage which is significantly lower. My other stand portfolio (1X, which consists of VEA, VWO, VTI and VIOV) is not affected by the Simple Moving Average.
- If GSPC does again rise above SMA-230, I will take on Asset Leverage again and invest all additional funds into UPRO again.
- As you can see in the excel screenshot, I've calculated the potential downfall to SMA and how much of the loss attributes to the use of Leverage.
- I am constributing around 3'600$ on a monthly basis in Swiss francs. The nice side-effect of taking on Asset Leverage in USD is that, I am hedging that part of the portfolio (around 25%, the current asset leverage) for the further downside potential of the USD. Thus - my portfolio is 25%-hedged thanks to the debt in USD, which I will pay back on a monthly basis in Swiss francs.
- My plan is to slowly lower the Asset Leverage as with greater portfolio value - the absolute amount of Leverage gets greater and greater when using consistent percentages. For a portfolio of USD 1 million and an asset leverage of 125% - I'd need debt capital of 250'00$ -> thus a significantly greater risk as it will take me 5 years to pay back that loan. However, when portfolio value is only 100'000$, I do only need 25'000$ debt to generate the necessary leverage - thus I am able to pay it back in half a year - reducing the risk of a margin call significantly.
- I am still unsure what Asset Leverage and Return Leverage I should drive into the future. Maybe you guys can help me out finding a "sweet spot".
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Re: Lifecycle Investing - Leveraging when young

Post by Uncorrelated »

RayKeynes wrote: Mon Aug 10, 2020 5:13 am I am interested in getting feedback to my leverage strategy explained below:
That strategy has nothing to do with lifecycle investing.

If you want to incorporate lifecycle investing in your strategy, you can calculate the samuelson share as usual:

samuelson share = r / (γ * σ ^ 2)

r = expected arithmetic return of your strategy minus the risk free rate.
σ = expected standard deviation of your strategy
γ = coefficient of relative risk aversion. For example, 3.

The samuelson share is the proportion of lifetime wealth invested in your strategy.
zhuyz05
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Re: Lifecycle Investing - Leveraging when young

Post by zhuyz05 »

Steve Reading wrote: Sun Aug 09, 2020 10:37 pm
zhuyz05 wrote: Sun Aug 09, 2020 9:44 pm Thank you, OP, for sharing the idea of life cycle investing. It really makes sense to me. I have a quick question: for small leverages (e.g., 1 ~ 1.5), would it better to just go with margin account at IB or M1 if the IRA space is too small?
I don't think you can trade on margin with an IRA. You can use futures, options and Leveraged ETFs though.
zhuyz05 wrote: Sun Aug 09, 2020 9:44 pm I have about 200K in taxable. So do you think that the best way to go would be to transfer the taxable to IB and leverage it up to say 1.5? (I am only 200K away from my desired equity allocation).
I want to be very wary of recommending things to folks. I want this thread to read as "hey, this is the research I've done on the subject, here are the options I had available, here's what I chose and why". I also want the thread to be living proof that one can use these strategies properly, prudently and effectively.

So the following is NOT a recommendation as to what you should do. I will simply say what I might do given your circumstances. Reader beware:

If I had 80k in tax-protected space, 200k in taxable and needed another 200k in exposure, I probably would utilize futures on the tax-advantaged space (~2x leverage) and then would complete it with a margin loan of 120K in the taxable at IBKR (1.6x leverage). This would let me proceed to stage 2 (using cash flows to deleverage). Futures are a cheaper form of borrowing if taxes are not a concern, which is why I would prioritize leverage in retirement accounts. 2x leverage is a bit outside of my personal comfort zone and hasn't been much better than 1.5x historically but I probably would just do it if I was so close to reaching Phase 2.

I could also consider just using 2x leverage on IBKR taxable and none in the retirement accounts. That would also get me to the additional 200k exposure. It's a little more expensive but it is simply easier to manage one leveraged account than 3 of them so it might be something I'd do from a simplification standpoint.

Using less leverage than that is totally acceptable as well of course.

Thank you. I appreciate your suggestions.
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Re: Lifecycle Investing - Leveraging when young

Post by RayKeynes »

Uncorrelated wrote: Mon Aug 10, 2020 6:23 am
RayKeynes wrote: Mon Aug 10, 2020 5:13 am I am interested in getting feedback to my leverage strategy explained below:
That strategy has nothing to do with lifecycle investing.

If you want to incorporate lifecycle investing in your strategy, you can calculate the samuelson share as usual:

samuelson share = r / (γ * σ ^ 2)
To my extent, I feel like my strategy is another form of "lifecycle investing" as I am lowering asset leverage when being closer to retirement. I am doing it just without the "samuelson share" and more risk-based by taking into consideration SMA-230 as a safety line and margin requirements from by broker.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

redstar wrote: Tue Aug 04, 2020 2:37 pm
Steve Reading wrote: Tue Aug 04, 2020 8:17 am
Quick question, are you using the normal Margin account at IB or their Portfolio Margin account? It seems like if you are operating under 2x leverage then the normal account should be fine, right?
BTW in case you wanted to know: I checked my account and my T Reg margin account requires 25% maintenance margin. If it were portfolio margin, it would only require 19.6%. That gives you about a 3-4% extra "buffer" in a market decline before being margin called, depending on your starting leverage.

So not really a whole lot gained from PM in my portfolio but since it's variable, maybe it could increase when you least expect it. YMMV.
"... 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 Steve Reading »

RayKeynes wrote: Mon Aug 10, 2020 5:13 am I am interested in getting feedback to my leverage strategy explained below:

I'd like to present my current leverage strategy that I'm driving:
Image

Simple Moving Average as Leverage Safety Line
- As you can see, my portfolio does currenty have an Asset Leverage of around 128.5% and a Return Leverage of around 160%. This leads to a total leverage ratio of something around 200%.
- The Asset Leverage is achieved by using debt from Interactive Brokers 1.6%
- Further, Return Leverage is achieved by using both SSO and UPRO. You might now ask yourself why I am using both SSO and UPRO to generate Leverage. The reason is the following.
- I have implemented the Simple Moving Average as a tool to decide when to cancel Asset Leverage. For example, if GSPC (S&P 500) falls below SMA-230 (which sits currently around 3045, thus around 8.5% to fall), I will sell my whole UPRO position. I will, however, still hold my SSO position. This will lead to 0 Asset Leverage (cancellation) and a Return Leverage which is significantly lower. My other stand portfolio (1X, which consists of VEA, VWO, VTI and VIOV) is not affected by the Simple Moving Average.
- If GSPC does again rise above SMA-230, I will take on Asset Leverage again and invest all additional funds into UPRO again.
- As you can see in the excel screenshot, I've calculated the potential downfall to SMA and how much of the loss attributes to the use of Leverage.
- I am constributing around 3'600$ on a monthly basis in Swiss francs. The nice side-effect of taking on Asset Leverage in USD is that, I am hedging that part of the portfolio (around 25%, the current asset leverage) for the further downside potential of the USD. Thus - my portfolio is 25%-hedged thanks to the debt in USD, which I will pay back on a monthly basis in Swiss francs.
- My plan is to slowly lower the Asset Leverage as with greater portfolio value - the absolute amount of Leverage gets greater and greater when using consistent percentages. For a portfolio of USD 1 million and an asset leverage of 125% - I'd need debt capital of 250'00$ -> thus a significantly greater risk as it will take me 5 years to pay back that loan. However, when portfolio value is only 100'000$, I do only need 25'000$ debt to generate the necessary leverage - thus I am able to pay it back in half a year - reducing the risk of a margin call significantly.
- I am still unsure what Asset Leverage and Return Leverage I should drive into the future. Maybe you guys can help me out finding a "sweet spot".
I don't use technical analysis with stocks so I have little advice here. However, when reading some papers this past week, I encountered this one:
https://papers.ssrn.com/sol3/papers.cfm ... id=2741701

Seems like the kind of stuff you were asking about. Maybe you've seen it before but if not, maybe it's worth a read.
"... 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 cos »

How does the interest you pay on your loan play into your taxes? Is it tax-deductible given that you're investing the entire sum?

I managed to get an unsecured self-amortizing personal loan from an online bank at a rate that just barely beats expected returns. Although less than the probability of coming out positive, the probability of incurring a loss is still fairly high so I'd like to take what I can get.

I'm selling a constant dollar amount every month to pay down the loan, but this often triggers short-term capital gains. Does the interest on the loan offset these gains via tax deductions? Or am I screwing myself tax-wise?
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

cos wrote: Mon Aug 17, 2020 11:53 am How does the interest you pay on your loan play into your taxes? Is it tax-deductible given that you're investing the entire sum?

I managed to get an unsecured self-amortizing personal loan from an online bank at a rate that just barely beats expected returns. Although less than the probability of coming out positive, the probability of incurring a loss is still fairly high so I'd like to take what I can get.

I'm selling a constant dollar amount every month to pay down the loan, but this often triggers short-term capital gains. Does the interest on the loan offset these gains via tax deductions? Or am I screwing myself tax-wise?
Margin interest can be used to offset interest from bonds, so if you itemize and have bonds, the margin interest is effectively tax-deductible. I don't itemize so doesn't apply to me right now.

I don't know about unsecured loans but I don't think margin interest can be used to offset capital gains (short or long term).
"... 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 Steve Reading »

Uncorrelated wrote: Fri Jul 31, 2020 1:58 pm .
Hey man how's everything?

I read through this paper that I found very interesting. It's about how the utility gained over the lifecycle is quite high for investors that can borrow like Merton's problem (unconstrained, at the RFR), which we both know already. But once constraints are placed, such as collaterized borrowing slightly above RFR (like margin and futures), or unsecured borrowing at 6-8% above RFR, the utility gained is rather small.

https://www.nber.org/papers/w12309.pdf

It takes a bit of time to get through and I'll admit I don't necessarily understand everything but it offers a slightly different perspective than A+N since it seems to look at things more from a "utility perspective" instead of just "returns vs final wealth uncertainty".

If at some point you do happen to read it, I would look forward to your thoughts, applicability, etc.
"... 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 ScubaHogg »

OP,

This thread has grown to 21 pages, so I apologize if this is answered elsewhere. Would you mind posting a rough snapshot of how you are currently executing your leverage (Options at IB, Futures at IB, maybe mixed with the Excellent Adventure?) and how much leverage you are currently holding?

Thanks!
“Unexpected Returns dominate the Expected Returns” - Ken French
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

ScubaHogg wrote: Thu Aug 27, 2020 12:11 pm OP,

This thread has grown to 21 pages, so I apologize if this is answered elsewhere. Would you mind posting a rough snapshot of how you are currently executing your leverage (Options at IB, Futures at IB, maybe mixed with the Excellent Adventure?) and how much leverage you are currently holding?

Thanks!
My retirement accounts are not leveraged. They're all stock ETFs.
My taxable account is leveraged 2:1 at the moment. It's all invested in stock ETFs as well. No futures.
I achieved this leverage via margin at IB*. I don't use bonds/gold/etc at all. I don't use leveraged ETFs and I don't use the Excellent Adventure.

*I also sold a few SPX option box spreads short as a way to get a more favorable borrowing rate than IB's margin rate. This doesn't change the above mechanics, it just makes it so instead of paying 1.2-1.6% on my cash debit, I pay closer to 0.5%. That's all.
"... 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 ScubaHogg »

Steve Reading wrote: Thu Aug 27, 2020 2:29 pm
My retirement accounts are not leveraged. They're all stock ETFs.
Thanks. Any reason you are running the leverage solely through your taxable accounts and not through your retirement accounts?
“Unexpected Returns dominate the Expected Returns” - Ken French
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

ScubaHogg wrote: Thu Aug 27, 2020 3:11 pm
Steve Reading wrote: Thu Aug 27, 2020 2:29 pm
My retirement accounts are not leveraged. They're all stock ETFs.
Thanks. Any reason you are running the leverage solely through your taxable accounts and not through your retirement accounts?
They're too small to actually move the needle. If markets drop enough, I would consider 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
zhuyz05
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Re: Lifecycle Investing - Leveraging when young

Post by zhuyz05 »

Steve Reading wrote: Thu Aug 27, 2020 2:29 pm
ScubaHogg wrote: Thu Aug 27, 2020 12:11 pm OP,

This thread has grown to 21 pages, so I apologize if this is answered elsewhere. Would you mind posting a rough snapshot of how you are currently executing your leverage (Options at IB, Futures at IB, maybe mixed with the Excellent Adventure?) and how much leverage you are currently holding?

Thanks!
My retirement accounts are not leveraged. They're all stock ETFs.
My taxable account is leveraged 2:1 at the moment. It's all invested in stock ETFs as well. No futures.
I achieved this leverage via margin at IB*. I don't use bonds/gold/etc at all. I don't use leveraged ETFs and I don't use the Excellent Adventure.

*I also sold a few SPX option box spreads short as a way to get a more favorable borrowing rate than IB's margin rate. This doesn't change the above mechanics, it just makes it so instead of paying 1.2-1.6% on my cash debit, I pay closer to 0.5%. That's all.
Do you mind sharing how to do the box spreads? Thanks!
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

zhuyz05 wrote: Thu Aug 27, 2020 4:14 pm
Steve Reading wrote: Thu Aug 27, 2020 2:29 pm
ScubaHogg wrote: Thu Aug 27, 2020 12:11 pm OP,

This thread has grown to 21 pages, so I apologize if this is answered elsewhere. Would you mind posting a rough snapshot of how you are currently executing your leverage (Options at IB, Futures at IB, maybe mixed with the Excellent Adventure?) and how much leverage you are currently holding?

Thanks!
My retirement accounts are not leveraged. They're all stock ETFs.
My taxable account is leveraged 2:1 at the moment. It's all invested in stock ETFs as well. No futures.
I achieved this leverage via margin at IB*. I don't use bonds/gold/etc at all. I don't use leveraged ETFs and I don't use the Excellent Adventure.

*I also sold a few SPX option box spreads short as a way to get a more favorable borrowing rate than IB's margin rate. This doesn't change the above mechanics, it just makes it so instead of paying 1.2-1.6% on my cash debit, I pay closer to 0.5%. That's all.
Do you mind sharing how to do the box spreads? Thanks!
I would say you first read this page (in there, there's a PDF explaining box spreads as well):
https://www.reddit.com/r/options/commen ... 85_margin/

Once I get a chance, I'll make a post detailing the box spreads I did, how I came chose the strike prices, etc. Let me know if the above is unclear. It probably is complicated if you're not too familiar with options.

I wonder if BHs would appreciate a small tutorial :confused
"... 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
zhuyz05
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Re: Lifecycle Investing - Leveraging when young

Post by zhuyz05 »

Steve Reading wrote: Thu Aug 27, 2020 4:59 pm
zhuyz05 wrote: Thu Aug 27, 2020 4:14 pm
Steve Reading wrote: Thu Aug 27, 2020 2:29 pm
ScubaHogg wrote: Thu Aug 27, 2020 12:11 pm OP,

This thread has grown to 21 pages, so I apologize if this is answered elsewhere. Would you mind posting a rough snapshot of how you are currently executing your leverage (Options at IB, Futures at IB, maybe mixed with the Excellent Adventure?) and how much leverage you are currently holding?

Thanks!
My retirement accounts are not leveraged. They're all stock ETFs.
My taxable account is leveraged 2:1 at the moment. It's all invested in stock ETFs as well. No futures.
I achieved this leverage via margin at IB*. I don't use bonds/gold/etc at all. I don't use leveraged ETFs and I don't use the Excellent Adventure.

*I also sold a few SPX option box spreads short as a way to get a more favorable borrowing rate than IB's margin rate. This doesn't change the above mechanics, it just makes it so instead of paying 1.2-1.6% on my cash debit, I pay closer to 0.5%. That's all.
Do you mind sharing how to do the box spreads? Thanks!
I would say you first read this page (in there, there's a PDF explaining box spreads as well):
https://www.reddit.com/r/options/commen ... 85_margin/

Once I get a chance, I'll make a post detailing the box spreads I did, how I came chose the strike prices, etc. Let me know if the above is unclear. It probably is complicated if you're not too familiar with options.

I wonder if BHs would appreciate a small tutorial :confused
I would definitely appreciate such a tutorial! Did you buy the options also in BK?
zhuyz05
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Re: Lifecycle Investing - Leveraging when young

Post by zhuyz05 »

Steve Reading wrote: Thu Aug 27, 2020 2:29 pm
ScubaHogg wrote: Thu Aug 27, 2020 12:11 pm OP,

This thread has grown to 21 pages, so I apologize if this is answered elsewhere. Would you mind posting a rough snapshot of how you are currently executing your leverage (Options at IB, Futures at IB, maybe mixed with the Excellent Adventure?) and how much leverage you are currently holding?

Thanks!
My retirement accounts are not leveraged. They're all stock ETFs.
My taxable account is leveraged 2:1 at the moment. It's all invested in stock ETFs as well. No futures.
I achieved this leverage via margin at IB*. I don't use bonds/gold/etc at all. I don't use leveraged ETFs and I don't use the Excellent Adventure.

*I also sold a few SPX option box spreads short as a way to get a more favorable borrowing rate than IB's margin rate. This doesn't change the above mechanics, it just makes it so instead of paying 1.2-1.6% on my cash debit, I pay closer to 0.5%. That's all.
I was very lucky to come across your posts at the right time before the recent drop in long-term bond -- I was previously mostly invested in the Excellent Adventure strategy until I saw your threads and switch to life-cycle investing. So, thank you!
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Re: Lifecycle Investing - Leveraging when young

Post by bling »

what are the requirements for being able to trade a synthetic stock option? does the put count as a "naked put" since you don't own the underlying stock, and thus be required to meet strict margin requirements?
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