Lifecycle Investing - Leveraging when young

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ZoomerInvestor
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Re: Lifecycle Investing - Leveraging when young

Post by ZoomerInvestor »

Steve Reading wrote: Mon Nov 16, 2020 8:41 am
I'm still not sure what you mean. I went there and looked up various tickers stock tickers and the MM just said "default". Nothing with 15%. And how did you find out what the MM for SPY was back in March? Thanks.

I agree that's what your "equity margin cushion" is. But the crucial question is "how much do stocks need to drop, to make an equity margin cushion go to 0% and trigger auto-liquidation?". These are NOT the same numbers. In this case, it is -42.8%. As such:

Start with 296,125, borrow 250,271. You have a total of 546,396 in positions, with a MM of 109,125. Note that the MM is exactly 20% of the position size, which is about what I've found in my personal portfolio of index ETFs.

Now if the market dropped -42.8%, your positions would go 546,396 -> 312,538. Your NLV is 312,538-250,271 = 62,267. Your MM would still be 20% of the (62,507). Note that your NLV is basically right at the MM, so liquidation would begin.
The margin calculator here should indicate the initial margin requirements which are usually the same as the MM provided the ticker doesn't have any volatility guards in place i.e. $TSLA or biotech stocks etc. The source for 33% $SPY in March has just been from reading comments/threads on EliteTraders and /r/InteractiveBrokers so nothing I can find easily again.

So in our example we have 546,396 in positions yes, but our MM of 109,125 only applies to the equity portion of the portfolio. The NLV does not include equities bought with margin. We could take this margin loan and cash it out into your bank account and IB would have no idea what is happening with that money, they only care about what your initial (equity portion) of your portfolio does. Lets say we take our 250,271 dollars cashed out into our bank account. In my paper account example we are at 1.85 leverage and our MM is currently 109,303 (~37%) of my equity (not total portfolio) A 42.8% drop would leave us with 169,383, meaning we will not be margin called until our 169,383 drops a further 60,080 aka a ~35% cushion on top of our portfolio even after the 42% drop. As we get a bigger and bigger margin loan, the key number that changes is our Excess Liquidity which is (ELV - MM). You can find the definitions of NLV and ELV here. At no point does either definition include the balance of the margin loan
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

ZoomerInvestor wrote: Mon Nov 16, 2020 1:29 pmSo in our example we have 546,396 in positions yes, but our MM of 109,125 only applies to the equity portion of the portfolio. The NLV does not include equities bought with margin.
The MM is a function of the position size, including leveraged purchases. MM is not a function at all of your equity. In the above example, the MM is 109,125/546,396, or 20%.

If you then bought another 50K of stock on margin, your position size would grow to 596,396. And your MM would become 20% of that, or 119,279. Go ahead, try it out in the paper account.
ZoomerInvestor wrote: Mon Nov 16, 2020 1:29 pm The NLV does not include equities bought with margin. We could take this margin loan and cash it out into your bank account and IB would have no idea what is happening with that money, they only care about what your initial (equity portion) of your portfolio does. Lets say we take our 250,271 dollars cashed out into our bank account. In my paper account example we are at 1.85 leverage and our MM is currently 109,303 (~37%) of my equity (not total portfolio) A 42.8% drop would leave us with 169,383, meaning we will not be margin called until our 169,383 drops a further 60,080 aka a ~35% cushion on top of our portfolio even after the 42% drop.
The above is wrong but I think the easiest way is to ask a series of questions to you. Answer what you think so I can figure out where the inconsistency is:
1) Say you bring in 300K to IBKR. You buy 500K of SPY (now there’s a cash balance of -200K). What is the NLV and what is the MM (approximately) of the account?
2) Now say you bring in 300K to IBKR. You buy 300K of SPY. And then you take a cash outflow to your bank account of 200K (so there’s a cash balance of -200K). What is the NLV and the MM (approximately) of the account?
"... 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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expecting_unexpected
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Re: Lifecycle Investing - Leveraging when young

Post by expecting_unexpected »

rhe wrote: Mon Mar 04, 2019 12:25 am Right, a leveraged ETF is keeping a constant leverage ratio. The problem is that this involves selling into losses as they occur.
Actually, keeping a constant leverage ratio is the key to avoid gambler's ruin. See Ed Thorp's paper on applying Kelly criterion on blackjack.

You can think the market is a blackjack dealer who reveals one card per day. Investing becomes how to size your bet everyday before the market reveals his card.

Another Ed Thorp's insight is the card is not completely random. You should adjust your bets based on the shift of the odds in order to beat the dealer.

If you want to have a career in academia, you cannot shrug off paul samuelson. But, if you want to be a practioner making money in the market, you've got to pay attention to Kelly.
Expecting the unexpected
keith6014
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Re: Lifecycle Investing - Leveraging when young

Post by keith6014 »

bugleheadd wrote: Wed Nov 11, 2020 8:27 pm
kim.gold wrote: Wed Oct 28, 2020 6:44 pm
keith6014 wrote: Tue Oct 27, 2020 6:49 pm
kim.gold wrote: Tue Oct 27, 2020 5:33 pm
keith6014 wrote: Tue Oct 27, 2020 1:52 pm For people utilizing LEAPs (SPX & TLT), how far and close with regard to expiration do you buy, sell them for roll over? I am guessing you don't sell them closer to expiration (3-4 months) . Otherwise, I suspect getting a fill on your limit order will be hard due to liquidity issues?
Buy more than one year far and sell at 6 months to expiration. LEAPs always have low liquidity. Be prepared to deal with a large bid / ask spread. On SPY expects something like 1 to 2%.

You also need to consider the volatility of the LEAPs. A quick / short drop of the underlining comes with a rise of the volatility and increases the price of the option. Not recommended to buy.
I am surprised how submissive the contracts behave. Even after yesterday's big sell off (2%) , I was shocked how little it moved. I still have 15 months for the contract to expire.

At the 6 month phase the liquidity will increase and the spreads will tighten?
The 6 month spread is definitely smaller. Anyway, round trip, you still have more than 1% slippage.
two weeks ago I bought my first spx leaps expiring in two years and now its up 54%. So since it's very illiquid right now, it's best to hold for another year and half?
You may already know this but there are mini spx contracts. They are 1/10 size of SPX. They are made for people like me. :mrgreen:
dont_know_mind
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Re: Lifecycle Investing - Leveraging when young

Post by dont_know_mind »

Hi Steve,
This is an interesting thread.
I have levered world index ex-US with non-callable debt.
The cost of funding is 2% p.a and I am levered around 1.5:1 using a vanguard ETF.
I have fixed rates on the debt for 2 years and the dividend on the index fund is 2.8% so the positive carry is around 0.7% pa.
Currently my savings rate is around 10X the total interest cost per annum.

I looked at the IB option. The interest rate is good but the risk of margin call is too much of a headache.

I started buying in April 2020.
YTD I am up around 15%-20% on the total portfolio or 30% on the equity invested.

I am still thinking about whether I should start debt payoff or keep cash-flowing further purchases.
It would take me around 7 years to pay off the debt at my current savings rate.

If your debt was non-callable, and the investment had a positive carry at current prices, would you still do debt payoff or keep cashflowing ?
My rationale for continuing to cashflow would be that further index fund purchases would insulate me from future falls in dividend as my leverage ratio would reduce anyway if I purchases more ETF. If I cashflow further ETF purchases, the LVR would reduce to 1:1 even if there is no capital appreciation and the dividends would cover the interest cost.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

dont_know_mind wrote: Wed Dec 02, 2020 3:14 am If your debt was non-callable, and the investment had a positive carry at current prices, would you still do debt payoff or keep cashflowing ?
Whether I pay debt off or buy more stocks depends solely on whether I have reached the point where I have my desired allocation to stocks for my present and future savings. For instance, say I want to have 50% stocks, 50% bonds. I have $100K today in savings. And I will save about 200K in the next decade. So I want to invest 50%*(100K+200K) = $150K in stocks today. So I'd leverage my 100K 1.5:1. From then on (assuming the market stays flat), any additional savings would pay debt.

Note how this doesn't depend on what dividends are, or whether debt is callable or not.
"... 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
dont_know_mind
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Re: Lifecycle Investing - Leveraging when young

Post by dont_know_mind »

Steve,
thanks for your thoughts.
Do you take into account valuations in implementing this ?

Say 3 assets that you wish to have target amounts in:
1. International equities - 10 Units
2. Domestic equities - 10 units
3. Bonds - 10 units

In my case, I have equity of 5 units and have filled bucket 1 (bought 10 units) as I thought this was cheaper at the time relative to 2 and 3.
Say I have bought target amount of 1, 10 Units and it has now appreciated to 13 units.

So now I am considering doing debt payoff for 1, cashflow purchases of 2 or keep buying 1 in the hope that it will appreciated further and then sell and rebalance to target amount of 2 at a later date. I would not buy 3 until I have done debt payoff for 1 and 2 as it is above my cost of debt.

Sorry if this is a basic question.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

dont_know_mind wrote: Sun Dec 06, 2020 4:45 am Steve,
thanks for your thoughts.
Do you take into account valuations in implementing this ?

Say 3 assets that you wish to have target amounts in:
1. International equities - 10 Units
2. Domestic equities - 10 units
3. Bonds - 10 units

In my case, I have equity of 5 units and have filled bucket 1 (bought 10 units) as I thought this was cheaper at the time relative to 2 and 3.
Say I have bought target amount of 1, 10 Units and it has now appreciated to 13 units.

So now I am considering doing debt payoff for 1, cashflow purchases of 2 or keep buying 1 in the hope that it will appreciated further and then sell and rebalance to target amount of 2 at a later date. I would not buy 3 until I have done debt payoff for 1 and 2 as it is above my cost of debt.

Sorry if this is a basic question.
I take into account valuations but I only “sin” based on them by about 5-10%. I increased my ex-US allocation by about 5% compared to US recently but that’s about all I’ve done.

Whether you pay debt or buy stocks depends on the procedure I mentioned in my previous post. If you’ve decided stock is what you’re supposed to buy, then which stock you buy depends on which target is under its weight; in your case, USA stocks.

I would sell Ex-US and buy US stocks in your case to rebalance as per your targets (regardless of whether you’ll buy more stocks or pay debt with future cash flows), only if you can do so in a tax-free way (say in a 401K). Otherwise, I probably wouldn’t bother realizing the gains. Although if they are off enough (it sounds like you have 13/18= 72% in Ex-US), then I might consider selling a portion of the tax lots with the least gains just to be a bit more balanced.
"... 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
ma21n2
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Re: Lifecycle Investing - Leveraging when young

Post by ma21n2 »

My partner and I are both around age 40, and we started saving somewhat late. I recently learned about Lifecycle Investing, and read the book over the weekend. The concept of time diversification was very convincing to me. We're currently 85% stock, and I was considering going up to 120% stock or so.

But then Chapter 4 of the book ("But Is Now the Right Time?" section) gave me a pause. Table 4.6 suggests Samuelson Share (i.e., stock %) of only 12% when Shiller's Price/Earnings (PE10) ratio is 26 (whereas it suggests 83% when PE10 is 14). It looks like PE10 is 33.73 now according to this.

I downloaded the spreadsheet to calculate Samuelson Share on lifecycleinvesting.net, and when I put in 33.73, it suggests 0% (because expected S&P return becomes 0%). So now I'm thinking, maybe now isn't a good time to buy more stock (or maybe I should even sell stocks?)

I wanted to hear if others implementing the Ayres/Nalebuff Lifecycle investing strategy are taking PE10 ratio into account. Thanks!
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

ma21n2 wrote: Mon Dec 07, 2020 4:47 pm My partner and I are both around age 40, and we started saving somewhat late. I recently learned about Lifecycle Investing, and read the book over the weekend. The concept of time diversification was very convincing to me. We're currently 85% stock, and I was considering going up to 120% stock or so.

But then Chapter 4 of the book ("But Is Now the Right Time?" section) gave me a pause. Table 4.6 suggests Samuelson Share (i.e., stock %) of only 12% when Shiller's Price/Earnings (PE10) ratio is 26 (whereas it suggests 83% when PE10 is 14). It looks like PE10 is 33.73 now according to this.

I downloaded the spreadsheet to calculate Samuelson Share on lifecycleinvesting.net, and when I put in 33.73, it suggests 0% (because expected S&P return becomes 0%). So now I'm thinking, maybe now isn't a good time to buy more stock (or maybe I should even sell stocks?)

I wanted to hear if others implementing the Ayres/Nalebuff Lifecycle investing strategy are taking PE10 ratio into account. Thanks!
Excellent question. This has been the case for basically years now. Here is their response when I asked them back in February 2019:
Thanks for reading the book and for emailing. Barry and I are not certified financial advisors and so can’t give you financial advice. Reasonable academics have some disagreement on whether or not any market timing (include PE10 timing ala Shiller) is worthwhile or not. If one chooses not to make a PE10 adjustment, one way of proceeding is to just make the expected equity premium based on some historically based measure or upon some measure of what economist survey suggest future equity premium will be. I leave it to you to consult the literature on this question. Sorry not to be more directive.
Ian
If you do not think there is any premium to equities over bonds then there is no reason to take on the extra risk. Today the CAPE is at around 30, which compares to with an average of about 20 over the past half century—in other words, quite expensive. But the CAPE may overstate how pricey stocks are. First, it still reflects (but soon won’t) large write-downs from the financial crisis a decade ago. Second, it reflects a different tax regime. Through the first three quarters of last year, the corporate tax cut boosted the earnings measure the CAPE relies on by about 11%, according to Zion Research Group. If last year’s tax cut had prevailed over the past decade, the CAPE would be about three points lower.

To avoid the impact of the tax cut, and also the question of whether tax laws will be changed again, investors could look at a valuation measure Mr. Buffett has pointed to: The market capitalization of U.S. stocks as a percentage of gross national product. Right now, that measure stands at about 159% which isn’t far from the 171% it hit during the dot-com bubble.

Of course no single measure can really capture how under or overvalued the stock market might be—there are too many moving parts. But looking across a variety of them suggests the market is hardly a bargain. Some individual stocks almost certainly are, but for both Mr. Buffett and regular investors, identifying them is no easy task.
Barry
Pretty useless answers but figured I should show them.

Any ways, I formed my own opinion is as follows:
1) Their CAPE market-timing is the definition of "hindsight bias" and suffers from look-ahead bias (amongst other things). I would literally just ignore it. It doesn't help that it has some fundamental flaws on top (see next).
2) CAPE might give an indication (rough) of the real rate of return to stocks. But what matters for Lifecycle Investing is the equity risk premium. Yes, stocks are very expensive vs the past, but so are bonds, so the equity risk premium is actually surprisingly similar to the past. This means your Samuelson share shouldn't change that much.
3) Personally, I use various fundamental methods to get a rough estimate of the equity risk premium (stock returns minus bond returns). And then use that to "sin a little" as they put it, either upping or cutting back on equity % by at most 10%. Right now, I'm doing no market timing since the equity risk premium is similar to the historical one (at least based on my estimates).


I would recommend you fully ignore any valuations-based market timing and just invest based on the historical equity premium. Stocks and bonds might get cheap and expensive but you could expect the difference (risk compensation) to be roughly about the same through the decades. If you do want to incorporate some form of market-timing, do only a little bit of it and only if you feel comfortable confident about it.

Good luck!
"... 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
younginvestor23
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Re: Lifecycle Investing - Leveraging when young

Post by younginvestor23 »

Steve Reading wrote: Fri Mar 01, 2019 12:11 am Hello,
I recently came across the research from Prof. Ayres and Nalebuff about lifecycle investing and time diversification. The cliffnotes is that if one thinks about every future year as a potential bet, then it's in your best interest to spread out your bets as uniformly as possible across all those years. This means investing, to the best of your ability, the same dollar amount in stocks every year throughout your life. Since people accumulate money as they age, the implication is to use leverage when young to get closer to that target. That increases short term risk but, paradoxically, lowers long term risk. There are some rules set (such as not borrowing on credit, keeping leverage at 2:1 max, taking into account the nature of your income, etc) but that's the general idea.

The paper is here:

https://poseidon01.ssrn.com/delivery.ph ... 23&EXT=pdf

I decided to buy their book. I think their logic is sound and the results are extremely compelling. t was cool to read about MarketTimer since that's the thread that first got me thinking about it.

I found few threads opened in the past on the subject but they're a few years old so I wanted to start a new one to see if anyone is implementing the strategy, hear about other people's thoughts, recommendations for other forums where people implement similar strategies in the case that this forum is not appropriate for the topic, etc. I am basically right on the fence at the moment on whether to use the strategy or not.

Thank you

UPDATE: I am following this strategy and will update every 3 months.

May 2019
Stock Exposure = 235k
Debt = 92k
Equity in the exposure = 143k
Leverage = 1.64

Aug 2019
Stock Exposure = 251k
Debt = 101k
Equity in the exposure = 150k
Leverage = 1.68

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

April 2020
Stock Exposure = 413k
Effective Debt = 301k
Equity in the exposure = 123k
Leverage = 3.69

August 2020
Total Stock Exposure = 540k
Effective Debt = 300k
Equity in the exposure = 241k
Leverage (@ IBKR) = 1.5
Hey Steve, just wondering specifically how did you implement this and how do you roll the leaps?
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

younginvestor23 wrote: Fri Dec 11, 2020 3:12 am
Steve Reading wrote: Fri Mar 01, 2019 12:11 am Hello,
I recently came across the research from Prof. Ayres and Nalebuff about lifecycle investing and time diversification. The cliffnotes is that if one thinks about every future year as a potential bet, then it's in your best interest to spread out your bets as uniformly as possible across all those years. This means investing, to the best of your ability, the same dollar amount in stocks every year throughout your life. Since people accumulate money as they age, the implication is to use leverage when young to get closer to that target. That increases short term risk but, paradoxically, lowers long term risk. There are some rules set (such as not borrowing on credit, keeping leverage at 2:1 max, taking into account the nature of your income, etc) but that's the general idea.

The paper is here:

https://poseidon01.ssrn.com/delivery.ph ... 23&EXT=pdf

I decided to buy their book. I think their logic is sound and the results are extremely compelling. t was cool to read about MarketTimer since that's the thread that first got me thinking about it.

I found few threads opened in the past on the subject but they're a few years old so I wanted to start a new one to see if anyone is implementing the strategy, hear about other people's thoughts, recommendations for other forums where people implement similar strategies in the case that this forum is not appropriate for the topic, etc. I am basically right on the fence at the moment on whether to use the strategy or not.

Thank you

UPDATE: I am following this strategy and will update every 3 months.

May 2019
Stock Exposure = 235k
Debt = 92k
Equity in the exposure = 143k
Leverage = 1.64

Aug 2019
Stock Exposure = 251k
Debt = 101k
Equity in the exposure = 150k
Leverage = 1.68

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

April 2020
Stock Exposure = 413k
Effective Debt = 301k
Equity in the exposure = 123k
Leverage = 3.69

August 2020
Total Stock Exposure = 540k
Effective Debt = 300k
Equity in the exposure = 241k
Leverage (@ IBKR) = 1.5
Hey Steve, just wondering specifically how did you implement this and how do you roll the leaps?
This describes what I do nowadays:
viewtopic.php?p=5459415#p5459415
"... 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
ma21n2
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Re: Lifecycle Investing - Leveraging when young

Post by ma21n2 »

Steve Reading wrote: Mon Dec 07, 2020 8:39 pm
ma21n2 wrote: Mon Dec 07, 2020 4:47 pm My partner and I are both around age 40, and we started saving somewhat late. I recently learned about Lifecycle Investing, and read the book over the weekend. The concept of time diversification was very convincing to me. We're currently 85% stock, and I was considering going up to 120% stock or so.

But then Chapter 4 of the book ("But Is Now the Right Time?" section) gave me a pause. Table 4.6 suggests Samuelson Share (i.e., stock %) of only 12% when Shiller's Price/Earnings (PE10) ratio is 26 (whereas it suggests 83% when PE10 is 14). It looks like PE10 is 33.73 now according to this.

I downloaded the spreadsheet to calculate Samuelson Share on lifecycleinvesting.net, and when I put in 33.73, it suggests 0% (because expected S&P return becomes 0%). So now I'm thinking, maybe now isn't a good time to buy more stock (or maybe I should even sell stocks?)

I wanted to hear if others implementing the Ayres/Nalebuff Lifecycle investing strategy are taking PE10 ratio into account. Thanks!
Excellent question. This has been the case for basically years now. Here is their response when I asked them back in February 2019:
Thanks for reading the book and for emailing. Barry and I are not certified financial advisors and so can’t give you financial advice. Reasonable academics have some disagreement on whether or not any market timing (include PE10 timing ala Shiller) is worthwhile or not. If one chooses not to make a PE10 adjustment, one way of proceeding is to just make the expected equity premium based on some historically based measure or upon some measure of what economist survey suggest future equity premium will be. I leave it to you to consult the literature on this question. Sorry not to be more directive.
Ian
If you do not think there is any premium to equities over bonds then there is no reason to take on the extra risk. Today the CAPE is at around 30, which compares to with an average of about 20 over the past half century—in other words, quite expensive. But the CAPE may overstate how pricey stocks are. First, it still reflects (but soon won’t) large write-downs from the financial crisis a decade ago. Second, it reflects a different tax regime. Through the first three quarters of last year, the corporate tax cut boosted the earnings measure the CAPE relies on by about 11%, according to Zion Research Group. If last year’s tax cut had prevailed over the past decade, the CAPE would be about three points lower.

To avoid the impact of the tax cut, and also the question of whether tax laws will be changed again, investors could look at a valuation measure Mr. Buffett has pointed to: The market capitalization of U.S. stocks as a percentage of gross national product. Right now, that measure stands at about 159% which isn’t far from the 171% it hit during the dot-com bubble.

Of course no single measure can really capture how under or overvalued the stock market might be—there are too many moving parts. But looking across a variety of them suggests the market is hardly a bargain. Some individual stocks almost certainly are, but for both Mr. Buffett and regular investors, identifying them is no easy task.
Barry
Pretty useless answers but figured I should show them.

Any ways, I formed my own opinion is as follows:
1) Their CAPE market-timing is the definition of "hindsight bias" and suffers from look-ahead bias (amongst other things). I would literally just ignore it. It doesn't help that it has some fundamental flaws on top (see next).
2) CAPE might give an indication (rough) of the real rate of return to stocks. But what matters for Lifecycle Investing is the equity risk premium. Yes, stocks are very expensive vs the past, but so are bonds, so the equity risk premium is actually surprisingly similar to the past. This means your Samuelson share shouldn't change that much.
3) Personally, I use various fundamental methods to get a rough estimate of the equity risk premium (stock returns minus bond returns). And then use that to "sin a little" as they put it, either upping or cutting back on equity % by at most 10%. Right now, I'm doing no market timing since the equity risk premium is similar to the historical one (at least based on my estimates).


I would recommend you fully ignore any valuations-based market timing and just invest based on the historical equity premium. Stocks and bonds might get cheap and expensive but you could expect the difference (risk compensation) to be roughly about the same through the decades. If you do want to incorporate some form of market-timing, do only a little bit of it and only if you feel comfortable confident about it.

Good luck!
Thank you for that response. I've tentatively picked our Samuelson Share target of 50~60%, but am finding it difficult to calculate our current Samuelson Share because it really depends on (1) whether we take into account future social security benefits (considered as a bond equal to the premium of a single premium immediate annuity at retirement age), our house value, and mortgage debt, and (2) what % of our future retirement contributions are considered to be already in stock (because our future compensation is correlated w/the stock market, and some of our compensation is in employer equity). Current Samuelson Share could be as low as 35%, but if we include the house and consider a larger portion of our future income to be in stock, we could already be way above 60%. What did you do with all these different factors that the book talked about when calculating the PV of future retirement contributions and what % of that is in stock? Thanks!
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

ma21n2 wrote: Sat Dec 12, 2020 8:01 pm (1) whether we take into account future social security benefits (considered as a bond equal to the premium of a single premium immediate annuity at retirement age),
I count my SS as 100% a bond, just like you say above.
ma21n2 wrote: Sat Dec 12, 2020 8:01 pm our house value, and mortgage debt
This can be complicated and there's no perfect answer. But just ignoring it actually is a decent choice. So your net worth would be the sum of current savings + future discounted savings and SS, and you'd invest 50-60% of that number today.

Ignoring it is reasonable because, if you think about Lifecycle Investing, the point is to be more evenly exposed to assets over time. Since a house will be part of your retirement portfolio (so your ideal portfolio is like 50% stock, 40% bond, 10% house), and it is a part of your current portfolio, then you're done here. The logic is a bit handwavy, but it'll be roughly correct and is just simpler.
ma21n2 wrote: Sat Dec 12, 2020 8:01 pm (2) what % of our future retirement contributions are considered to be already in stock (because our future compensation is correlated w/the stock market, and some of our compensation is in employer equity). Current Samuelson Share could be as low as 35%, but if we include the house and consider a larger portion of our future income to be in stock, we could already be way above 60%.
I consider my job to be 100% bond. My job doesn't have much, if any, market correlation. Even if I was fired due to a economic downturn, I believe I stand a good chance of landing another job relatively quickly.

Your situation might be different so you'll have to think accordingly. The Lifecycle Investing book has a few examples of what studies have found job-market correlations to be. Most jobs are uncorrelated to the market, but some (especially cyclical industry jobs) have some amount of correlation (10-20%) while others even have negative correlations.
"... 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 Ben Mathew »

ma21n2 wrote: Sat Dec 12, 2020 8:01 pm (2) what % of our future retirement contributions are considered to be already in stock (because our future compensation is correlated w/the stock market, and some of our compensation is in employer equity).
I find it hard to directly answer the question of how much of future compensation is stock-like.

You could instead try constructing the following scenarios:

low compensation (probability 1/3)
medium compensation (probability 1/3)
high compensation (probability 1/3)

low stock performance (probability 1/3)
medium stock performance (probability 1/3)
high stock performance (probability 1/3)

Estimate how much you'll have in the low-low scenario (low compensation + low stock performance) and in the high-high scenario (high compensation + high stock performance).

If compensation is independent of stock performance, the probability of these extreme events is 1/9 each. Are you comfortable with that?

If compensation is correlated to stock performance, the probability of these extreme events is is more than 1/9, but less than 1/3 (unless perfectly correlated, which is unlikely). Are you comfortable with that?

If the low-low makes you more unhappy than the high-high makes you happy, reduce Samuelson share and try the exercise again.

A rough exercise, but may be useful.
freyj6
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Re: Lifecycle Investing - Leveraging when young

Post by freyj6 »

I've been working my way through this thread and others, and rereading Lifecycle investing with great interest.

I do think this strategy makes sense and I'd like to implement it myself at some point. I like the idea of slowly ramping up to 1.5x leverage over a year or two and holding for the long term. I'm not sure if now is the time for me though.

A funny little anecdote: I was flipping through Lifecycle investing today and came across the quote "It's only when the P?E ratio goes above 27.7 that our number crunching suggests that people should completely stop investing in stock". As fate would have it, VTI is exactly 27.7 right now.

Now, I'm certainly not going to time the market here. I'm still 100% stock and have been for a while. It does, however, give me pause as to whether I should bide my time ramping up to 1.5x.

Since I joined in 2014, there have always been fears of another crash and low expectations for the market. Strangely (given the state of the world) this feels like the first time there's a ton of confidence. Tech stocks are soaring, bitcoin is at an all-time high, and several of the most popular topics on bogleheads are leverage related.

If my job was 100% stable and I planned on a regular retirement curve, working consistently through until 65, I'd probably still lever up right now. In the meantime, I'll keep following this thread and wish you luck :)

Cheers
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Re: Lifecycle Investing - Leveraging when young

Post by rhe »

expecting_unexpected wrote: Fri Nov 27, 2020 11:39 am
rhe wrote: Mon Mar 04, 2019 12:25 am Right, a leveraged ETF is keeping a constant leverage ratio. The problem is that this involves selling into losses as they occur.
Actually, keeping a constant leverage ratio is the key to avoid gambler's ruin. See Ed Thorp's paper on applying Kelly criterion on blackjack.

You can think the market is a blackjack dealer who reveals one card per day. Investing becomes how to size your bet everyday before the market reveals his card.

Another Ed Thorp's insight is the card is not completely random. You should adjust your bets based on the shift of the odds in order to beat the dealer.

If you want to have a career in academia, you cannot shrug off paul samuelson. But, if you want to be a practioner making money in the market, you've got to pay attention to Kelly.
I think what I was trying to suggest in my initial comment was that a constant leverage ratio is not really what you want if you are just starting out and have few assets but substantial future earnings. I'm aware that it's what you have to do if you choose to invest in the stock market using callable debt, but if I were in this situation I would choose instead to invest in real estate using a (non-callable) mortgage. The details are likely location specific, but in many jurisdictions small multi-family properties can be purchased using the same type of government-guaranteed mortgage that applies to single-family homes.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

freyj6 wrote: Thu Dec 17, 2020 10:50 pm I've been working my way through this thread and others, and rereading Lifecycle investing with great interest.

I do think this strategy makes sense and I'd like to implement it myself at some point. I like the idea of slowly ramping up to 1.5x leverage over a year or two and holding for the long term. I'm not sure if now is the time for me though.

A funny little anecdote: I was flipping through Lifecycle investing today and came across the quote "It's only when the P?E ratio goes above 27.7 that our number crunching suggests that people should completely stop investing in stock". As fate would have it, VTI is exactly 27.7 right now.

Now, I'm certainly not going to time the market here. I'm still 100% stock and have been for a while. It does, however, give me pause as to whether I should bide my time ramping up to 1.5x.

Since I joined in 2014, there have always been fears of another crash and low expectations for the market. Strangely (given the state of the world) this feels like the first time there's a ton of confidence. Tech stocks are soaring, bitcoin is at an all-time high, and several of the most popular topics on bogleheads are leverage related.

If my job was 100% stable and I planned on a regular retirement curve, working consistently through until 65, I'd probably still lever up right now. In the meantime, I'll keep following this thread and wish you luck :)

Cheers
I remember back on March 2019 when I was deciding if I should use the strategy or not, I had similar thoughts. You’ve seen the thread. Plenty of posters telling me I was picking the market peak, too much leverage interest in BHs meant irrational exuberance, etc.

What made me pull the trigger is that I realized I was a lot more vulnerable to prices going up than down. I was terrified of a market that would, say, double in price. And I’d be stuck buying at ridiculously high prices during my accumulation, only to reach a market drop near retirement.

In the end, instead of having a scenario where I’d do really well and one really poorly, I chose to diversify and simply do OK in both. I’m still leveraged so I still believe in these concepts.

Cheers mate and good luck to you as well.
"... 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 freyj6 »

Yeah I view it in a similar way. I'd like to be somewhat agnostic to what the market does.

Right now with 100% stocks, I still have a preference for the market tanking because I plan to roughly double my investment over the next year and a half. I'd certainly rather buy low than high, but I've enjoyed this big ride up from when I bought all the way down in March and it's hard to hate big gains when you're 100% stocks.

Honestly the main consideration is that I'm planning to dial my work back a bit a year and a half from now to travel, so the thought of having 150% exposure if the market tanks isn't where I want to be. For now, 100% stock leaves me happily agnostic.

All that said, what you're doing is inspiring and I wish you the best of luck. I'll keep following this thread and if P/Es are reasonable when I finish traveling, I look forward to levering up :happy
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Re: Lifecycle Investing - Leveraging when young

Post by qwertyjazz »

freyj6 wrote: Sat Dec 19, 2020 2:03 am Yeah I view it in a similar way. I'd like to be somewhat agnostic to what the market does.

Right now with 100% stocks, I still have a preference for the market tanking because I plan to roughly double my investment over the next year and a half. I'd certainly rather buy low than high, but I've enjoyed this big ride up from when I bought all the way down in March and it's hard to hate big gains when you're 100% stocks.

Honestly the main consideration is that I'm planning to dial my work back a bit a year and a half from now to travel, so the thought of having 150% exposure if the market tanks isn't where I want to be. For now, 100% stock leaves me happily agnostic.

All that said, what you're doing is inspiring and I wish you the best of luck. I'll keep following this thread and if P/Es are reasonable when I finish traveling, I look forward to levering up :happy
If you are dialing back your work and want to maintain equal risk including human capital, shouldn’t you want to be less than 100% if you buy this model?
You were 100% with greater future human capital so your goal level would be implicitly less I think
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Re: Lifecycle Investing - Leveraging when young

Post by YearTrader »

Steve Reading wrote: Fri Aug 28, 2020 9:05 pm ...

For tax-advantaged accounts, just use futures. They're actually pretty easy to use and there's no cash drag any more since interest rates are ~0% any ways.

If taxable, I would recommend IBKR margin. You can sell an SPX box to get even lower financing but you don't have to. You can keep things super simple with just margin. The rates are great already.

I don't like using spreads or synthetic longs with options in taxable because you will have to realize the gains. I did it before but have learned :happy Either way, setting up various spreads probably is more work than just margin.

I don't like long calls only at the moment. The implied rates appear too pricey for my taste (~4.3% for Dec 22 contracts) plus you also realize gains every so often.

I can't talk much about LETFs. I used to dislike them but Uncorrelated has changed my views here. I don't like that they're a bit opaque. I've heard stories of trading desks front running the end-of-day rebalancing they perform for instance. I also have some concerns in terms of counterparty risk of the swaps. I generally feel safer being the one that handles the derivatives. I'd say, if you feel comfortable with them, you could use them, they're definitely the easiest!

Just my 2 cents.
To add a data point for leveraging up the tax-advantaged space. I've thought about the synthetic long approach with buying the call in IRA and selling the put in taxable (because I can't sell naked put in IRA).

After counting paying STCG tax on the put side as part of the effective borrowing rate, the rate for SPY option is optimal at around 2/3 to 3/4 strike/spot ratio (deep ITM), which is 3% at the moment (for my tax situation).

Comparing with ATM synthetic long, it has some vega exposure but shouldn't be an issue if you hold it close to expiration and give up the time value. Also there are fewer things to worry about for the put side (?).

But the implied borrowing rate is around 1% now for futures, so 3% is too much. It seems futures/L-ETFs are still the way to go. I've never used futures before -- wouldn't you spend extra time monitoring the market for future's risk management?
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Re: Lifecycle Investing - Leveraging when young

Post by bobcat2 »

YearTrader wrote: Mon Dec 28, 2020 8:16 am I've never used futures before -- wouldn't you spend extra time monitoring the market for future's risk management?
Yes, you would. :)

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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

YearTrader wrote: Mon Dec 28, 2020 8:16 am To add a data point for leveraging up the tax-advantaged space. I've thought about the synthetic long approach with buying the call in IRA and selling the put in taxable (because I can't sell naked put in IRA).

After counting paying STCG tax on the put side as part of the effective borrowing rate, the rate for SPY option is optimal at around 2/3 to 3/4 strike/spot ratio (deep ITM), which is 3% at the moment (for my tax situation).

Comparing with ATM synthetic long, it has some vega exposure but shouldn't be an issue if you hold it close to expiration and give up the time value. Also there are fewer things to worry about for the put side (?).

But the implied borrowing rate is around 1% now for futures, so 3% is too much. It seems futures/L-ETFs are still the way to go. I've never used futures before -- wouldn't you spend extra time monitoring the market for future's risk management?
Thanks for the post, it's an interesting thought splitting the call and the put into different accounts.

I think the only monitoring you have to do is to make sure you rebalance your leverage if it gets too out of whack. I would just set a notification that pings you if the market moves, say, 10% up or down in total (so if SPX hits 3350 or 4100). If it does, just log in and rebalance accordingly. You'd also log in every quarter to roll contracts and presumably every year to invest your new contribution.
"... 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 bling »

Steve Reading wrote: Mon Dec 28, 2020 10:39 am
YearTrader wrote: Mon Dec 28, 2020 8:16 am To add a data point for leveraging up the tax-advantaged space. I've thought about the synthetic long approach with buying the call in IRA and selling the put in taxable (because I can't sell naked put in IRA).

After counting paying STCG tax on the put side as part of the effective borrowing rate, the rate for SPY option is optimal at around 2/3 to 3/4 strike/spot ratio (deep ITM), which is 3% at the moment (for my tax situation).

Comparing with ATM synthetic long, it has some vega exposure but shouldn't be an issue if you hold it close to expiration and give up the time value. Also there are fewer things to worry about for the put side (?).

But the implied borrowing rate is around 1% now for futures, so 3% is too much. It seems futures/L-ETFs are still the way to go. I've never used futures before -- wouldn't you spend extra time monitoring the market for future's risk management?
Thanks for the post, it's an interesting thought splitting the call and the put into different accounts.

I think the only monitoring you have to do is to make sure you rebalance your leverage if it gets too out of whack. I would just set a notification that pings you if the market moves, say, 10% up or down in total (so if SPX hits 3350 or 4100). If it does, just log in and rebalance accordingly. You'd also log in every quarter to roll contracts and presumably every year to invest your new contribution.
interesting indeed. wouldn't this also present a tax arbitrage opportunity as well? if the market goes up, your call's gains are tax advantaged. if the market goes down, your loss capped in your IRA because of the call, and then you can harvest the rest of the losses on your put in your taxable account.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

bling wrote: Mon Dec 28, 2020 10:53 am
Steve Reading wrote: Mon Dec 28, 2020 10:39 am
YearTrader wrote: Mon Dec 28, 2020 8:16 am To add a data point for leveraging up the tax-advantaged space. I've thought about the synthetic long approach with buying the call in IRA and selling the put in taxable (because I can't sell naked put in IRA).

After counting paying STCG tax on the put side as part of the effective borrowing rate, the rate for SPY option is optimal at around 2/3 to 3/4 strike/spot ratio (deep ITM), which is 3% at the moment (for my tax situation).

Comparing with ATM synthetic long, it has some vega exposure but shouldn't be an issue if you hold it close to expiration and give up the time value. Also there are fewer things to worry about for the put side (?).

But the implied borrowing rate is around 1% now for futures, so 3% is too much. It seems futures/L-ETFs are still the way to go. I've never used futures before -- wouldn't you spend extra time monitoring the market for future's risk management?
Thanks for the post, it's an interesting thought splitting the call and the put into different accounts.

I think the only monitoring you have to do is to make sure you rebalance your leverage if it gets too out of whack. I would just set a notification that pings you if the market moves, say, 10% up or down in total (so if SPX hits 3350 or 4100). If it does, just log in and rebalance accordingly. You'd also log in every quarter to roll contracts and presumably every year to invest your new contribution.
interesting indeed. wouldn't this also present a tax arbitrage opportunity as well? if the market goes up, your call's gains are tax advantaged. if the market goes down, your loss capped in your IRA because of the call, and then you can harvest the rest of the losses on your put in your taxable account.
This probably depends on the strike price. I’m most familiar with a synthetic with ATM strikes. In that case, the market would have to go up substantially before the call shows gains. Most of the gains in that synthetic long probably will come from the put so you’ll likely be better off keeping the call in taxable. The synthetic itself might only show a modest gain but if it came from large gains on the put and modest losses on the call, you’llbe sad to have that call in an IRA.

Presumably, if you pick a deep strike, then the call is more likely to show gains so you might be right. I don’t have a good intuition off the top of my head as to what would be a good strike for such a purpose but if you ever look into it, I’d love to hear what you find :)
"... 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 klaus14 »

Steve Reading wrote: Mon Dec 07, 2020 8:39 pm
Pretty useless answers but figured I should show them.

Any ways, I formed my own opinion is as follows:
1) Their CAPE market-timing is the definition of "hindsight bias" and suffers from look-ahead bias (amongst other things). I would literally just ignore it. It doesn't help that it has some fundamental flaws on top (see next).
2) CAPE might give an indication (rough) of the real rate of return to stocks. But what matters for Lifecycle Investing is the equity risk premium. Yes, stocks are very expensive vs the past, but so are bonds, so the equity risk premium is actually surprisingly similar to the past. This means your Samuelson share shouldn't change that much.
3) Personally, I use various fundamental methods to get a rough estimate of the equity risk premium (stock returns minus bond returns). And then use that to "sin a little" as they put it, either upping or cutting back on equity % by at most 10%. Right now, I'm doing no market timing since the equity risk premium is similar to the historical one (at least based on my estimates).


I would recommend you fully ignore any valuations-based market timing and just invest based on the historical equity premium. Stocks and bonds might get cheap and expensive but you could expect the difference (risk compensation) to be roughly about the same through the decades. If you do want to incorporate some form of market-timing, do only a little bit of it and only if you feel comfortable confident about it.

Good luck!
I do something like what you described.
I look at ERP estimation by Aswath Damodaran. It was 4.73% as of Dec 1. Then I compare it to last 10 years average, 5.58%. Then I reduce my equity target (from 80%) for each basis point difference from that 10 years average by 0.1%.
5.58% - 4.73% = 0.85. Then my new equity target is 80% - 8.5% = 71.5%.
I invest new money to target this new number.

Do you think this make sense?
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

klaus14 wrote: Thu Dec 31, 2020 7:53 pm I do something like what you described.
I look at ERP estimation by Aswath Damodaran. It was 4.73% as of Dec 1. Then I compare it to last 10 years average, 5.58%. Then I reduce my equity target (from 80%) for each basis point difference from that 10 years average by 0.1%.
5.58% - 4.73% = 0.85. Then my new equity target is 80% - 8.5% = 71.5%.
I invest new money to target this new number.

Do you think this make sense?
Haha I like it, it's original. I mean, it's a little weird because there's no mathematical relationship that would say to do sp. Like, there's no reason why an equity premium that is lower by 1% means the allocation should be lower by 10%. It's a bit arbitrary in the sense that you could've chosen 1% to correspond to a lower allocation of, say, 7%, or 12%. That said, it is directionally correct so it's not nonsensical by any means; just out of the box :happy

I personally use the historical equity risk premium to choose my long-term allocation (with the Merton formula). Say that's 60%. I then re-do the allocation using today's equity risk premium (say with CAPE, or Damodaran, etc). Say that's 40% (because stocks are more expensive or whatever). So now I have the optimal allocation based on the past 100+ years, and the optimal allocation based on my best guess of the future. So I just take some weighted average of the two. You could say "hey I trust more the current observable ERP over the historical one" so you'd put more weight on the 40% than the 60%. Or maybe you think "nah, market timing is hard, the long-run ERP is probably about the right one". I personally put the same weight on both so I just average them. That would give me an allocation of 50%.

Nowadays, both the historical and the current-forward-looking numbers give very, very similar answers so not much to do. The average of 60% and 60% is just 60% haha.
"... 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 klaus14 »

Steve Reading wrote: Thu Dec 31, 2020 8:43 pm
klaus14 wrote: Thu Dec 31, 2020 7:53 pm I do something like what you described.
I look at ERP estimation by Aswath Damodaran. It was 4.73% as of Dec 1. Then I compare it to last 10 years average, 5.58%. Then I reduce my equity target (from 80%) for each basis point difference from that 10 years average by 0.1%.
5.58% - 4.73% = 0.85. Then my new equity target is 80% - 8.5% = 71.5%.
I invest new money to target this new number.

Do you think this make sense?
Haha I like it, it's original. I mean, it's a little weird because there's no mathematical relationship that would say to do sp. Like, there's no reason why an equity premium that is lower by 1% means the allocation should be lower by 10%. It's a bit arbitrary in the sense that you could've chosen 1% to correspond to a lower allocation of, say, 7%, or 12%. That said, it is directionally correct so it's not nonsensical by any means; just out of the box :happy

I personally use the historical equity risk premium to choose my long-term allocation (with the Merton formula). Say that's 60%. I then re-do the allocation using today's equity risk premium (say with CAPE, or Damodaran, etc). Say that's 40% (because stocks are more expensive or whatever). So now I have the optimal allocation based on the past 100+ years, and the optimal allocation based on my best guess of the future. So I just take some weighted average of the two. You could say "hey I trust more the current observable ERP over the historical one" so you'd put more weight on the 40% than the 60%. Or maybe you think "nah, market timing is hard, the long-run ERP is probably about the right one". I personally put the same weight on both so I just average them. That would give me an allocation of 50%.

Nowadays, both the historical and the current-forward-looking numbers give very, very similar answers so not much to do. The average of 60% and 60% is just 60% haha.
sp?
yeah i am aware that parameters are a bit arbitrary :D That's because I have not figured a way to optimize those. 10% gives a reasonable slope (no abrupt changes in the target). I like Damodaran because he bases his numbers on analyst consensus earnings estimates and he shares his spreadsheet so i can update the ERP myself on mid month.

I haven't read the whole thread yet so I don't know what Merton formula is. (by the way, a summary of the thread in OP would be immensely helpful for readers). But i guess that is your average allocation in the temporal dimension. You are leveraged with equities now, at some point you'll be 100% equities with no leverage, then 60% equities and maybe you'll die with 100% bonds. is this correct? Or is 60% is where you will keep it once you reach it?
Last edited by klaus14 on Thu Dec 31, 2020 9:34 pm, edited 1 time in total.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

klaus14 wrote: Thu Dec 31, 2020 9:00 pm yeah i am aware that number are a bit arbitrary :D That's because I have not figured a way to optimize those. 10% gives a reasonable slope (no abrupt changes in the target). I like Damodaran because he bases his numbers on analyst consensus earnings estimates plus he shares his spreadsheet so i can calculate it myself on mid month.
If you looked at the numbers/slope/etc and you like it, then that's perfectly acceptable. I just didn't know if it was just some arbitrary "meh, I'll just multiply by ten and then subtract". All of this has some level of arbitrary choices but as long as there is thought behind it, I don't see much issue. And yeah, Damodaran is good, that's another resource I use too!


klaus14 wrote: Thu Dec 31, 2020 9:00 pm I haven't read the whole thread yet so I don't know what Merton formula is. (by the way, a summary of the thread in OP would be immensely helpful for readers).
If you assume stock returns are randomly distributed, then it turns out there is already a formula that says what the optimal % in stocks you should use. It's Merton's formula. Uncorrelated made a post with that and more info:

viewtopic.php?t=305919

Most relevant:
The following expression gives the optimal proportion allocated to the risky asset (stocks).

proportion of risky asset = (1 / γ) * E(X - Rf) / Var(X - Rf)

Rf indicates the risk free rate. It is important to realize that the optimal proportion does not depend on the absolute return, but on the risk premium compared to a risk free benchmark.

We can plug in some numbers to get a feel for the correct value of γ. I will use a risk premium of 5% and standard deviation of 16%.

γ=5 corresponds to an asset allocation of 40% stocks, 60% bonds
γ=4 corresponds to an asset allocation of 50% stocks, 50% bonds
γ=3 corresponds to an asset allocation of 65% stocks, 35% bonds
γ=2 corresponds to an asset allocation of 100% stocks
γ=1 corresponds to an asset allocation of 200% stocks
γ=0 corresponds to an asset allocation of infinitely many stocks.

I think a value of 3 is a good starting point for most investors. I personally think I'm a bit more risk tolerant than the average investor, and a lot less likely to panic sell, my risk aversion is between 2 and 3.
So all I need is the stock volatility, expected return over cash (the equity risk premium) and my risk tolerance value, and boom, optimal asset allocation. So I market time with valuations by simply re-doing the formula above with different equity risk premiums based on historical or current values, take an average from them, and go with that.
klaus14 wrote: Thu Dec 31, 2020 9:00 pm You are leveraged with equities now, at some point you'll be 100% equities with no leverage, then 60% equities and maybe you'll die with 100% bonds. is this correct? Or is 60% is where you will keep it once you reach it?
Say 60% is my optimal stock %. So I want to have 60% of my entire wealth (including my future savings) in stocks. So I need to leverage now to hit that. At some point, my current savings will be exactly 60% of my entire wealth (with future savings accounting for the other 40%). At that point, I won't use leverage and simply go 100% stocks.

Once I retire, I will have no more future savings and no need to over invest current savings to make up for future ones. So I'll just be 60% in retirement all the way until I die, since that's what the optimal allocation is based on above.
"... 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 »

Updated OP with 2021 numbers:

January 2021
Total Stock Exposure = 742k
Effective Debt = 361k
Equity in the exposure = 381k
Leverage (@ IBKR) = 2.0

I've made big changes since August (increase risk aversion coefficient for my calculations, different future discounted savings, etc). The numbers look quite different from last update. The end result is that I am back to Phase 1, trying to hit a specific equity target. I decided to go up to 2:1 leverage to get as close to that target as possible. That's how this strategy goes; you make the best estimates and revise as you learn more about the future.

2020 Summary
This year had a fairly large and very fast market crash, but the strategy continues just fine. Hopefully this shows this strategy isn't implemented just because all I know are bull markets, and that I would fold at the first crash (as many posters implied early in the thread). I think a big challenge was the psychological aspect of March, especially with the amount of panic present in BHs. It's key to stick to your convictions and take losses with equanimity. William Bernstein is not quite right when he said there are no sentients being in this galaxy that can tolerate a portfolio with 2.0 beta, but he isn't too wrong either.

In all though, 2020 was fantastic for leveraged strategies and returns have been outstanding honestly. My concern was precisely what happened; stock prices going way up and forcing accumulation at expensive valuations. I think this is a big risk for accumulators, and this strategy addresses it.

Happy New Year!
"... 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 amagerewai »

If this does not relate to lifecycle investing, my apologies. I came here after some thinking about the comparative value of investments “this” ie last year, vs ongoing smaller investments all the years afterward. Along with other increased earning and standard investment strategies, I could be doing something I think of as expense investing - ongoing use of 0% credit card loans for my expenses that I already have more than enough to cover, while investing the funds I had for the expenses I will need to pay later. I know this scenario is not without it’s risks, but it seems to be investing on my own marginal terms. I’m referring to a relatively small amount, as my expenses are low, and balances aren’t due for 14 months. Instead, I’m the one watching my stock performances and selling if I’m headed down. I don’t have the luxury of holding the stock when it heads lower than my original investment, to keep it at no-risk. So far I’m making 15% returns. How does this compare to loans from margin or a broker? Other than that I can get an overall higher leverage? It seems the benefits of investing my (low) expenses on a cyclical basis would increase my exposure for now.
UberGrub
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Re: Lifecycle Investing - Leveraging when young

Post by UberGrub »

Steve Reading wrote: Fri Jan 01, 2021 3:12 pm I think a big challenge was the psychological aspect of March, especially with the amount of panic present in BHs. It's key to stick to your convictions and take losses with equanimity. William Bernstein is not quite right when he said there are no sentients being in this galaxy that can tolerate a portfolio with 2.0 beta, but he isn't too wrong either.
Did you have any doubts during that March? I'm also curious if, now having gone through 2020, you are more or less concerned of another market crash?

Thank you I have benefited much from this thread info.
freyj6
Posts: 392
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Re: Lifecycle Investing - Leveraging when young

Post by freyj6 »

Steve Reading wrote: Fri Jan 01, 2021 3:12 pm Updated OP with 2021 numbers:

January 2021
Total Stock Exposure = 742k
Effective Debt = 361k
Equity in the exposure = 381k
Leverage (@ IBKR) = 2.0

I've made big changes since August (increase risk aversion coefficient for my calculations, different future discounted savings, etc). The numbers look quite different from last update. The end result is that I am back to Phase 1, trying to hit a specific equity target. I decided to go up to 2:1 leverage to get as close to that target as possible. That's how this strategy goes; you make the best estimates and revise as you learn more about the future.

2020 Summary
This year had a fairly large and very fast market crash, but the strategy continues just fine. Hopefully this shows this strategy isn't implemented just because all I know are bull markets, and that I would fold at the first crash (as many posters implied early in the thread). I think a big challenge was the psychological aspect of March, especially with the amount of panic present in BHs. It's key to stick to your convictions and take losses with equanimity. William Bernstein is not quite right when he said there are no sentients being in this galaxy that can tolerate a portfolio with 2.0 beta, but he isn't too wrong either.

In all though, 2020 was fantastic for leveraged strategies and returns have been outstanding honestly. My concern was precisely what happened; stock prices going way up and forcing accumulation at expensive valuations. I think this is a big risk for accumulators, and this strategy addresses it.

Happy New Year!
How do you feel about what you mentioned earlier in the thread: favoring lower leverage and so as to not require selling on the way down? Now that you're 2x, what do you plan on doing if there's another 30 or 40% drop, particularly if it lasts longer?

As I've thought more about implementing this myself in the future, I think I'm most comfortable with a fixed dollar amount of leverage vs fixed (or variable) percent. I like the idea of having, say $150k in stock and borrowing another $50k. This version is more intuitively appealing to me because I'd be able to buy non-leveraged stocks aggressively during a crash without worrying about my leverage getting out of control.
dboeger1
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Re: Lifecycle Investing - Leveraging when young

Post by dboeger1 »

amagerewai wrote: Sat Jan 02, 2021 4:35 pm If this does not relate to lifecycle investing, my apologies. I came here after some thinking about the comparative value of investments “this” ie last year, vs ongoing smaller investments all the years afterward. Along with other increased earning and standard investment strategies, I could be doing something I think of as expense investing - ongoing use of 0% credit card loans for my expenses that I already have more than enough to cover, while investing the funds I had for the expenses I will need to pay later. I know this scenario is not without it’s risks, but it seems to be investing on my own marginal terms. I’m referring to a relatively small amount, as my expenses are low, and balances aren’t due for 14 months. Instead, I’m the one watching my stock performances and selling if I’m headed down. I don’t have the luxury of holding the stock when it heads lower than my original investment, to keep it at no-risk. So far I’m making 15% returns. How does this compare to loans from margin or a broker? Other than that I can get an overall higher leverage? It seems the benefits of investing my (low) expenses on a cyclical basis would increase my exposure for now.
This is something I more or less did with a car loan once instead of a credit card. I think it was a 4 year loan though so it was a slightly less risky time horizon. Still, I wouldn't have done it without having a solid income relative to the expense. The reason I felt okay doing it was that I would almost certainly earn enough income from my job to cover any market losses.

Still, in retrospect, it was kind of a dumb thing to do. It worked out for me, but I got lucky. It was literally my first experience investing outside of my 401k. I would not do it again today, nor would I recommend it to others. I certainly wouldn't recommend what you're doing with just a 14-month period before high credit card interest rates kick in. Even 4 years is not a long time in the equity markets, let alone 1. Your investment could be down for 10+ years, especially during a serious economic downturn where you may be likely to lose your job due to conditions beyond your control. To think that a bunch of things could go wrong all at once and leave you with an absolutely tremendous debt burden on the other side, that's not really a risk I'd be willing to take.

I've since bought my first home, and I feel infinitely better about it. In fact, I'm kind of kicking myself for not pursuing buying more aggressively earlier on. In my expensive area, I probably could have bought the same home years ago for $200k less, saved money compared to renting, been way up in equity, had a much better standard of living, and just kept refinancing with falling interest rates. I know hindsight is 20/20, but especially one's first home has the potential to be a phenomenal investment when you factor in the necessary cost of rent prior to owning. It's also a secured, non-callable debt with generally favorable terms and rates, not to mention 30 years to pay off. Even with a modest housing market drop, you're likely to come out ahead just from all the benefits that aren't factored into the sticker price. Mortgages are in a league of their own when it comes to this kind of leveraged investing.

If you don't own a home yet, I would seriously consider just paying off your credit card while the market is up and saving for a home. I realize it's comparing apples to oranges, but the risk/reward trade-off is just so much better in both the short and long terms. Doing this with 1-year credit card promos is relying heavily on very precise market timing, which is bound to bite you in the butt. You said this was a small amount relative to your earnings, so you'll probably be okay, but as long as it's small money, it's really not going to make a big positive difference either. Let's just throw out a random number of $1000 net gain after a year of doing this. Is that really going to change your life? Probably not. So maybe you decide to 10x it. At that point, are you willing to take the risk? Considering the possibility of being on the hook for a super high interest rate following a huge market loss, maybe not. Anyway, these are questions for you to answer, but it just doesn't seem to extrapolate to a good plan on a larger scale. People are already hesitant to recommend 100% stock portfolios with a low interest mortgage for example. Credit cards are a way more dangerous game.

Speaking of mortgages, if you don't own a home, remember you could tank your credit scores and by extension your ability to get a mortgage if this goes South. That would arguably be one of the worst outcomes.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

freyj6 wrote: Fri Jan 22, 2021 12:39 am
Steve Reading wrote: Fri Jan 01, 2021 3:12 pm Updated OP with 2021 numbers:

January 2021
Total Stock Exposure = 742k
Effective Debt = 361k
Equity in the exposure = 381k
Leverage (@ IBKR) = 2.0

I've made big changes since August (increase risk aversion coefficient for my calculations, different future discounted savings, etc). The numbers look quite different from last update. The end result is that I am back to Phase 1, trying to hit a specific equity target. I decided to go up to 2:1 leverage to get as close to that target as possible. That's how this strategy goes; you make the best estimates and revise as you learn more about the future.

2020 Summary
This year had a fairly large and very fast market crash, but the strategy continues just fine. Hopefully this shows this strategy isn't implemented just because all I know are bull markets, and that I would fold at the first crash (as many posters implied early in the thread). I think a big challenge was the psychological aspect of March, especially with the amount of panic present in BHs. It's key to stick to your convictions and take losses with equanimity. William Bernstein is not quite right when he said there are no sentients being in this galaxy that can tolerate a portfolio with 2.0 beta, but he isn't too wrong either.

In all though, 2020 was fantastic for leveraged strategies and returns have been outstanding honestly. My concern was precisely what happened; stock prices going way up and forcing accumulation at expensive valuations. I think this is a big risk for accumulators, and this strategy addresses it.

Happy New Year!
How do you feel about what you mentioned earlier in the thread: favoring lower leverage and so as to not require selling on the way down? Now that you're 2x, what do you plan on doing if there's another 30 or 40% drop, particularly if it lasts longer?

As I've thought more about implementing this myself in the future, I think I'm most comfortable with a fixed dollar amount of leverage vs fixed (or variable) percent. I like the idea of having, say $150k in stock and borrowing another $50k. This version is more intuitively appealing to me because I'd be able to buy non-leveraged stocks aggressively during a crash without worrying about my leverage getting out of control.
I still stand by 1.5x leverage. Historically, it was about as good as 2x leverage any ways. And even after a 33% market decline, you still end up at 2x leverage, which was the recommendation from the paper. So it gives a large cushion in case you want to be opportunistic and not rebalance your leverage back to 1.5x in the midst of a bear market.

The only reason I went to 2x this year is because doing so got me right within reach of my equity goal rebalancing bands so I decided to just go for it already.

If the market dropped 30 or 40%, I would just sell positions. I don’t think it’s as big of a deal as I made it out earlier in the thread.

What you suggest (using 1.25x leverage) seems reasonable to me. I would just be wary that if you’re set on not selling for a loss and your leverage goes past 2x in a Bear market, that you do rebalance (at least back to 2x) as per the book.
"... 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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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

UberGrub wrote: Thu Jan 21, 2021 11:53 pm
Steve Reading wrote: Fri Jan 01, 2021 3:12 pm I think a big challenge was the psychological aspect of March, especially with the amount of panic present in BHs. It's key to stick to your convictions and take losses with equanimity. William Bernstein is not quite right when he said there are no sentients being in this galaxy that can tolerate a portfolio with 2.0 beta, but he isn't too wrong either.
Did you have any doubts during that March? I'm also curious if, now having gone through 2020, you are more or less concerned of another market crash?

Thank you I have benefited much from this thread info.
No doubts about the strategy although I did wonder if I would have to cut back exposure. If the market dropped much more, I probably would have cut back somewhat.

I don't think much has changed since I went through March. It's not like I'm much more or less risk averse since I went through.

Glad you've benefited!
"... 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
freyj6
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Re: Lifecycle Investing - Leveraging when young

Post by freyj6 »

Steve Reading wrote: Fri Jan 22, 2021 8:43 am
freyj6 wrote: Fri Jan 22, 2021 12:39 am
Steve Reading wrote: Fri Jan 01, 2021 3:12 pm Updated OP with 2021 numbers:

January 2021
Total Stock Exposure = 742k
Effective Debt = 361k
Equity in the exposure = 381k
Leverage (@ IBKR) = 2.0

I've made big changes since August (increase risk aversion coefficient for my calculations, different future discounted savings, etc). The numbers look quite different from last update. The end result is that I am back to Phase 1, trying to hit a specific equity target. I decided to go up to 2:1 leverage to get as close to that target as possible. That's how this strategy goes; you make the best estimates and revise as you learn more about the future.

2020 Summary
This year had a fairly large and very fast market crash, but the strategy continues just fine. Hopefully this shows this strategy isn't implemented just because all I know are bull markets, and that I would fold at the first crash (as many posters implied early in the thread). I think a big challenge was the psychological aspect of March, especially with the amount of panic present in BHs. It's key to stick to your convictions and take losses with equanimity. William Bernstein is not quite right when he said there are no sentients being in this galaxy that can tolerate a portfolio with 2.0 beta, but he isn't too wrong either.

In all though, 2020 was fantastic for leveraged strategies and returns have been outstanding honestly. My concern was precisely what happened; stock prices going way up and forcing accumulation at expensive valuations. I think this is a big risk for accumulators, and this strategy addresses it.

Happy New Year!
How do you feel about what you mentioned earlier in the thread: favoring lower leverage and so as to not require selling on the way down? Now that you're 2x, what do you plan on doing if there's another 30 or 40% drop, particularly if it lasts longer?

As I've thought more about implementing this myself in the future, I think I'm most comfortable with a fixed dollar amount of leverage vs fixed (or variable) percent. I like the idea of having, say $150k in stock and borrowing another $50k. This version is more intuitively appealing to me because I'd be able to buy non-leveraged stocks aggressively during a crash without worrying about my leverage getting out of control.
I still stand by 1.5x leverage. Historically, it was about as good as 2x leverage any ways. And even after a 33% market decline, you still end up at 2x leverage, which was the recommendation from the paper. So it gives a large cushion in case you want to be opportunistic and not rebalance your leverage back to 1.5x in the midst of a bear market.

The only reason I went to 2x this year is because doing so got me right within reach of my equity goal rebalancing bands so I decided to just go for it already.

If the market dropped 30 or 40%, I would just sell positions. I don’t think it’s as big of a deal as I made it out earlier in the thread.

What you suggest (using 1.25x leverage) seems reasonable to me. I would just be wary that if you’re set on not selling for a loss and your leverage goes past 2x in a Bear market, that you do rebalance (at least back to 2x) as per the book.
Good to know.

I'm not sure if this was clear from the last post, but I like the idea of the fixed dollar amount version because I'd be buying unleveraged stocks all the way down. This would make it really difficult to actually end up more than 2x leveraged.

For example, take a 1.33x leveraged portfolio of 150k regular stock and 50k borrowed (200k stock total).

If the market drops 50%, you'd still have 75k regular stock and 50k borrowed (125k total). The market would need to drop 66.6% to move beyond 2x.

Furthermore, I'd be buying into the unlevered position only. Even with contribution as low as 1k per month, it would take roughly a 75% drop in 12 months to exceed a 2x position.

Other than the relative safety and intuitive appeal of a smaller, fixed amount, I also like the fact that factor exposure can be much higher in these portfolios. I like the idea of a 200k portfolio having 100k in 2x S&P/total international and 100k in SCV and momentum.

Anyway, even if I'm not jumping into leverage yet, this topic has been super helpful both in terms of education and perspective. Sometimes I get a little nervous being 100% stock with these high valuations and rampant speculation, but when I view it through the perspective of stock exposure vs lifetime human capital it's much easier. Realistically, I'm about 10% stock and 90% human-capital bond :)
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

freyj6 wrote: Fri Jan 22, 2021 12:20 pm
Steve Reading wrote: Fri Jan 22, 2021 8:43 am
freyj6 wrote: Fri Jan 22, 2021 12:39 am
Steve Reading wrote: Fri Jan 01, 2021 3:12 pm Updated OP with 2021 numbers:

January 2021
Total Stock Exposure = 742k
Effective Debt = 361k
Equity in the exposure = 381k
Leverage (@ IBKR) = 2.0

I've made big changes since August (increase risk aversion coefficient for my calculations, different future discounted savings, etc). The numbers look quite different from last update. The end result is that I am back to Phase 1, trying to hit a specific equity target. I decided to go up to 2:1 leverage to get as close to that target as possible. That's how this strategy goes; you make the best estimates and revise as you learn more about the future.

2020 Summary
This year had a fairly large and very fast market crash, but the strategy continues just fine. Hopefully this shows this strategy isn't implemented just because all I know are bull markets, and that I would fold at the first crash (as many posters implied early in the thread). I think a big challenge was the psychological aspect of March, especially with the amount of panic present in BHs. It's key to stick to your convictions and take losses with equanimity. William Bernstein is not quite right when he said there are no sentients being in this galaxy that can tolerate a portfolio with 2.0 beta, but he isn't too wrong either.

In all though, 2020 was fantastic for leveraged strategies and returns have been outstanding honestly. My concern was precisely what happened; stock prices going way up and forcing accumulation at expensive valuations. I think this is a big risk for accumulators, and this strategy addresses it.

Happy New Year!
How do you feel about what you mentioned earlier in the thread: favoring lower leverage and so as to not require selling on the way down? Now that you're 2x, what do you plan on doing if there's another 30 or 40% drop, particularly if it lasts longer?

As I've thought more about implementing this myself in the future, I think I'm most comfortable with a fixed dollar amount of leverage vs fixed (or variable) percent. I like the idea of having, say $150k in stock and borrowing another $50k. This version is more intuitively appealing to me because I'd be able to buy non-leveraged stocks aggressively during a crash without worrying about my leverage getting out of control.
I still stand by 1.5x leverage. Historically, it was about as good as 2x leverage any ways. And even after a 33% market decline, you still end up at 2x leverage, which was the recommendation from the paper. So it gives a large cushion in case you want to be opportunistic and not rebalance your leverage back to 1.5x in the midst of a bear market.

The only reason I went to 2x this year is because doing so got me right within reach of my equity goal rebalancing bands so I decided to just go for it already.

If the market dropped 30 or 40%, I would just sell positions. I don’t think it’s as big of a deal as I made it out earlier in the thread.

What you suggest (using 1.25x leverage) seems reasonable to me. I would just be wary that if you’re set on not selling for a loss and your leverage goes past 2x in a Bear market, that you do rebalance (at least back to 2x) as per the book.
Good to know.

I'm not sure if this was clear from the last post, but I like the idea of the fixed dollar amount version because I'd be buying unleveraged stocks all the way down. This would make it really difficult to actually end up more than 2x leveraged.

For example, take a 1.33x leveraged portfolio of 150k regular stock and 50k borrowed (200k stock total).

If the market drops 50%, you'd still have 75k regular stock and 50k borrowed (125k total). The market would need to drop 66.6% to move beyond 2x.

Furthermore, I'd be buying into the unlevered position only. Even with contribution as low as 1k per month, it would take roughly a 75% drop in 12 months to exceed a 2x position.

Anyway, even if I'm not jumping into leverage yet, this topic has been super helpful both in terms of education and perspective. Sometimes I get a little nervous being 100% stock with these high valuations and rampant speculation, but when I view it through the perspective of stock exposure vs lifetime human capital it's much easier. Realistically, I'm about 10% stock and 90% human-capital bond :)
Right but if the market doubled from then and you ended up at 400k in stock (350k yours, 50k borrowed), would you not re-lever back up to 1.33x? Assuming you haven’t hit your target yet (still in Phase 1).
"... 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 »

After reading the book, I know have an understanding of the underlying strategy. Which does require frequent rebalancing (which allays my earlier misgivings about Steve's original strategy (although he/you could have just said so back then)).

Playing around in portfolio visualizer, you do historically achieve a far greater return if you input -100% cashx. However, I do not believe that it is actually achievable to borrow at that rate for long periods of time. Any thoughts?

Searching around for a more realistic alternative, I stumbled upon a very high correlation between SSO (2x bull Proshares SPY ETF) and a 200% VFINX (S&P500) & -100% VIPS (TIPS). It matches almost exactly. Just an observation I wanted to share with other interested people.

So, the question then becomes, is a TIPS fund a good approximation of historical borrowing rates the average investor can achieve?

Related question: does anyone else think IB's rates are too good to be true for much longer? Ie, it feels like an "introductory" offer to me. Ie, they're taking a "loss" so as to grab market share. (Which is fine, but it doesn't bode well for the long term viability of the strategy).
DMoogle
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Re: Lifecycle Investing - Leveraging when young

Post by DMoogle »

Lee_WSP wrote: Sat Jan 23, 2021 1:45 pmRelated question: does anyone else think IB's rates are too good to be true for much longer? Ie, it feels like an "introductory" offer to me. Ie, they're taking a "loss" so as to grab market share. (Which is fine, but it doesn't bode well for the long term viability of the strategy).
They've priced their margin rates at (benchmark)+spread since at least earlier last decade. They used to use the LIBOR rate as the benchmark rate, now it's a combination of LIBOR and Fed Funds. Nearly all their competitors just use a flat (much higher) rate, and alter it on an ad-hoc basis.

They might change their pricing strategy at some point, but it's been this way for quite a while. Their margin rates are the reason I switched to them ~8 years ago.
bling
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Re: Lifecycle Investing - Leveraging when young

Post by bling »

Lee_WSP wrote: Sat Jan 23, 2021 1:45 pm Related question: does anyone else think IB's rates are too good to be true for much longer? Ie, it feels like an "introductory" offer to me. Ie, they're taking a "loss" so as to grab market share. (Which is fine, but it doesn't bode well for the long term viability of the strategy).
i doubt it, it's too profitable. unlike other brokers, IBKR doesn't issue a margin call, they just sell your positions immediately, so their risk is actually pretty low compared to other brokers. they pretty much have a monopoly on the >100k investor who wants to use margin because they're the only game in town that offers these rates.
manlymatt83
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Re: Lifecycle Investing - Leveraging when young

Post by manlymatt83 »

bling wrote: Sat Jan 23, 2021 8:08 pm
Lee_WSP wrote: Sat Jan 23, 2021 1:45 pm Related question: does anyone else think IB's rates are too good to be true for much longer? Ie, it feels like an "introductory" offer to me. Ie, they're taking a "loss" so as to grab market share. (Which is fine, but it doesn't bode well for the long term viability of the strategy).
i doubt it, it's too profitable. unlike other brokers, IBKR doesn't issue a margin call, they just sell your positions immediately, so their risk is actually pretty low compared to other brokers. they pretty much have a monopoly on the >100k investor who wants to use margin because they're the only game in town that offers these rates.
Hmm. Rates are that good at only $100k? I wish Schwab was willing to do better than 7% or whatever they offer.
bling
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Re: Lifecycle Investing - Leveraging when young

Post by bling »

manlymatt83 wrote: Sat Jan 23, 2021 8:10 pm
bling wrote: Sat Jan 23, 2021 8:08 pm
Lee_WSP wrote: Sat Jan 23, 2021 1:45 pm Related question: does anyone else think IB's rates are too good to be true for much longer? Ie, it feels like an "introductory" offer to me. Ie, they're taking a "loss" so as to grab market share. (Which is fine, but it doesn't bode well for the long term viability of the strategy).
i doubt it, it's too profitable. unlike other brokers, IBKR doesn't issue a margin call, they just sell your positions immediately, so their risk is actually pretty low compared to other brokers. they pretty much have a monopoly on the >100k investor who wants to use margin because they're the only game in town that offers these rates.
Hmm. Rates are that good at only $100k? I wish Schwab was willing to do better than 7% or whatever they offer.
IBKR lite gives you 2.6%, which is still amazing. however, IBKR pro gets you the 1.6% and goes down from there the more you borrow. there's a monthly fee that's waived if you have more than 100k, hence that number.

the thing is, the rate is low enough that many investors are willing to pay extra for the convenience of margin, even though if they put in the work, they could beat that rate with futures and/or options.
manlymatt83
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Re: Lifecycle Investing - Leveraging when young

Post by manlymatt83 »

bling wrote: Sat Jan 23, 2021 8:16 pm
manlymatt83 wrote: Sat Jan 23, 2021 8:10 pm
bling wrote: Sat Jan 23, 2021 8:08 pm
Lee_WSP wrote: Sat Jan 23, 2021 1:45 pm Related question: does anyone else think IB's rates are too good to be true for much longer? Ie, it feels like an "introductory" offer to me. Ie, they're taking a "loss" so as to grab market share. (Which is fine, but it doesn't bode well for the long term viability of the strategy).
i doubt it, it's too profitable. unlike other brokers, IBKR doesn't issue a margin call, they just sell your positions immediately, so their risk is actually pretty low compared to other brokers. they pretty much have a monopoly on the >100k investor who wants to use margin because they're the only game in town that offers these rates.
Hmm. Rates are that good at only $100k? I wish Schwab was willing to do better than 7% or whatever they offer.
IBKR lite gives you 2.6%, which is still amazing. however, IBKR pro gets you the 1.6% and goes down from there the more you borrow. there's a monthly fee that's waived if you have more than 100k, hence that number.

the thing is, the rate is low enough that many investors are willing to pay extra for the convenience of margin, even though if they put in the work, they could beat that rate with futures and/or options.
I’m pretty much a VT holder, but have some PSLDX. I would definitely get rid of PSLDX if I could just leverage VT at affordable rates.
bling
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Re: Lifecycle Investing - Leveraging when young

Post by bling »

manlymatt83 wrote: Sat Jan 23, 2021 8:19 pm I’m pretty much a VT holder, but have some PSLDX. I would definitely get rid of PSLDX if I could just leverage VT at affordable rates.
buy deep in the money SPY and EFA call options.
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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP »

manlymatt83 wrote: Sat Jan 23, 2021 8:19 pm
bling wrote: Sat Jan 23, 2021 8:16 pm
manlymatt83 wrote: Sat Jan 23, 2021 8:10 pm
bling wrote: Sat Jan 23, 2021 8:08 pm
Lee_WSP wrote: Sat Jan 23, 2021 1:45 pm Related question: does anyone else think IB's rates are too good to be true for much longer? Ie, it feels like an "introductory" offer to me. Ie, they're taking a "loss" so as to grab market share. (Which is fine, but it doesn't bode well for the long term viability of the strategy).
i doubt it, it's too profitable. unlike other brokers, IBKR doesn't issue a margin call, they just sell your positions immediately, so their risk is actually pretty low compared to other brokers. they pretty much have a monopoly on the >100k investor who wants to use margin because they're the only game in town that offers these rates.
Hmm. Rates are that good at only $100k? I wish Schwab was willing to do better than 7% or whatever they offer.
IBKR lite gives you 2.6%, which is still amazing. however, IBKR pro gets you the 1.6% and goes down from there the more you borrow. there's a monthly fee that's waived if you have more than 100k, hence that number.

the thing is, the rate is low enough that many investors are willing to pay extra for the convenience of margin, even though if they put in the work, they could beat that rate with futures and/or options.
I’m pretty much a VT holder, but have some PSLDX. I would definitely get rid of PSLDX if I could just leverage VT at affordable rates.
Another option is sso. Based on back testing the interest rate is the same as tips.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

manlymatt83 wrote: Sat Jan 23, 2021 8:10 pm
bling wrote: Sat Jan 23, 2021 8:08 pm
Lee_WSP wrote: Sat Jan 23, 2021 1:45 pm Related question: does anyone else think IB's rates are too good to be true for much longer? Ie, it feels like an "introductory" offer to me. Ie, they're taking a "loss" so as to grab market share. (Which is fine, but it doesn't bode well for the long term viability of the strategy).
i doubt it, it's too profitable. unlike other brokers, IBKR doesn't issue a margin call, they just sell your positions immediately, so their risk is actually pretty low compared to other brokers. they pretty much have a monopoly on the >100k investor who wants to use margin because they're the only game in town that offers these rates.
Hmm. Rates are that good at only $100k? I wish Schwab was willing to do better than 7% or whatever they offer.
I actually transferred from Schwab to IBKR precisely for the lower margin rate (they would only promise a provisional a rate of about 4% on the phone). And even IBKR’s rate is generally high, I enact most of my leverage with options (borrowing at around 0.5%). But I do have a small negative cash balance that fluctuates, it’s nice to only pay a spread of about 1% above the risk free rate on it instead of the spread Schwab had.
"... 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
manlymatt83
Posts: 453
Joined: Tue Jan 30, 2018 8:23 am

Re: Lifecycle Investing - Leveraging when young

Post by manlymatt83 »

Steve Reading wrote: Sat Jan 23, 2021 10:08 pm
manlymatt83 wrote: Sat Jan 23, 2021 8:10 pm
bling wrote: Sat Jan 23, 2021 8:08 pm
Lee_WSP wrote: Sat Jan 23, 2021 1:45 pm Related question: does anyone else think IB's rates are too good to be true for much longer? Ie, it feels like an "introductory" offer to me. Ie, they're taking a "loss" so as to grab market share. (Which is fine, but it doesn't bode well for the long term viability of the strategy).
i doubt it, it's too profitable. unlike other brokers, IBKR doesn't issue a margin call, they just sell your positions immediately, so their risk is actually pretty low compared to other brokers. they pretty much have a monopoly on the >100k investor who wants to use margin because they're the only game in town that offers these rates.
Hmm. Rates are that good at only $100k? I wish Schwab was willing to do better than 7% or whatever they offer.
I actually transferred from Schwab to IBKR precisely for the lower margin rate (they would only promise a provisional a rate of about 4% on the phone). And even IBKR’s rate is generally high, I enact most of my leverage with options (borrowing at around 0.5%). But I do have a small negative cash balance that fluctuates, it’s nice to only pay a spread of about 1% above the risk free rate on it instead of the spread Schwab had.
Schwab gave you 4%? What was your range of balance?
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

manlymatt83 wrote: Sat Jan 23, 2021 10:53 pm
Steve Reading wrote: Sat Jan 23, 2021 10:08 pm
manlymatt83 wrote: Sat Jan 23, 2021 8:10 pm
bling wrote: Sat Jan 23, 2021 8:08 pm
Lee_WSP wrote: Sat Jan 23, 2021 1:45 pm Related question: does anyone else think IB's rates are too good to be true for much longer? Ie, it feels like an "introductory" offer to me. Ie, they're taking a "loss" so as to grab market share. (Which is fine, but it doesn't bode well for the long term viability of the strategy).
i doubt it, it's too profitable. unlike other brokers, IBKR doesn't issue a margin call, they just sell your positions immediately, so their risk is actually pretty low compared to other brokers. they pretty much have a monopoly on the >100k investor who wants to use margin because they're the only game in town that offers these rates.
Hmm. Rates are that good at only $100k? I wish Schwab was willing to do better than 7% or whatever they offer.
I actually transferred from Schwab to IBKR precisely for the lower margin rate (they would only promise a provisional a rate of about 4% on the phone). And even IBKR’s rate is generally high, I enact most of my leverage with options (borrowing at around 0.5%). But I do have a small negative cash balance that fluctuates, it’s nice to only pay a spread of about 1% above the risk free rate on it instead of the spread Schwab had.
Schwab gave you 4%? What was your range of balance?
After I put in the transfer, Schwab called me. When I told them I was transferring to IBKR for the margin rate, they said they'd give 4% for one year (presumably trying to change my mind). I had about 300K in the account.
"... 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
calvin111
Posts: 87
Joined: Wed Dec 25, 2019 8:28 pm

Re: Lifecycle Investing - Leveraging when young

Post by calvin111 »

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 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*.

-- Apologies, and I am still learning this and went thru lots of pages. I am interested in following this strategy. So can you please help simplify it.

If I have 100K cash in my taxable account, so do I just buy 200K worth of SPY or VTI or something in my account ?
In this case I will be leveraged 2:1. Correct ?
For borrowing 100K, I will pay margin interest on it (whatever it may be at fidelity - my broker) ?

Is this it ? or what else do I have to do
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