Lifecycle Investing - Leveraging when young

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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

gokuisthebest wrote: Thu Feb 11, 2021 1:03 pm
Steve Reading wrote: Wed Feb 10, 2021 7:36 pm The reason is that SSO has a high expense ratio and if you use margin with regular ETFs, you can actually diversify globally (instead of just the S&P 500). But it's a close race and if you opted for LETFs, that's likely fine as well (the book mentions them as an option).
Why is 0.91% considered high when it provides 2/3x leverage. Many leverage ETF's usually have around this much ER. I'm using 3x etfs all of them have ~0.9% ER which are globally diversified. Is it possible to go above 2x leverage using margin and non leveraged ETF?
I think it's high because you can borrow at similar or even lower rates than LETFs, and not even pay that expense ratio 0_o
gokuisthebest wrote: Thu Feb 11, 2021 1:03 pm
Steve Reading wrote: Wed Feb 10, 2021 7:36 pm First of all, you can't buy a 3x LETF with 2:1 margin at IBKR. The maintenance margin of UPRO is 75%, not 25%. But say you could, for math sakes. If you did have 6:1 leverage, then a 16% drop in the index will fully wipe out all of your money. And you'd get a margin call well before that.

I think around 1.5-2x leverage is enough, I really would follow the book here.
Can you tell me how its 16% drop and not 33% to wipe out the account? For the usual 3x account 33% is obvious but even for 6x leverage the underlying ETF's are still 3x, only our capital has increased now.
What about the margin call, am i correct that we get margin call at 11.11% drop in my earlier example?
I searched online and found inconsistent results like 50%, 75%, 90% margin maintenance for leveraged ETF's. is there any way to get margin for each ticker on IBKR?
A 16.66% drop causes a 50% drop in the value of the 3x LETF, which wipes out the equity of an account leveraged 2:1.
You can check the maintenance margin of LETFs by directly purchasing them in IBKR with the paper trading account.

gokuisthebest wrote: Thu Feb 11, 2021 1:03 pm
  1. I have the book in google playstore pages 114-115 in Chapter 8 -> "Another Approach", the next section is "Investing with ProFunds UltraBull". Maybe the playstore book is in a different format compared to say kindle ebook?
  2. how do i check the s&p micro/mini contract prices in IBKR, whats the window name? i can only see options chain. and how does keeping $9,772 bring the total leverage to 2:1? if 'c' is the contract price and 5x leverage gives us 5c exposure. we add 's' cash => c + s gives us 5c + s exposure. 2x leverage implies 5c + s = 2*(c + s). so s = 3*c. that means i should have 3c as cash and additional c to purchase the contract that means total of 4c to start the account with 2x leverage implementation. i dont think i understand how to calculate leverage tbh :confused
  3. The contract eg. in the book is from July 27, 2009 to December. Shouldnt it be 5 months from Aug-Dec? so the implied iR should be (1.004)^(5/12) = 1.0096 = 0.96%
  4. I live in singapore(not a US citizen) and theres no capital gains tax but theres dividend tax of 30%(can be brought down to 15% if Irish domicile which isnt worth the effort).
Edit: I figured the futures has their own tickers like MES for micro E-mini S&P500 which is currently trading at ~3800-3900. Also theres MES ∞ which is probably the auto-rollover feature in IBKR.
1 MES 18 Jun 2021 @3900 gives exposure to 19500USD which is 5:1, if my calculation in step 2 above are correct, i should maintain 3*c=3*3900=11700 USD cash. maybe short term treasury is better? Since this will be a leverage play, does margin come into account here?
1) An E-Mini contract gives access to 50 shares of S&P 500. So you miss out on two dividend, each of about 1.94%/4 = 0.485%. So that's 0.00485*2*979.26*50 = $475. You're right that they're mistaken there. They pro-rated the dividend (0.0194/12*5*979.26*50 = ~$395), but that's not what you should actually do.
2) i'm not familiar with futures on IBKR, so can't help you with tickers. An E-Micro gives you access to 5 shares of the S&P 500, which is like having exposure to $19500, that's right. The ratio of this exposure to your collateral is the leverage. If you have $9,772 and the index drops 10%, your contract will cause a loss of $1950, so you'll end up with 9772-1950 = $7822. Notice that 7822/9772 = 80%. So a 10% drop in the index caused a 20% drop in your account balance, so you know you have 2:1 leverage.
3) It would be 1.2% if it were 4 months, and 0.96% for five months. Looks like they mistakenly thought there were only 4 months from July to December haha. There are mistakes throughout the book, it's good you're paying attention!
4) If you don't have to pay taxes on the gains of futures, then that seems like the best choice. They're the cheapest way to borrow and would have no expense ratio. Since interest rates are zero, there isn't even an opportunity cost to having money in cash as collateral so futures seem like a strong contender in your case.
"... 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
Incompetent
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Re: Lifecycle Investing - Leveraging when young

Post by Incompetent »

Canadian investor here, happily leveraging away with IBKR in a taxable account. I do however have a question regarding the use of leverage in our registered (Tax free/deferred) accounts.

We're not able to trade on margin or use options etc in our RRSPs and TFSAs, which leaves only LETFs as a means to achieving leverage in these accounts. The mainstream advice on the use of leveraged ETFs as a long-term holding has thus far kept me from ever thinking about it, however, after reading through this thread and others on the forum (With particular thanks to Uncorrelated, Hedgefundie, and Mr. Reading, among others!) I have come to the conclusion that perhaps leveraged ETFs are not some manner of equity vampire, doomed to drain my portfolio performance through dreaded volatility decay until I am left both penniless and broken.

I do have a couple questions on implementation. Say that I have the following targets:

Code: Select all

Model	Weight	MER	Leverage
XIC	30	0.06	1
VUN	30	0.16	
AVUV	10	0.25	
XEF	16	0.22	
AVDV	6	0.36	
XEC	8	0.27	
Total	100	0.17	
(Shamelessly stolen from Ben Felix and team at PWL Capital. RRSP contains US equivalents where possible to save FWT)

Swapping the US Equity portion from VUN to UPRO, and altering the others holdings accordingly gives:

Code: Select all

1x/3x	Weight	MER	Leverage
XIC	37.5	0.06	1.25
UPRO	12.5	0.93	
AVUV	12.5	0.25	
XEF	20.0	0.22	
AVDV	7.5	0.36	
XEC	10.0	0.27	
Total	100	0.27	
Am I right in my math, and how close would one expect this to act as the target portfolio would if it was instead levered with margin?

I am concerned with changing from US Total Market to the S&P 500, and the increased concentration of large caps associated thereof. Mitigating factors may be that the S&P 500 does seem like a somewhat decent approximation of US Total Market, at least, and my US small cap value exposure through AVUV probably helps combat that somewhat as well. Interested in your opinions on this subject.

As a comedy option, there exists as well a 2x S&P 60 TSX fun offered by Horizons, HXU, the use of which would result in something along the lines of:

Code: Select all

2x/3x	Weight	MER	Leverage
HXU	23.1	1.55	1.54
UPRO	15.4	0.93	
AVUV	15.4	0.25	
XEF	24.6	0.22	
AVDV	9.2	0.36	
XEC	12.3	0.27	
Total	100	0.66	
I am much less sure of the S&P 60's ability to act as a proxy for Canadian Total Market however - not to mention the significant MER. Open to being convinced otherwise, as this is just a gut feeling, and as we know, gut feelings are generally a terrible way to make investment decisions (Or, at least, my gut feelings are...)
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Incompetent wrote: Fri Feb 12, 2021 4:47 am

Code: Select all

Model	Weight	MER	Leverage
XIC	30	0.06	1
VUN	30	0.16	
AVUV	10	0.25	
XEF	16	0.22	
AVDV	6	0.36	
XEC	8	0.27	
Total	100	0.17	
(Shamelessly stolen from Ben Felix and team at PWL Capital. RRSP contains US equivalents where possible to save FWT)

Swapping the US Equity portion from VUN to UPRO, and altering the others holdings accordingly gives:

Code: Select all

1x/3x	Weight	MER	Leverage
XIC	37.5	0.06	1.25
UPRO	12.5	0.93	
AVUV	12.5	0.25	
XEF	20.0	0.22	
AVDV	7.5	0.36	
XEC	10.0	0.27	
Total	100	0.27	
Yeah that looks like the closest fit using UPRO. If it was levered with margin, it would behave identically since you'd just bump up the weight of each position by 1.25 proportionally. Idk the margin rates over there though so it might or might not be better.
"... 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 Incompetent »

Steve Reading wrote: Fri Feb 12, 2021 9:17 am Yeah that looks like the closest fit using UPRO. If it was levered with margin, it would behave identically since you'd just bump up the weight of each position by 1.25 proportionally. Idk the margin rates over there though so it might or might not be better.
Awesome thanks, glad I'm not crazy. Currently leveraged up to ~1.25 in my non-registered/taxable account using margin on IBKR, they're charging 1.5%, which is a deductible expense on one's taxes here in the Great White North.

I suppose the "cost" of leveraging with UPRO would be .1% from the difference in weighted MER, as well as whatever is happening internally to UPRO to get the 3x - definitely interested in this as an option for the registered accounts, where traditional forms of leverage are not kosher.
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

gokuisthebest wrote: Thu Feb 11, 2021 1:03 pm
  1. I have the book in google playstore pages 114-115 in Chapter 8 -> "Another Approach", the next section is "Investing with ProFunds UltraBull". Maybe the playstore book is in a different format compared to say kindle ebook?
  2. how do i check the s&p micro/mini contract prices in IBKR, whats the window name? i can only see options chain. and how does keeping $9,772 bring the total leverage to 2:1? if 'c' is the contract price and 5x leverage gives us 5c exposure. we add 's' cash => c + s gives us 5c + s exposure. 2x leverage implies 5c + s = 2*(c + s). so s = 3*c. that means i should have 3c as cash and additional c to purchase the contract that means total of 4c to start the account with 2x leverage implementation. i dont think i understand how to calculate leverage tbh :confused
  3. The contract eg. in the book is from July 27, 2009 to December. Shouldnt it be 5 months from Aug-Dec? so the implied iR should be (1.004)^(5/12) = 1.0096 = 0.96%
  4. I live in singapore(not a US citizen) and theres no capital gains tax but theres dividend tax of 30%(can be brought down to 15% if Irish domicile which isnt worth the effort).
You may want to consider using EUREX MSCI World index Futures to gain leverage. The ticker at IB is MXWO(DTB). The BID/ASK spread is about 20~25 USD/contract(~28000USD), which is a little larger. But it provide developed market exposure instead of only S&P 500.
Pairing it with some EIMI.LSE, and you can get global exposure.
If you don't mind borrow in EUR, MBWO(DTB) would get you lower interest rate, and the BID/ASK spread is tighter than MXWO.

And I think Irish domicile ETF is certainly worth it.

edit:
MBWO tracking MSCI World net return index, so you don't need to add foregone dividend when you calculate implied financing rate.
Last edited by daze on Fri Feb 12, 2021 8:26 pm, edited 3 times in total.
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

Incompetent wrote: Fri Feb 12, 2021 4:47 am
I am concerned with changing from US Total Market to the S&P 500, and the increased concentration of large caps associated thereof. Mitigating factors may be that the S&P 500 does seem like a somewhat decent approximation of US Total Market, at least, and my US small cap value exposure through AVUV probably helps combat that somewhat as well. Interested in your opinions on this subject.
AVUV may or may not offset it since it's a SCV.

You may want to consider VXF (Vanguard Extended Market ETF). It's almost VTI minus VOO.
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Re: Lifecycle Investing - Leveraging when young

Post by gokuisthebest »

Steve Reading wrote: Thu Feb 11, 2021 8:09 pm 2) i'm not familiar with futures on IBKR, so can't help you with tickers. An E-Micro gives you access to 5 shares of the S&P 500, which is like having exposure to $19500, that's right. The ratio of this exposure to your collateral is the leverage. If you have $9,772 and the index drops 10%, your contract will cause a loss of $1950, so you'll end up with 9772-1950 = $7822. Notice that 7822/9772 = 80%. So a 10% drop in the index caused a 20% drop in your account balance, so you know you have 2:1 leverage.
How did you get 9772? For 1 MES contract, it would be exactly (1 contract value)/(leverage) = 19500/2 = 9750 assuming 2x.

If we have 'x' amount in our account, can we just buy x/9750 (rounded down to integer) no of MES contracts? What would be the margin requirement here? CME website says maintenance as of today is 1.1k USD but not sure if that means 1.1k or 5.5k per contract.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

gokuisthebest wrote: Thu Feb 18, 2021 6:25 pm How did you get 9772? For 1 MES contract, it would be exactly (1 contract value)/(leverage) = 19500/2 = 9750 assuming 2x.
Steve Reading wrote: Wed Feb 10, 2021 7:36 pm So one S&P Micro contract is $5 times the S&P 500 (3909 today). So a value of $19,545. So if you keep about $9,772 in cash as the collateral for the contract, you'd have 2:1 leverage.
gokuisthebest wrote: Thu Feb 18, 2021 6:25 pm If we have 'x' amount in our account, can we just buy x/9750 (rounded down to integer) no of MES contracts?
You would go long 2*x/(5*S&P 500 price) contracts, rounded down. That comes out very close to x/9750, that's right.
gokuisthebest wrote: Thu Feb 18, 2021 6:25 pm What would be the margin requirement here? CME website says maintenance as of today is 1.1k USD but not sure if that means 1.1k or 5.5k per contract.
I'm 95% sure that's 1.1K for one contract. But it doesn't hurt to buy one on Interactive Brokers paper trading, and just confirm the maintenance margin. Do note this maintenance can and probably will increase during more volatile times. But this shouldn't matter; you should be rebalancing and decreasing exposure if markets drop and your leverage rises well before you start to get anywhere near maintenance margin requirements.
"... 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 gokuisthebest »

Steve Reading wrote: Thu Feb 18, 2021 6:51 pm I'm 95% sure that's 1.1K for one contract. But it doesn't hurt to buy one on Interactive Brokers paper trading, and just confirm the maintenance margin. Do note this maintenance can and probably will increase during more volatile times. But this shouldn't matter; you should be rebalancing and decreasing exposure if markets drop and your leverage rises well before you start to get anywhere near maintenance margin requirements.
Thanks, Ill check it out in the paper account. Since this works for 3x leverage, it can be used to replace UPRO in HFEA right? Rebalancing would be a problem for small accounts as it will be in multiples of SnP500 price but other than there shouldnt be any other problem.
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

The total portfolio allocation and withdrawal (TPAW) strategy now has a spreadsheet that covers the accumulation phase. This can be used by people trying to figure out their AA in the accumulation phase.

TPAW wiki and the associated thread

The underlying model in TPAW is lifecycle investing, which involves spreading risk across time by trying to maintain a fixed asset allocation on the total portfolio. This is the same basic model used by the Ayres and Nalebuff (A&N). But there are a couple of differences to note:

(1) A&N assume the full portfolio is annuitized at retirement, whereas TPAW carries the fixed AA logic into retirement and withdrawal planning. The lifecycle models of Samuelson and Merton maintain the AA through retirement. It would be suboptimal to drop from the target stock allocation down to zero at retirement. The spreading of stock risk would ideally continue into retirement as well. I suspect A&N were just trying to simplify things with the full annuitization assumption.

(2) The second difference is in how the user decides on their AA (Samuelson share). A&N do it through the new job question. TPAW takes a more direct approach and simply asks the user to adjust AA and withdrawal growth rate (g) till they find the withdrawal distribution that they like the best. Safer AA will tighten the distribution (lower risk) but give lower averages (lower return). The user simply tries different AA and g till they find the withdrawal distribution they most prefer. This seems more intuitive and direct to me.

EXAMPLE

The example below shows a 25 year old with $30,000 in current savings. They expect to save $10,000 per year till retirement at age 65, and to draw $20,000 per year from social security starting age 70. They select an AA of 30/70 on the total portfolio, and withdrawal growth rate (g) of .30%. This gives them the following withdrawal distribution, with withdrawals scheduled to grow from $51,140 at age 65 to $56,793 by age 100:

Image

The projected glidepath for the savings portfolio is shown in the table below, in red on the right. The 30/70 fixed AA on the total portfolio translates to a savings portfolio glidepath that starts at 1300% stocks (i.e. 1200% leverage) at age 25, gliding down to 100% stocks at age 41, and stabilizing around 50% stocks around age 65. If the user is not willing or able to take on the leverage indicated in any given year (likely to be the case in the early stages), then they would simply go up to the top of their acceptable AA range that year.

Image

TPAW leaves it to the user to decide what their personal max AA is, and whether or not it involves leverage. It takes no position on whether you should leverage or not. If you don't want to leverage, just go up to 100% stocks when the calculator calls for leverage.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Ben Mathew wrote: Thu Feb 18, 2021 8:43 pm The total portfolio allocation and withdrawal (TPAW) strategy now has a spreadsheet that covers the accumulation phase. This can be used by people trying to figure out their AA in the accumulation phase.

TPAW wiki and the associated thread

The underlying model in TPAW is lifecycle investing, which involves spreading risk across time by trying to maintain a fixed asset allocation on the total portfolio. This is the same basic model used by the Ayres and Nalebuff (A&N). But there are a couple of differences to note:

(1) A&N assume the full portfolio is annuitized at retirement, whereas TPAW carries the fixed AA logic into retirement and withdrawal planning. The lifecycle models of Samuelson and Merton maintain the AA through retirement. It would be suboptimal to drop from the target stock allocation down to zero at retirement. The spreading of stock risk would ideally continue into retirement as well. I suspect A&N were just trying to simplify things with the full annuitization assumption.

(2) The second difference is in how the user decides on their AA (Samuelson share). A&N do it through the new job question. TPAW takes a more direct approach and simply asks the user to adjust AA and withdrawal growth rate (g) till they find the withdrawal distribution that they like the best. Safer AA will tighten the distribution (lower risk) but give lower averages (lower return). The user simply tries different AA and g till they find the withdrawal distribution they most prefer. This seems more intuitive and direct to me.

EXAMPLE

The example below shows a 25 year old with $30,000 in current savings. They expect to save $10,000 per year till retirement at age 65, and to draw $20,000 per year from social security starting age 70. They select an AA of 30/70 on the total portfolio, and withdrawal growth rate (g) of .30%. This gives them the following withdrawal distribution, with withdrawals scheduled to grow from $51,140 at age 65 to $56,793 by age 100:

Image

The projected glidepath for the savings portfolio is shown in the table below, in red on the right. The 30/70 fixed AA on the total portfolio translates to a savings portfolio glidepath that starts at 1300% stocks (i.e. 1200% leverage) at age 25, gliding down to 100% stocks at age 41, and stabilizing around 50% stocks around age 65. If the user is not willing or able to take on the leverage indicated in any given year (likely to be the case in the early stages), then they would simply go up to the top of their acceptable AA range that year.

Image

TPAW leaves it to the user to decide what their personal max AA is, and whether or not it involves leverage. It takes no position on whether you should leverage or not. If you don't want to leverage, just go up to 100% stocks when the calculator calls for leverage.
This is pretty cool, thanks Ben! I have modified OP to link to this since I agree this is a very useful exercise. I just tried it out with some personal numbers just to see what I get. Something that is different between my personal spreadsheet and this one is that I use cash as the risk-free asset and you use long-term TIPs. This makes my current desired AA based on the New Job question (88%) seem truly terrible in risk-return terms when using your spreadsheet, as you can imagine.

I think there's pros and cons to using cash vs LT TIPs as the risk-free rate. FWIW, I think I fall somewhere in the middle. LT TIPs are clearly the safer asset for long-term withdrawal. But they are very volatile near-term and I don't plan to use my portfolio purely as an amortized annuity: if at 55 an interesting real estate investment comes up, I might jump into it so T-Bills do have a certain appeal as an actual risk-free asset. Another disadvantage is that various expenses are nominal, so LT TIPs are risky for that too.

Of course, cash doesn't offer a constant real or nominal long-term return so it's not a risk-free asset from that sense but the real return on T-Bills doesn't vary THAT much either. So in the end, I settled for using cash in the New Job question. And when I fully deleverage and invest in fixed income, I probably will invest in a combination of LT TIPs, LT nominal bonds, and ST nominal bonds. My thinking is that LT bonds can be subbed out for cash without changing my desired stock allocation since they are more volatile today, but make up for it with higher returns and less long-term risk. This is pretty qualitative but it's what I settled on.

Curious to hear your take. Thanks.
"... 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 »

Steve Reading wrote: Fri Feb 19, 2021 3:39 pm This is pretty cool, thanks Ben! I have modified OP to link to this since I agree this is a very useful exercise.
Thanks, Steve! Hope people find it useful.
Steve Reading wrote: Fri Feb 19, 2021 3:39 pm I just tried it out with some personal numbers just to see what I get. Something that is different between my personal spreadsheet and this one is that I use cash as the risk-free asset and you use long-term TIPs. This makes my current desired AA based on the New Job question (88%) seem truly terrible in risk-return terms when using your spreadsheet, as you can imagine.
So based on the new job question, you are getting a total portfolio AA (Samuelson share) of 88%. If you plug this AA into the TPAW calculation and leave the default numbers for expected returns and volatility of stocks and bonds, it is giving you a very wide dispersion of withdrawals. Am I understanding that right?
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Ben Mathew wrote: Fri Feb 19, 2021 7:18 pm
Steve Reading wrote: Fri Feb 19, 2021 3:39 pm This is pretty cool, thanks Ben! I have modified OP to link to this since I agree this is a very useful exercise.
Thanks, Steve! Hope people find it useful.
Steve Reading wrote: Fri Feb 19, 2021 3:39 pm I just tried it out with some personal numbers just to see what I get. Something that is different between my personal spreadsheet and this one is that I use cash as the risk-free asset and you use long-term TIPs. This makes my current desired AA based on the New Job question (88%) seem truly terrible in risk-return terms when using your spreadsheet, as you can imagine.
So based on the new job question, you are getting a total portfolio AA (Samuelson share) of 88%. If you plug this AA into the TPAW calculation and leave the default numbers for expected returns and volatility of stocks and bonds, it is giving you a very wide dispersion of withdrawals. Am I understanding that right?
I’llhave to do it again with the default numbers but when I put my own expectations, the dispersion and the expected withdrawal is roughly what I would’ve expected. But lower allocations (I looked at 50/50) looked pretty darn compelling (the dispersion is a good bit less while the median still looked very decent).

When I use my own spreadsheet and pick 50/50, my final average accumulation is a lot lower, leading to a much lower average withdrawal.
"... 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 »

Steve Reading wrote: Fri Feb 19, 2021 8:03 pm when I put my own expectations, the dispersion and the expected withdrawal is roughly what I would’ve expected. But lower allocations (I looked at 50/50) looked pretty darn compelling (the dispersion is a good bit less while the median still looked very decent).

When I use my own spreadsheet and pick 50/50, my final average accumulation is a lot lower, leading to a much lower average withdrawal.
The TPAW spreadsheet assumes that the target AA is achieved. Capping leverage will mean that the actual AA is safer than the target AA. So the true withdrawal distribution will be lower and more tightly distributed than what is displayed. That might explain why your spreadsheet is showing lower withdrawals than TPAW. But this problem should be worse for 88/12 than for 50/50 because 88/12 assumes even more unattainable leverage than 50/50. So it doesn't quite explain why 88/12 looks preferable in your spreadsheet while 50/50 looks better in TPAW. I don't have a good answer to that.

Note that even though the actual attainable withdrawal distribution is different from what's displayed in TPAW because of the leverage cap, the fact that the 50/50 distribution looks more attractive to you than 88/12 in TPAW contains information about your risk preferences. You can think of this as a hypothetical question just like the new job question, the answer to which tells you where to locate within the acceptable AA boundaries. If the answers are different--i.e new job says 88/12 and TPAW says 50/50, then it comes down to which answer is more reliable in this context. IMO a question that is close to the actual situation (risk vs reward in withdrawals) is more likely to lead to a better answer.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Ben Mathew wrote: Fri Feb 19, 2021 10:30 pm
Steve Reading wrote: Fri Feb 19, 2021 8:03 pm when I put my own expectations, the dispersion and the expected withdrawal is roughly what I would’ve expected. But lower allocations (I looked at 50/50) looked pretty darn compelling (the dispersion is a good bit less while the median still looked very decent).

When I use my own spreadsheet and pick 50/50, my final average accumulation is a lot lower, leading to a much lower average withdrawal.
The TPAW spreadsheet assumes that the target AA is achieved. Capping leverage will mean that the actual AA is safer than the target AA. So the true withdrawal distribution will be lower and more tightly distributed than what is displayed. That might explain why your spreadsheet is showing lower withdrawals than TPAW. But this problem should be worse for 88/12 than for 50/50 because 88/12 assumes even more unattainable leverage than 50/50. So it doesn't quite explain why 88/12 looks preferable in your spreadsheet while 50/50 looks better in TPAW. I don't have a good answer to that.

Note that even though the actual attainable withdrawal distribution is different from what's displayed in TPAW because of the leverage cap, the fact that the 50/50 distribution looks more attractive to you than 88/12 in TPAW contains information about your risk preferences. You can think of this as a hypothetical question just like the new job question, the answer to which tells you where to locate within the acceptable AA boundaries. If the answers are different--i.e new job says 88/12 and TPAW says 50/50, then it comes down to which answer is more reliable in this context. IMO a question that is close to the actual situation (risk vs reward in withdrawals) is more likely to lead to a better answer.
I thought it was just because the “safe” asset on my spreadsheet has a -2% real return (cash) and yours has -0.3% (20Y TIP). So a 50/50 in yours has like a 1% higher CAGR than mine, which matters a lot when talking about decades.
"... 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 »

Steve Reading wrote: Sat Feb 20, 2021 12:21 am
Ben Mathew wrote: Fri Feb 19, 2021 10:30 pm
Steve Reading wrote: Fri Feb 19, 2021 8:03 pm when I put my own expectations, the dispersion and the expected withdrawal is roughly what I would’ve expected. But lower allocations (I looked at 50/50) looked pretty darn compelling (the dispersion is a good bit less while the median still looked very decent).

When I use my own spreadsheet and pick 50/50, my final average accumulation is a lot lower, leading to a much lower average withdrawal.
The TPAW spreadsheet assumes that the target AA is achieved. Capping leverage will mean that the actual AA is safer than the target AA. So the true withdrawal distribution will be lower and more tightly distributed than what is displayed. That might explain why your spreadsheet is showing lower withdrawals than TPAW. But this problem should be worse for 88/12 than for 50/50 because 88/12 assumes even more unattainable leverage than 50/50. So it doesn't quite explain why 88/12 looks preferable in your spreadsheet while 50/50 looks better in TPAW. I don't have a good answer to that.

Note that even though the actual attainable withdrawal distribution is different from what's displayed in TPAW because of the leverage cap, the fact that the 50/50 distribution looks more attractive to you than 88/12 in TPAW contains information about your risk preferences. You can think of this as a hypothetical question just like the new job question, the answer to which tells you where to locate within the acceptable AA boundaries. If the answers are different--i.e new job says 88/12 and TPAW says 50/50, then it comes down to which answer is more reliable in this context. IMO a question that is close to the actual situation (risk vs reward in withdrawals) is more likely to lead to a better answer.
I thought it was just because the “safe” asset on my spreadsheet has a -2% real return (cash) and yours has -0.3% (20Y TIP). So a 50/50 in yours has like a 1% higher CAGR than mine, which matters a lot when talking about decades.
Ah, yes, that makes sense. The higher yield of the TIPS in TPAW helps the 50/50 more than the 88/12.
Steve Reading wrote: Fri Feb 19, 2021 3:39 pm I think there's pros and cons to using cash vs LT TIPs as the risk-free rate. FWIW, I think I fall somewhere in the middle. LT TIPs are clearly the safer asset for long-term withdrawal. But they are very volatile near-term and I don't plan to use my portfolio purely as an amortized annuity: if at 55 an interesting real estate investment comes up, I might jump into it so T-Bills do have a certain appeal as an actual risk-free asset. Another disadvantage is that various expenses are nominal, so LT TIPs are risky for that too.

Of course, cash doesn't offer a constant real or nominal long-term return so it's not a risk-free asset from that sense but the real return on T-Bills doesn't vary THAT much either. So in the end, I settled for using cash in the New Job question. And when I fully deleverage and invest in fixed income, I probably will invest in a combination of LT TIPs, LT nominal bonds, and ST nominal bonds. My thinking is that LT bonds can be subbed out for cash without changing my desired stock allocation since they are more volatile today, but make up for it with higher returns and less long-term risk. This is pretty qualitative but it's what I settled on.

Curious to hear your take. Thanks.
Long term bonds offer both higher yields and reduced interest rate risk for younger investors. So I think it's a compelling proposition. Even if you might need cash at some point for a real estate investment, long term bonds may work better in some ways. Real estate prices would rise if interest rate drops, so a longer term hedges against that. The current environment is a good example of low interest rates driving up the price of all assets including stocks, bonds and real estate. Longer term bonds would have kept up better.
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Re: Lifecycle Investing - Leveraging when young

Post by msun641 »

Wondering what thoughts you guys have on a strategy of buying LEAPS and simply exercising at expiration on margin aiming for somewhere around 2-3x total leverage. Main benefit is minimizing tax drag as no taxable events hopefully before withdrawal for retirement. On robinhood I can get VTI and VXUS for an implied 3 to 4 interest rate no problem.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Ben Mathew wrote: Sat Feb 20, 2021 3:27 am
Steve Reading wrote: Sat Feb 20, 2021 12:21 am
Ben Mathew wrote: Fri Feb 19, 2021 10:30 pm
Steve Reading wrote: Fri Feb 19, 2021 8:03 pm when I put my own expectations, the dispersion and the expected withdrawal is roughly what I would’ve expected. But lower allocations (I looked at 50/50) looked pretty darn compelling (the dispersion is a good bit less while the median still looked very decent).

When I use my own spreadsheet and pick 50/50, my final average accumulation is a lot lower, leading to a much lower average withdrawal.
The TPAW spreadsheet assumes that the target AA is achieved. Capping leverage will mean that the actual AA is safer than the target AA. So the true withdrawal distribution will be lower and more tightly distributed than what is displayed. That might explain why your spreadsheet is showing lower withdrawals than TPAW. But this problem should be worse for 88/12 than for 50/50 because 88/12 assumes even more unattainable leverage than 50/50. So it doesn't quite explain why 88/12 looks preferable in your spreadsheet while 50/50 looks better in TPAW. I don't have a good answer to that.

Note that even though the actual attainable withdrawal distribution is different from what's displayed in TPAW because of the leverage cap, the fact that the 50/50 distribution looks more attractive to you than 88/12 in TPAW contains information about your risk preferences. You can think of this as a hypothetical question just like the new job question, the answer to which tells you where to locate within the acceptable AA boundaries. If the answers are different--i.e new job says 88/12 and TPAW says 50/50, then it comes down to which answer is more reliable in this context. IMO a question that is close to the actual situation (risk vs reward in withdrawals) is more likely to lead to a better answer.
I thought it was just because the “safe” asset on my spreadsheet has a -2% real return (cash) and yours has -0.3% (20Y TIP). So a 50/50 in yours has like a 1% higher CAGR than mine, which matters a lot when talking about decades.
Ah, yes, that makes sense. The higher yield of the TIPS in TPAW helps the 50/50 more than the 88/12.
Steve Reading wrote: Fri Feb 19, 2021 3:39 pm I think there's pros and cons to using cash vs LT TIPs as the risk-free rate. FWIW, I think I fall somewhere in the middle. LT TIPs are clearly the safer asset for long-term withdrawal. But they are very volatile near-term and I don't plan to use my portfolio purely as an amortized annuity: if at 55 an interesting real estate investment comes up, I might jump into it so T-Bills do have a certain appeal as an actual risk-free asset. Another disadvantage is that various expenses are nominal, so LT TIPs are risky for that too.

Of course, cash doesn't offer a constant real or nominal long-term return so it's not a risk-free asset from that sense but the real return on T-Bills doesn't vary THAT much either. So in the end, I settled for using cash in the New Job question. And when I fully deleverage and invest in fixed income, I probably will invest in a combination of LT TIPs, LT nominal bonds, and ST nominal bonds. My thinking is that LT bonds can be subbed out for cash without changing my desired stock allocation since they are more volatile today, but make up for it with higher returns and less long-term risk. This is pretty qualitative but it's what I settled on.

Curious to hear your take. Thanks.
Long term bonds offer both higher yields and reduced interest rate risk for younger investors. So I think it's a compelling proposition. Even if you might need cash at some point for a real estate investment, long term bonds may work better in some ways. Real estate prices would rise if interest rate drops, so a longer term hedges against that. The current environment is a good example of low interest rates driving up the price of all assets including stocks, bonds and real estate. Longer term bonds would have kept up better.
Does it make sense to do the New Job question with LT TIP rate as the risk-free asset instead? If so, should one use the CAGR or the arithmetic mean return of the LT TIP?
"... 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 »

Steve Reading wrote: Sat Feb 20, 2021 8:36 am Does it make sense to do the New Job question with LT TIP rate as the risk-free asset instead? If so, should one use the CAGR or the arithmetic mean return of the LT TIP?
I think it makes sense to try the new job question with long term TIPS rates and see what you get.

I use yield to maturity as the return estimate for bonds. Forward looking and easily available. I use the real yield curve from: https://www.treasury.gov/resource-cente ... =realyield
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Ben Mathew wrote: Sat Feb 20, 2021 7:08 pm
Steve Reading wrote: Sat Feb 20, 2021 8:36 am Does it make sense to do the New Job question with LT TIP rate as the risk-free asset instead? If so, should one use the CAGR or the arithmetic mean return of the LT TIP?
I think it makes sense to try the new job question with long term TIPS rates and see what you get.

I use yield to maturity as the return estimate for bonds. Forward looking and easily available. I use the real yield curve from: https://www.treasury.gov/resource-cente ... =realyield
FWIW, I now get about 70%. When I look at that using the TPAW, it looks like about what I would've picked independently too. Thank you for bringing this up, I think I do like using LT TIPs as RFR with the New Job question.

Interestingly, this change would mean I'm definitely overweight in stocks right now. But my shares have appreciated significantly, so there would be some taxes if I sell stocks now haha. Clearly a good problem to have after all though!
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by bdogg »

Hey Steve,

If you can please PM. I just made an account to comment on your post but, I cannot PM people due to the novelty of my account. However, I just finished lifecycle investing and I find the principles to be taught in the book quite sound and persuasive. I believe that the strategy makes sense I am looking forward to applying the strategy with my own investments. I was just wondering if you applied the Lifecycle investing approach and how your experience has been with the strategy.

Best.
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Re: Lifecycle Investing - Leveraging when young

Post by comeinvest »

daze wrote: Fri Feb 12, 2021 11:38 am You may want to consider using EUREX MSCI World index Futures to gain leverage. The ticker at IB is MXWO(DTB). The BID/ASK spread is about 20~25 USD/contract(~28000USD), which is a little larger. But it provide developed market exposure instead of only S&P 500.
Pairing it with some EIMI.LSE, and you can get global exposure.
If you don't mind borrow in EUR, MBWO(DTB) would get you lower interest rate, and the BID/ASK spread is tighter than MXWO.

And I think Irish domicile ETF is certainly worth it.

edit:
MBWO tracking MSCI World net return index, so you don't need to add foregone dividend when you calculate implied financing rate.
MBWO seems to have very low volume compared to many other country and region equity index futures. I suspect you would incur higher rollover cost in the long run than with other equity futures. I would consider, for example, a combination of ES (S&P 500), Stoxx Europe 600, and MME (MSCI Emerging Markets futures).

Regarding your other comment about net total return index futures: I hear that sometimes country equity futures are more efficient, as market makers can balance their short futures positions with equities without paying dividend withholding tax. I have not done the math lately examining the implied cost of individual futures contracts, but I think it is something to consider.
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Re: Lifecycle Investing - Leveraging when young

Post by comeinvest »

Steve Reading wrote: Tue Feb 09, 2021 1:40 pm Shorting an SPX box is just a way to change the margin borrowing rate from 1.59% (or lower) into about 0.6%. It doesn't change anything else. You still invest in the exact same broad-based ETFs. This is what I did; I bought all of the ETFs I wanted on margin, then shorted SPX boxes to change my margin balance (which I'd pay about 1.2% on) to around 0.6% (via options).

I highly recommend you open a paper-trading account at Interactive Brokers (and go through some of the Mosaic tutorials of TWS). And just try out some trades of all sizes and see what happens. Think about how you think a purchase would affect your margin requirement and excess liquidity, do the purchase, then look at the margin requirement to confirm. If you're ever interested in shorting an SPX box to reduce your margin interest, try it out in paper trading first too.

Even though I understood most of this stuff in theory, I still took about a week paper trading to confirm I understood what I'm doing, what the portfolio will look like, etc. Just play around with the $1M they give you. I found it to be invaluable practice.
I want to implement box spread financing in my taxable account, and have a few questions about box spread financing. Almost all my assets are at Interactive Brokers currently.

1. But with a paper trading account you can't simulate the execution quality of limit orders, can you?

2. Do you implement the suggestion from the Reddit page to protect yourself from bad mark or quote prices using a GTC order? "Portfolio margin traders can suffer margin calls if you have a bad mark/quote. This is a huge problem at Interactive Brokers. TD Ameritrade seems to be a lot smarter about this. You need to place a GTC close order at a very favorable unrealistic price to always quote your box."

I have relatively much experience with equities and futures orders, but I'm new to options. (I know the theory of options, but not the mechanics or the trading "best practices".) Reading some of your posts I understand that you put in an order for the whole box, not the individual legs; and you "test the market" somewhere between the bid and ask, slightly modifying the limit until you get filled, correct? That leads me to question 3:

3. Have you considered putting in limit orders for the legs separately, providing liquidity, in hope to get filled by liquidity takers? If similar to futures, I think this is what some traders and investors do to roll positions, as the individual legs are more liquid than the combination orders. (Of course the risk is that the market moves against you during the time lag of the individual fills i.e. there would be some "tracking error"; but the market can move both ways and it might average out in the long run. IB also has some order types that immediately put in market orders for remaining legs once one leg is filled. I'm curious what the most efficient trading strategy is in the long run.)

4. The Reddit page suggests "You need to direct route these orders to an exchange. You can try smart routing first but it seems to work better getting quoted. Direct routing may bypass some limitations your broker attempts to prevent you from getting better interest rates." - What are the market places offered by IB for index options, and what is the best to use for the box spread strategy in your experience?

5. Do you think it might be advantageous to "spread the risk" of some of the risks mentioned on the Reddit page (e.g. the "bad quote" risk), by using several expirations / strike prices, and/or a few different underlyings instead of just one? I assume there are European style index options on other indexes, e.g. Dow Jones, European equity indexes, etc.

Thanks a lot! I wouldn't have come across box spread financing had I not read your Bogleheads thread!
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

comeinvest wrote: Sun Feb 21, 2021 7:07 pm 1. But with a paper trading account you can't simulate the execution quality of limit orders, can you?
Probably not to a great degree. I assume real execution quality is probably better than with the paper trading account since you actually access market makers.
comeinvest wrote: Sun Feb 21, 2021 7:07 pm 2. Do you implement the suggestion from the Reddit page to protect yourself from bad mark or quote prices using a GTC order? "Portfolio margin traders can suffer margin calls if you have a bad mark/quote. This is a huge problem at Interactive Brokers. TD Ameritrade seems to be a lot smarter about this. You need to place a GTC close order at a very favorable unrealistic price to always quote your box."

I have relatively much experience with equities and futures orders, but I'm new to options. (I know the theory of options, but not the mechanics or the trading "best practices".) Reading some of your posts I understand that you put in an order for the whole box, not the individual legs; and you "test the market" somewhere between the bid and ask, slightly modifying the limit until you get filled, correct? That leads me to question 3:
I do put the limit GTC orders just in case. Definitely put the order as a box (that's a strategy IBKR allows) and use limit orders, slowly getting to a price you'd like (I found 0.5-0.6% implied rates often). Some times it takes some time. Some times I try another set of strikes.
comeinvest wrote: Sun Feb 21, 2021 7:07 pm 3. Have you considered putting in limit orders for the legs separately, providing liquidity, in hope to get filled by liquidity takers? If similar to futures, I think this is what some traders and investors do to roll positions, as the individual legs are more liquid than the combination orders. (Of course the risk is that the market moves against you during the time lag of the individual fills i.e. there would be some "tracking error"; but the market can move both ways and it might average out in the long run. IB also has some order types that immediately put in market orders for remaining legs once one leg is filled. I'm curious what the most efficient trading strategy is in the long run.)
I don't do that, but it's an interesting thought. I don't know a lot about options either, just enough to do what you see on this thread haha.
comeinvest wrote: Sun Feb 21, 2021 7:07 pm 4. The Reddit page suggests "You need to direct route these orders to an exchange. You can try smart routing first but it seems to work better getting quoted. Direct routing may bypass some limitations your broker attempts to prevent you from getting better interest rates." - What are the market places offered by IB for index options, and what is the best to use for the box spread strategy in your experience?
I always used SMART routing. My fills were fine, I'd get implied borrowing rates of 0.5%, which is what futures get so no complaints. I think there might be another routing option, you can check on the paper trading account and try it out. I'd be interested to hear your experience.
comeinvest wrote: Sun Feb 21, 2021 7:07 pm 5. Do you think it might be advantageous to "spread the risk" of some of the risks mentioned on the Reddit page (e.g. the "bad quote" risk), by using several expirations / strike prices, and/or a few different underlyings instead of just one? I assume there are European style index options on other indexes, e.g. Dow Jones, European equity indexes, etc.
I suppose it can't hurt. I have shorted multiple boxes but just because whenever I have re-leveraged up, I needed to re-borrow so I shorted another one (generally different expiration and strikes).

There's options on the Dow, Russell 2K and 1K and some sectors, so you could look into those. I'd be interested to hear if you get good fills.

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
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Re: Lifecycle Investing - Leveraging when young

Post by eggraid101 »

Steve, great thread, thanks so much for all of your thoughtful replies; I read about the first 14 pages :) I am very impressed by your patience with people who are persistent in demanding answers or evidence that is covered in great detail in the Lifecyle Investing book.

I read the book a few years ago and was really taken by the idea, but a little nervous/naive to actually implement any kind of leverage, although I did shift as close to 100% equities as I could. I re-read the book last week, and came to some conclusions in my own head that were supported by your thread here.

I feel like LEAPS are the way to go to avoid any margin calls, although I think I will keep it simple and not bother with the puts, even though you lay out a good case for them. I plan to shoot for 1.6 leverage in my tax-advantaged account only, so I will probably be at only about 1.2 leverage overall.

I'm interested to hear if anyone has successfully done leverage in an IRA account for a minor? I'd love to do this for my kids, who have maybe $15,000 in their IRAs at this point.
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Re: Lifecycle Investing - Leveraging when young

Post by comeinvest »

eggraid101 wrote: Sun Feb 21, 2021 8:12 pm I feel like LEAPS are the way to go to avoid any margin calls, although I think I will keep it simple and not bother with the puts, even though you lay out a good case for them. I plan to shoot for 1.6 leverage in my tax-advantaged account only, so I will probably be at only about 1.2 leverage overall.

I'm interested to hear if anyone has successfully done leverage in an IRA account for a minor? I'd love to do this for my kids, who have maybe $15,000 in their IRAs at this point.
I use futures for leverage in my IRA (Interactive Brokers), but I'm not a minor.
I personally had higher leverage in some accounts like tax-advantaged accounts than in others a while ago. Although theoretically the overall leverage ratio is what matters, I found it too labor intensive and nerve wrecking to deal with "rescue operations" and reshuffling assets when the higher-leveraged account came close to, or beyond, margin calls. I now see little benefit of having different leverage ratios in different accounts, and try to have similar leverage as well as similar asset allocation in all accounts. (Except when there is a discernible benefit e.g. taxable bonds in tax-advantaged, municipal bonds in taxable, futures in tax-advantaged, box spreads I'm planning for taxable.) This way I hope that I rarely if ever have to deleverage in my lifetime, or monitor my accounts overly closely. It's more like autopilot. That's also one of the reasons I prefer lower leverage (ca. 1.25 - 1.35), and (hopefully) no deleveraging, or possibly even opportunistically adding assets during downturns. Any reason why you would have different leverage per account?
Last edited by comeinvest on Sun Feb 21, 2021 10:25 pm, edited 3 times in total.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

eggraid101 wrote: Sun Feb 21, 2021 8:12 pm I feel like LEAPS are the way to go to avoid any margin calls, although I think I will keep it simple and not bother with the puts, even though you lay out a good case for them. I plan to shoot for 1.6 leverage in my tax-advantaged account only, so I will probably be at only about 1.2 leverage overall.
Well, if it's a tax-advantaged account then margin is not an option any ways, so you can't sell puts. The OP has a list of ways to leverage, it looks like you have the choice of futures, deep ITM LEAPs and leveraged ETFs. I like futures the most in this instance.
eggraid101 wrote: Sun Feb 21, 2021 8:12 pm I'm interested to hear if anyone has successfully done leverage in an IRA account for a minor? I'd love to do this for my kids, who have maybe $15,000 in their IRAs at this point.
Can't speak about the minor part but just a heads up that one SPY LEAP gives exposure to about $39K of stock so an account with just $15K is a bit small. It would have at least 2.6x leverage, which is likely too much. This is a situation where a combination of leveraged ETFs (like UPRO) with international stock ETFs (like VXUS) might let you hit your desired leverage (say, 1.5x or 2x) with a smaller account size.
"... 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 comeinvest »

Steve Reading wrote: Sun Feb 21, 2021 7:49 pm There's options on the Dow, Russell 2K and 1K and some sectors, so you could look into those. I'd be interested to hear if you get good fills.
Good luck!
Thanks for your replies. I will definitely post on this thread once I get started with options and box spreads, so we can combine our experiences and refine our strategies!
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Re: Lifecycle Investing - Leveraging when young

Post by msun641 »

Steve, isn't there a significant tax drag when using futures? Are you only leveraging in an IRA?
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Re: Lifecycle Investing - Leveraging when young

Post by climber2020 »

Steve Reading wrote: Fri Mar 01, 2019 12:11 am Hello,
This thread has evolved into a discussion of all aspects of Lifecycle Investing. It has also gotten quite long. To that end, I have modified this OP to serve as a one-stop-shop of the most relevant information in the thread.
One thing I didn't read in the concise and useful FAQ in the very first post: what is the worst possible scenario that could unfold with this investing approach and what combination of market conditions would lead to this outcome?
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

msun641 wrote: Mon Feb 22, 2021 11:21 am Steve, isn't there a significant tax drag when using futures? Are you only leveraging in an IRA?
Tax drag depends on your circumstances. I only leverage in taxable using margin at the moment (see OP for additional information on ways to leverage, just added some clarification to it).
climber2020 wrote: Mon Feb 22, 2021 11:25 am
Steve Reading wrote: Fri Mar 01, 2019 12:11 am Hello,
This thread has evolved into a discussion of all aspects of Lifecycle Investing. It has also gotten quite long. To that end, I have modified this OP to serve as a one-stop-shop of the most relevant information in the thread.
One thing I didn't read in the concise and useful FAQ in the very first post: what is the worst possible scenario that could unfold with this investing approach and what combination of market conditions would lead to this outcome?
I feel like the Great Depression is about as bad as it can get. This strategy still outperformed despite it. See:
Steve Reading wrote: Fri Mar 01, 2019 12:11 am Hey, I think I’ve seen this one before. What about Market Timer’s thread?
Market Timer absolutely had the right idea but made some mistakes in implementation. See:
viewtopic.php?p=4874404#p4874404
Implemented properly, the strategy would have worked out even during the Great Depression. So implement it properly!
"... 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 eggraid101 »

comeinvest wrote: Sun Feb 21, 2021 10:16 pm
eggraid101 wrote: Sun Feb 21, 2021 8:12 pm I feel like LEAPS are the way to go to avoid any margin calls, although I think I will keep it simple and not bother with the puts, even though you lay out a good case for them. I plan to shoot for 1.6 leverage in my tax-advantaged account only, so I will probably be at only about 1.2 leverage overall.

I'm interested to hear if anyone has successfully done leverage in an IRA account for a minor? I'd love to do this for my kids, who have maybe $15,000 in their IRAs at this point.
I use futures for leverage in my IRA (Interactive Brokers), but I'm not a minor.
I personally had higher leverage in some accounts like tax-advantaged accounts than in others a while ago. Although theoretically the overall leverage ratio is what matters, I found it too labor intensive and nerve wrecking to deal with "rescue operations" and reshuffling assets when the higher-leveraged account came close to, or beyond, margin calls. I now see little benefit of having different leverage ratios in different accounts, and try to have similar leverage as well as similar asset allocation in all accounts. (Except when there is a discernible benefit e.g. taxable bonds in tax-advantaged, municipal bonds in taxable, futures in tax-advantaged, box spreads I'm planning for taxable.) This way I hope that I rarely if ever have to deleverage in my lifetime, or monitor my accounts overly closely. It's more like autopilot. That's also one of the reasons I prefer lower leverage (ca. 1.25 - 1.35), and (hopefully) no deleveraging, or possibly even opportunistically adding assets during downturns. Any reason why you would have different leverage per account?
I figure it would be easiest to have leverage in one account just to make it as easy as possible to keep on top of. I have a 401k (can't do it there) an IRA, and a taxable account. I don't want the hassle of adding tax implications - at least when I start out, so I figure the best account to wade into leverage is the IRA. With how much things have gone up over the past 10 years, I am a little nervous about going all the way to 2x.
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

comeinvest wrote: Sat Feb 20, 2021 11:58 pm
daze wrote: Fri Feb 12, 2021 11:38 am You may want to consider using EUREX MSCI World index Futures to gain leverage. The ticker at IB is MXWO(DTB). The BID/ASK spread is about 20~25 USD/contract(~28000USD), which is a little larger. But it provide developed market exposure instead of only S&P 500.
Pairing it with some EIMI.LSE, and you can get global exposure.
If you don't mind borrow in EUR, MBWO(DTB) would get you lower interest rate, and the BID/ASK spread is tighter than MXWO.

And I think Irish domicile ETF is certainly worth it.

edit:
MBWO tracking MSCI World net return index, so you don't need to add foregone dividend when you calculate implied financing rate.
MBWO seems to have very low volume compared to many other country and region equity index futures. I suspect you would incur higher rollover cost in the long run than with other equity futures. I would consider, for example, a combination of ES (S&P 500), Stoxx Europe 600, and MME (MSCI Emerging Markets futures).

Regarding your other comment about net total return index futures: I hear that sometimes country equity futures are more efficient, as market makers can balance their short futures positions with equities without paying dividend withholding tax. I have not done the math lately examining the implied cost of individual futures contracts, but I think it is something to consider.
The volume of MXWO is really poor. MBWO has something like a thousand contract per day. M1WO has around a few thousands. Surely not comparable to ES. The spread of MBWO is about 10~15 EUR/contract(~35000 EUR) during working hours of Germany(GMT+1). It might be larger if your trading hours is US based. I estimate the practical implied financing rate of MBWO, including the rollover cost and tax loss of net return index, is about 0.1~0.2%/year. (My country do not tax capital gain less than ~240K USD)

A combination of ES (S&P 500), Stoxx Europe 600, and MSCI Emerging Markets futures should work, but the contract size is not very convenient for me. I think MME cannot be traded at IB, but M1EF is provided.
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Re: Lifecycle Investing - Leveraging when young

Post by msun641 »

Something that is worrying to me about futures is the unlimited downside risk. For anyone using futures for leverage, did you get margin-called last March?

I feel like with LEAPS, you're losing on some of the upside of leverage with a higher implied interest rate, but on the flip side, you'll never get margin-called, either. And if the purpose of lifecycle investing is to avoid SORR, smoothing out some of the implied volatility with options fits with that philosophy well.
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

msun641 wrote: Wed Feb 24, 2021 12:19 pm Something that is worrying to me about futures is the unlimited downside risk. For anyone using futures for leverage, did you get margin-called last March?

I feel like with LEAPS, you're losing on some of the upside of leverage with a higher implied interest rate, but on the flip side, you'll never get margin-called, either. And if the purpose of lifecycle investing is to avoid SORR, smoothing out some of the implied volatility with options fits with that philosophy well.
Futures do not have unlimited downside risk. Worst case, the index goes to zero. (Well, at least for stock indices. What happened to WTI on 2020 April is another story.) For MES, it means losing 19500 USD/contract at most. If you hold 50 shares of SPY, the worst case is also losing 19500 USD.
If you are worrying the downside risk of futures, are you also worrying the downside risk of stocks? It's fine to be worried, but if you think differently between futures and stocks, there's an inconsistency.

Suppose the expected return of stock is 7%, the implied financing rate of LEAPS is 4% and the implied financing rate of ES is 1%. Therefore, to achieve similar expected return of 150% leverage by future, you would need 200% leverage by LEAPS. While it's true that LEAPS will never get you a margin call, whether 200% leverage is safer than 150% leverage is probably debatable.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

msun641 wrote: Wed Feb 24, 2021 12:19 pm Something that is worrying to me about futures is the unlimited downside risk. For anyone using futures for leverage, did you get margin-called last March?

I feel like with LEAPS, you're losing on some of the upside of leverage with a higher implied interest rate, but on the flip side, you'll never get margin-called, either. And if the purpose of lifecycle investing is to avoid SORR, smoothing out some of the implied volatility with options fits with that philosophy well.
Just FYI, if you had started with 2:1 leverage and hadn't sold at all in March, you still wouldn't have received a margin call. That said, one should be selling exposure as losses mount to keep the leverage reasonable so even if March had been worse, you should never be in a position where you're receiving margin calls. And consider starting with less leverage (perhaps 1.5x) which historically gave most benefits while being more conservative in terms of psychological losses.

LEAPs are OK too. I hate on them because the "implied rate" is high but you are getting something for it (downside protection). So when the market drops, LEAPs don't drop as much (it's like you're leveraged but it's asymmetrical... your upside leverage is greater than downside leverage, even when they're still ITM). They can't be bad purchases, otherwise selling them would be great (which I doubt). You'll have to weigh pros and cons. I don't think there's a right answer.
"... 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 Gufomel »

Ben Mathew wrote: Thu Feb 18, 2021 8:43 pm The total portfolio allocation and withdrawal (TPAW) strategy now has a spreadsheet that covers the accumulation phase. This can be used by people trying to figure out their AA in the accumulation phase.

TPAW wiki and the associated thread

The underlying model in TPAW is lifecycle investing, which involves spreading risk across time by trying to maintain a fixed asset allocation on the total portfolio. This is the same basic model used by the Ayres and Nalebuff (A&N). But there are a couple of differences to note:

(1) A&N assume the full portfolio is annuitized at retirement, whereas TPAW carries the fixed AA logic into retirement and withdrawal planning. The lifecycle models of Samuelson and Merton maintain the AA through retirement. It would be suboptimal to drop from the target stock allocation down to zero at retirement. The spreading of stock risk would ideally continue into retirement as well. I suspect A&N were just trying to simplify things with the full annuitization assumption.

(2) The second difference is in how the user decides on their AA (Samuelson share). A&N do it through the new job question. TPAW takes a more direct approach and simply asks the user to adjust AA and withdrawal growth rate (g) till they find the withdrawal distribution that they like the best. Safer AA will tighten the distribution (lower risk) but give lower averages (lower return). The user simply tries different AA and g till they find the withdrawal distribution they most prefer. This seems more intuitive and direct to me.

EXAMPLE

The example below shows a 25 year old with $30,000 in current savings. They expect to save $10,000 per year till retirement at age 65, and to draw $20,000 per year from social security starting age 70. They select an AA of 30/70 on the total portfolio, and withdrawal growth rate (g) of .30%. This gives them the following withdrawal distribution, with withdrawals scheduled to grow from $51,140 at age 65 to $56,793 by age 100:

Image

The projected glidepath for the savings portfolio is shown in the table below, in red on the right. The 30/70 fixed AA on the total portfolio translates to a savings portfolio glidepath that starts at 1300% stocks (i.e. 1200% leverage) at age 25, gliding down to 100% stocks at age 41, and stabilizing around 50% stocks around age 65. If the user is not willing or able to take on the leverage indicated in any given year (likely to be the case in the early stages), then they would simply go up to the top of their acceptable AA range that year.

Image

TPAW leaves it to the user to decide what their personal max AA is, and whether or not it involves leverage. It takes no position on whether you should leverage or not. If you don't want to leverage, just go up to 100% stocks when the calculator calls for leverage.
This is fantastic! I’m definitely going to be playing around with this as I find time. A few quick questions:

1) Where’s the best place to put a mortgage? Just subtract it from the value you put for Savings Portfolio?
2) I’m getting a #REF error when I try to delete rows. I see the comment about not deleting the first two rows, last row, or retirement age row, but deleting anything seems to throw an error for me.
3) Related to above, I guess the number of rows would need to be manually adjusted every year going forward that someone uses this spreadsheet?
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Re: Lifecycle Investing - Leveraging when young

Post by verythankful »

As US market is overvalued. Was looking at EFA (developed-market securities based in Europe, Australia and the Far East) high expenses ratio (0.35) but offer leaps and pe ratio less than 20. Leveraging in roth using Deep in the money option for Jan 2023, looks reasonable, any thoughts here?
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

Gufomel wrote: Thu Feb 25, 2021 4:46 pm 1) Where’s the best place to put a mortgage? Just subtract it from the value you put for Savings Portfolio?
There's no place to directly enter the mortgage. It shows up indirectly as reduced future savings for the portfolio while you have the mortgage. A few examples:

Example 1: 30 year old with 13 years left on the mortgage: This shows up as lower savings for the next 13 years (ages 30-42), higher savings afterwards till retirement (ages 42-64), and no scheduled mortgage expense during retirement.

Example 2: 60 year old with 13 years left on the mortgage, planning to retire at age 65. Keeping mortgage for full term. So mortgage payments continue into into early part of retirement. This manifests as lower savings for ages 60-64, higher mortgage expense during early retirement (ages 65-72), and no mortgage expense after. You could enter the mortgage payments under "essential expenses" for ages 65-72.

Example 3: 60 year old with 13 years left on the mortgage, planning to retire at age 65. Will pay off mortgage at start of retirement. This manifests as lower savings for ages 60-64, and a onetime mortgage payoff expense scheduled under "essential expenses" at age 65.
Gufomel wrote: Thu Feb 25, 2021 4:46 pm 2) I’m getting a #REF error when I try to delete rows. I see the comment about not deleting the first two rows, last row, or retirement age row, but deleting anything seems to throw an error for me.
I expect a #REF error till the formulas are copied over. Let me look at the spreadsheet more closely tomorrow and see if I can improve this process.
Gufomel wrote: Thu Feb 25, 2021 4:46 pm 3) Related to above, I guess the number of rows would need to be manually adjusted every year going forward that someone uses this spreadsheet?
Yes. Eventually I hope to create an automated spreadsheet where you enter current age, withdrawal start age, and withdrawal end age, and the table is automatically created, so no manual row deleting required every year. The problem with this is that the formulas become complicated and hard to understand. So it ends up being easy to use as-is, but hard to modify. So I'll probably put up both versions--a manual spreadsheet (for understanding and customizing) and an automated spreadsheet (for ease of use) and let people decide which one they want to use.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

verythankful wrote: Thu Feb 25, 2021 10:57 pm As US market is overvalued. Was looking at EFA (developed-market securities based in Europe, Australia and the Far East) high expenses ratio (0.35) but offer leaps and pe ratio less than 20. Leveraging in roth using Deep in the money option for Jan 2023, looks reasonable, any thoughts here?
What was the implied interest rate on the LEAP?
"... 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 bumbojumbo »

Hey Steve. Could you comment on the mechanics of maintaining 2x leverage in a margin account? For example, how often do you buy/sell to maintain that ratio? I currently do 1.6-1.7x and let it ride, but I worry that that is actually riskier (letting it ride could lead to a margin call) and less effective (less equity exposure) than maintaining a 2x target.

On the other hand, I worry that attempting to maintain a fixed leverage ratio leads to the sisyphean task of rebalancing on a daily basis (or even more frequently :oops: ). If the market were to have several successive down days, one is better off re-adjusting each day rather than weekly.
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Re: Lifecycle Investing - Leveraging when young

Post by Gufomel »

Ben Mathew wrote: Thu Feb 25, 2021 11:53 pm
Gufomel wrote: Thu Feb 25, 2021 4:46 pm 1) Where’s the best place to put a mortgage? Just subtract it from the value you put for Savings Portfolio?
There's no place to directly enter the mortgage. It shows up indirectly as reduced future savings for the portfolio while you have the mortgage. A few examples:

Example 1: 30 year old with 13 years left on the mortgage: This shows up as lower savings for the next 13 years (ages 30-42), higher savings afterwards till retirement (ages 42-64), and no scheduled mortgage expense during retirement.

Example 2: 60 year old with 13 years left on the mortgage, planning to retire at age 65. Keeping mortgage for full term. So mortgage payments continue into into early part of retirement. This manifests as lower savings for ages 60-64, higher mortgage expense during early retirement (ages 65-72), and no mortgage expense after. You could enter the mortgage payments under "essential expenses" for ages 65-72.

Example 3: 60 year old with 13 years left on the mortgage, planning to retire at age 65. Will pay off mortgage at start of retirement. This manifests as lower savings for ages 60-64, and a onetime mortgage payoff expense scheduled under "essential expenses" at age 65.
Gufomel wrote: Thu Feb 25, 2021 4:46 pm 2) I’m getting a #REF error when I try to delete rows. I see the comment about not deleting the first two rows, last row, or retirement age row, but deleting anything seems to throw an error for me.
I expect a #REF error till the formulas are copied over. Let me look at the spreadsheet more closely tomorrow and see if I can improve this process.
Gufomel wrote: Thu Feb 25, 2021 4:46 pm 3) Related to above, I guess the number of rows would need to be manually adjusted every year going forward that someone uses this spreadsheet?
Yes. Eventually I hope to create an automated spreadsheet where you enter current age, withdrawal start age, and withdrawal end age, and the table is automatically created, so no manual row deleting required every year. The problem with this is that the formulas become complicated and hard to understand. So it ends up being easy to use as-is, but hard to modify. So I'll probably put up both versions--a manual spreadsheet (for understanding and customizing) and an automated spreadsheet (for ease of use) and let people decide which one they want to use.
Thanks. I don’t follow the mortgage impact, but I think it’s just my level of understanding. Let me digest that some more. I’m sure there’s also different ways it could be handled. Steve had helped me a while back to think through how to handle a mortgage in a lifecycle calculation, so I’m just trying to recall some of the things I remember from that. I *thought* that it’s best to reduce the current portfolio savings by the present value of all the mortgage payments (i.e. the mortgage balance) and then your future savings would actually include your mortgage payment as savings (i.e. future savings = income minus non-mortgage expenses). When I played around with this some before that seemed to make sense to me because it had the result of treating the mortgage as a negative bond in terms of the impact if you paid off the mortgage vs. purchased bonds. Ignoring a “mortgage” specifically, isn’t what I’ve outlined basically how you would handle any type of leverage, for example brokerage margin used to get to your desired AA? That leverage would just be a negative for the current savings portfolio? But let me know if I’m off in the understanding I came to, or if you see it differently. I’m interested to learn more.

Edit: I’ve looked at it a little more and I think I can see the approach you’re outlining. It just *feels* to me like I should be entering my mortgage as a negative somewhere, but I guess the way this spreadsheet is set up it’s best to handle it as reduced future savings or increased future expenses?



That makes sense on the #REF error and I agree the formulas could get too complex to be understandable if you make it automated. I’m fine with the way it works now. Wanted to make sure I was using it correctly.

This really is a fantastic spreadsheet. I was wanting to do a limited version of this, but you’ve created something that’s extremely robust yet simple enough to understand how to use and adjust to various needs.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

bumbojumbo wrote: Fri Feb 26, 2021 1:24 am Hey Steve. Could you comment on the mechanics of maintaining 2x leverage in a margin account? For example, how often do you buy/sell to maintain that ratio? I currently do 1.6-1.7x and let it ride, but I worry that that is actually riskier (letting it ride could lead to a margin call) and less effective (less equity exposure) than maintaining a 2x target.

On the other hand, I worry that attempting to maintain a fixed leverage ratio leads to the sisyphean task of rebalancing on a daily basis (or even more frequently :oops: ). If the market were to have several successive down days, one is better off re-adjusting each day rather than weekly.
I have had to buy more like 5 times in the past 7 months since my leverage steadily decreased with the rise in the market. Now I’m at my stock target so no more buying unless the market dropped enough and my leverage was below 2x, and selling unless the market dropped enough and my leverage was above 2.2x.

I wouldn’t rebalance daily (although if that’s what you wanted, then leveraged ETFs seem like a good fit for you). I would just buy more or sell if your leverage got outside some arbitrary bands, just like regular rebalancing
"... 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 »

Gufomel wrote: Fri Feb 26, 2021 6:15 am Thanks. I don’t follow the mortgage impact, but I think it’s just my level of understanding. Let me digest that some more. I’m sure there’s also different ways it could be handled. Steve had helped me a while back to think through how to handle a mortgage in a lifecycle calculation, so I’m just trying to recall some of the things I remember from that.
OP has links to your mortgage questions. But looking at Ben's answer, his suggestion is identical in result to mine. Because a mortgage is a negative bond, you can add it to the model by either reducing future savings (which act as positive bonds) or just directly putting them on the Essential Withdrawal column.
"... 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 Gufomel »

Steve Reading wrote: Fri Feb 26, 2021 9:16 am
Gufomel wrote: Fri Feb 26, 2021 6:15 am Thanks. I don’t follow the mortgage impact, but I think it’s just my level of understanding. Let me digest that some more. I’m sure there’s also different ways it could be handled. Steve had helped me a while back to think through how to handle a mortgage in a lifecycle calculation, so I’m just trying to recall some of the things I remember from that.
OP has links to your mortgage questions. But looking at Ben's answer, his suggestion is identical in result to mine. Because a mortgage is a negative bond, you can add it to the model by either reducing future savings (which act as positive bonds) or just directly putting them on the Essential Withdrawal column.
Thanks! If I recall (and understood) correctly, you favored the approach of counting the present value of the mortgage (i.e the mortgage balance) as a negative in the future savings contribution (I assumed this means subtracting the full present value of the mortgage in the current year) and then counting all future mortgage payments (including P+I) as future savings.

Whereas this approach seems to ignore the mortgage balance, and instead handle it by either reducing future savings or increasing future essential withdrawals.

It may be the same outcome. You guys have a much better intuitive grasp of this stuff. It takes me a while to wrap my head around each of the nuances and it’s impact!

Edit: I think maybe the crux of what I’m trying to wrap my head around is whether to include the mortgage balance as an expense today, or to include each year’s mortgage payment as an expense in each future year. And the impact there would be what discount rate is used.

A) If I count the mortgage balance as an expense today, it’s discounting it at the mortgage rate.

B) If I count each year’s mortgage payment as an expense in each year then it would be discounted at the safe bond rate in the spreadsheet.

But under either of these approaches I should be including the mortgage payment in each year’s future savings amount. Alternatively, I could just exclude the mortgage payment from each year’s future savings amount and not do anything with the expenses column. This should give the same result as B above.

I think?
Last edited by Gufomel on Fri Feb 26, 2021 10:14 am, edited 1 time in total.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Gufomel wrote: Fri Feb 26, 2021 9:44 am
Steve Reading wrote: Fri Feb 26, 2021 9:16 am
Gufomel wrote: Fri Feb 26, 2021 6:15 am Thanks. I don’t follow the mortgage impact, but I think it’s just my level of understanding. Let me digest that some more. I’m sure there’s also different ways it could be handled. Steve had helped me a while back to think through how to handle a mortgage in a lifecycle calculation, so I’m just trying to recall some of the things I remember from that.
OP has links to your mortgage questions. But looking at Ben's answer, his suggestion is identical in result to mine. Because a mortgage is a negative bond, you can add it to the model by either reducing future savings (which act as positive bonds) or just directly putting them on the Essential Withdrawal column.
Thanks! If I recall (and understood) correctly, you favored the approach of counting the present value of the mortgage (i.e the mortgage balance) as a negative in the future savings contribution (I assumed this means subtracting the full present value of the mortgage in the current year) and then counting all future mortgage payments (including P+I) as future savings.

Whereas this approach seems to ignore the mortgage balance, and instead handle it by either reducing future savings or increasing future essential withdrawals.

It may be the same outcome. You guys have a much better intuitive grasp of this stuff. It takes me a while to wrap my head around each of the nuances and it’s impact!
It'll give the same outcome as long as you keep future mortgage payments in real terms such that cell M47 only increases by your mortgage balance (or I47 is reduced by the mortgage balance, or some combination). I'm too lazy, so my approach is equivalent to putting the mortgage balance on the first cell of column M (M57).

In fact, any loan I have could be placed there. Ex: If I have 1M in stocks and 500K of debt (margin), I can either put "500K" of current savings, or "1M" of current savings and 500K withdrawal on M47. I don't need to actually put my margin payments on each year of column M, just like I don't have to for a mortgage.
"... 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 Gufomel »

Steve Reading wrote: Fri Feb 26, 2021 10:09 am
Gufomel wrote: Fri Feb 26, 2021 9:44 am
Steve Reading wrote: Fri Feb 26, 2021 9:16 am
Gufomel wrote: Fri Feb 26, 2021 6:15 am Thanks. I don’t follow the mortgage impact, but I think it’s just my level of understanding. Let me digest that some more. I’m sure there’s also different ways it could be handled. Steve had helped me a while back to think through how to handle a mortgage in a lifecycle calculation, so I’m just trying to recall some of the things I remember from that.
OP has links to your mortgage questions. But looking at Ben's answer, his suggestion is identical in result to mine. Because a mortgage is a negative bond, you can add it to the model by either reducing future savings (which act as positive bonds) or just directly putting them on the Essential Withdrawal column.
Thanks! If I recall (and understood) correctly, you favored the approach of counting the present value of the mortgage (i.e the mortgage balance) as a negative in the future savings contribution (I assumed this means subtracting the full present value of the mortgage in the current year) and then counting all future mortgage payments (including P+I) as future savings.

Whereas this approach seems to ignore the mortgage balance, and instead handle it by either reducing future savings or increasing future essential withdrawals.

It may be the same outcome. You guys have a much better intuitive grasp of this stuff. It takes me a while to wrap my head around each of the nuances and it’s impact!
It'll give the same outcome as long as you keep future mortgage payments in real terms such that cell M47 only increases by your mortgage balance (or I47 is reduced by the mortgage balance, or some combination). I'm too lazy, so my approach is equivalent to putting the mortgage balance on the first cell of column M (M57).

In fact, any loan I have could be placed there. Ex: If I have 1M in stocks and 500K of debt (margin), I can either put "500K" of current savings, or "1M" of current savings and 500K withdrawal on M47. I don't need to actually put my margin payments on each year of column M, just like I don't have to for a mortgage.
Thanks. I edited my post while you were responding. I *think* I’m on the same page. I’m guessing that the approach of putting the debt in cell M47 is more aggressive
than putting nominal future payments in each future year and having the spreadsheet discount it at the safe bond rate (assuming your mortgage/debt is at a higher rate than the safe bond rate you have in the spreadsheet)?

If I’m correct on that, then I think I’ve got it well enough. If not, you can just slap me and move on. :D
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Gufomel wrote: Fri Feb 26, 2021 10:20 am
Steve Reading wrote: Fri Feb 26, 2021 10:09 am
Gufomel wrote: Fri Feb 26, 2021 9:44 am
Steve Reading wrote: Fri Feb 26, 2021 9:16 am
Gufomel wrote: Fri Feb 26, 2021 6:15 am Thanks. I don’t follow the mortgage impact, but I think it’s just my level of understanding. Let me digest that some more. I’m sure there’s also different ways it could be handled. Steve had helped me a while back to think through how to handle a mortgage in a lifecycle calculation, so I’m just trying to recall some of the things I remember from that.
OP has links to your mortgage questions. But looking at Ben's answer, his suggestion is identical in result to mine. Because a mortgage is a negative bond, you can add it to the model by either reducing future savings (which act as positive bonds) or just directly putting them on the Essential Withdrawal column.
Thanks! If I recall (and understood) correctly, you favored the approach of counting the present value of the mortgage (i.e the mortgage balance) as a negative in the future savings contribution (I assumed this means subtracting the full present value of the mortgage in the current year) and then counting all future mortgage payments (including P+I) as future savings.

Whereas this approach seems to ignore the mortgage balance, and instead handle it by either reducing future savings or increasing future essential withdrawals.

It may be the same outcome. You guys have a much better intuitive grasp of this stuff. It takes me a while to wrap my head around each of the nuances and it’s impact!
It'll give the same outcome as long as you keep future mortgage payments in real terms such that cell M47 only increases by your mortgage balance (or I47 is reduced by the mortgage balance, or some combination). I'm too lazy, so my approach is equivalent to putting the mortgage balance on the first cell of column M (M57).

In fact, any loan I have could be placed there. Ex: If I have 1M in stocks and 500K of debt (margin), I can either put "500K" of current savings, or "1M" of current savings and 500K withdrawal on M47. I don't need to actually put my margin payments on each year of column M, just like I don't have to for a mortgage.
Thanks. I edited my post while you were responding. I *think* I’m on the same page. I’m guessing that the approach of putting the debt in cell M47 is more aggressive
than putting nominal future payments in each future year and having the spreadsheet discount it at the safe bond rate (assuming your mortgage/debt is at a higher rate than the safe bond rate you have in the spreadsheet)?

If I’m correct on that, then I think I’ve got it well enough. If not, you can just slap me and move on. :D
Oh fair point, I hadn't thought about that.
If you put the actual mortgage payments you plan to make in the future, and adjust them to be real dollars, then Ben's spreadsheet will show a bigger value on cell M47 because your mortgage repayment method is done with a higher interest rate. In other words, you can pay 200K today to pay the mortgage, but you can't invest 200K into safe bonds to pay future mortgage payments. In this sense, Ben's method is closer to correct than mine, that's a good point.

So do what Ben says!
"... 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 Gufomel »

Steve Reading wrote: Fri Feb 26, 2021 10:35 am
Gufomel wrote: Fri Feb 26, 2021 10:20 am
Steve Reading wrote: Fri Feb 26, 2021 10:09 am
Gufomel wrote: Fri Feb 26, 2021 9:44 am
Steve Reading wrote: Fri Feb 26, 2021 9:16 am

OP has links to your mortgage questions. But looking at Ben's answer, his suggestion is identical in result to mine. Because a mortgage is a negative bond, you can add it to the model by either reducing future savings (which act as positive bonds) or just directly putting them on the Essential Withdrawal column.
Thanks! If I recall (and understood) correctly, you favored the approach of counting the present value of the mortgage (i.e the mortgage balance) as a negative in the future savings contribution (I assumed this means subtracting the full present value of the mortgage in the current year) and then counting all future mortgage payments (including P+I) as future savings.

Whereas this approach seems to ignore the mortgage balance, and instead handle it by either reducing future savings or increasing future essential withdrawals.

It may be the same outcome. You guys have a much better intuitive grasp of this stuff. It takes me a while to wrap my head around each of the nuances and it’s impact!
It'll give the same outcome as long as you keep future mortgage payments in real terms such that cell M47 only increases by your mortgage balance (or I47 is reduced by the mortgage balance, or some combination). I'm too lazy, so my approach is equivalent to putting the mortgage balance on the first cell of column M (M57).

In fact, any loan I have could be placed there. Ex: If I have 1M in stocks and 500K of debt (margin), I can either put "500K" of current savings, or "1M" of current savings and 500K withdrawal on M47. I don't need to actually put my margin payments on each year of column M, just like I don't have to for a mortgage.
Thanks. I edited my post while you were responding. I *think* I’m on the same page. I’m guessing that the approach of putting the debt in cell M47 is more aggressive
than putting nominal future payments in each future year and having the spreadsheet discount it at the safe bond rate (assuming your mortgage/debt is at a higher rate than the safe bond rate you have in the spreadsheet)?

If I’m correct on that, then I think I’ve got it well enough. If not, you can just slap me and move on. :D
Oh fair point, I hadn't thought about that.
If you put the actual mortgage payments you plan to make in the future, and adjust them to be real dollars, then Ben's spreadsheet will show a bigger value on cell M47 because your mortgage repayment method is done with a higher interest rate. In other words, you can pay 200K today to pay the mortgage, but you can't invest 200K into safe bonds to pay future mortgage payments. In this sense, Ben's method is closer to correct than mine, that's a good point.

So do what Ben says!
Ok cool, thanks for thinking through it with me. Very helpful. And kudos again to Ben for this spreadsheet. As hard as some of these things are for me to conceptualize, the spreadsheet makes it so much easier to step through and get a visual on. Ever since I came across Steve’s post, it’s something I’ve been trying to do in my head or with a spreadsheet as best as I knew how.
verythankful
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Re: Lifecycle Investing - Leveraging when young

Post by verythankful »

Steve Reading wrote: Fri Feb 26, 2021 12:13 am
verythankful wrote: Thu Feb 25, 2021 10:57 pm As US market is overvalued. Was looking at EFA (developed-market securities based in Europe, Australia and the Far East) high expenses ratio (0.35) but offer leaps and pe ratio less than 20. Leveraging in roth using Deep in the money option for Jan 2023, looks reasonable, any thoughts here?
What was the implied interest rate on the LEAP?
Worked out to be 3.25% yearly, if counting foregone dividend only on amount invested (option price) 2%.
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