Is there a way to work "safe" leverage into a portfolio?

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2tall4economy
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Is there a way to work "safe" leverage into a portfolio?

Post by 2tall4economy »

I'm nearly finished selling off my rental property portfolio and going fully into the market (for many reasons, partly because of the RE opportunity we're living in, but also to make things simpler for my family if I kick off and also to mitigate the risk of my local team as they enter retirement age and exit the business), and my taxable balance has therefore become larger than I was planning on having previously.

I obviously used leverage alot when managing my RE portfolio but have never done margin investing on the equity side - so I was thinking - logically there is probably a level of leverage which can make sense to add incremental gain to the portfolio, if you believe the market always goes up and right eventually -- which presumably I am banking on by having equities in the first place).

The normal issue of a margin call can't be done away with completely, but if you money in excess of your planned needs, I should think leveraging a potion (say a loan for 10% of liquid assets) would leave a massive cushion for any margin call and still give you that extra 50 to 70 bps of return per year.

Is that a horrible idea? Am I missing anything?
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alex_686
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by alex_686 »

I sat on the margin desk.

First, I would contest the idea that you will have higher returns. In my opinion no, but that is just my opinion on market expectations.

Second, the safest leverage to use is a mortgage. It does not matter if you are borrowing against real estate or stocks. You have one portfolio and you are using leverage.

Third, lots of emotional and cognitive traps in using margin.

Lastly, anything under 25% should be safe. However, to get that extra return you should rebalance often- weather the market is up or down.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
gclancer
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by gclancer »

2tall4economy wrote: Tue Jun 08, 2021 7:13 pm to make things simpler for my family if I kick off
. . .
Am I missing anything?
Is there reason to assume the additional risk associated with margin? Or do you feel that you’ve “won the game” at this point? Does adding margin to your portfolio make things simpler for your family if you kick off?
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by 2tall4economy »

gclancer wrote: Tue Jun 08, 2021 7:23 pm
2tall4economy wrote: Tue Jun 08, 2021 7:13 pm to make things simpler for my family if I kick off
. . .
Am I missing anything?
Is there reason to assume the additional risk associated with margin? Or do you feel that you’ve “won the game” at this point? Does adding margin to your portfolio make things simpler for your family if you kick off?
As always good thought provocation on this board! I don't feel I've "won" but I certainly feel like I will win even if the worst happens on a 10% margin loan being called since the other 90% is still there and will keep growing. The incremental just feels like a "free" way to get slightly more margin and either retire earlier or have more money for toys and experiences when I do retire. I'm nearly 100% equities (and always have been) anyway, so there isn't really a good way to get anything incremental I think other than leverage.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by 2tall4economy »

alex_686 wrote: Tue Jun 08, 2021 7:20 pm I sat on the margin desk.

First, I would contest the idea that you will have higher returns. In my opinion no, but that is just my opinion on market expectations.

Second, the safest leverage to use is a mortgage. It does not matter if you are borrowing against real estate or stocks. You have one portfolio and you are using leverage.

Third, lots of emotional and cognitive traps in using margin.

Lastly, anything under 25% should be safe. However, to get that extra return you should rebalance often- weather the market is up or down.
Thanks, good input!

Why would you suggest you can't get a higher return with margin? Fair point on mortgage. I rent now so haven't really considered it that way (I get moved a lot for my career so a mortgage would likely be at least a few years down the road up until never...)
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by ckangas »

2tall4economy wrote: Tue Jun 08, 2021 10:54 pm
alex_686 wrote: Tue Jun 08, 2021 7:20 pm I sat on the margin desk.

First, I would contest the idea that you will have higher returns. In my opinion no, but that is just my opinion on market expectations.

Second, the safest leverage to use is a mortgage. It does not matter if you are borrowing against real estate or stocks. You have one portfolio and you are using leverage.

Third, lots of emotional and cognitive traps in using margin.

Lastly, anything under 25% should be safe. However, to get that extra return you should rebalance often- weather the market is up or down.
Thanks, good input!

Why would you suggest you can't get a higher return with margin? Fair point on mortgage. I rent now so haven't really considered it that way (I get moved a lot for my career so a mortgage would likely be at least a few years down the road up until never...)
If you're borrowing at a higher ratio of your investment, there's lots of ugly possibilities with margin calls.
If not, it depends a lot on the rate you're borrowing on to do it at. To state the obvious, borrowing at 1.5% is a lot different than borrowing at 5%.
todaysBob
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by todaysBob »

ckangas wrote: Tue Jun 08, 2021 11:17 pm
2tall4economy wrote: Tue Jun 08, 2021 10:54 pm
alex_686 wrote: Tue Jun 08, 2021 7:20 pm I sat on the margin desk.

First, I would contest the idea that you will have higher returns. In my opinion no, but that is just my opinion on market expectations.

Second, the safest leverage to use is a mortgage. It does not matter if you are borrowing against real estate or stocks. You have one portfolio and you are using leverage.

Third, lots of emotional and cognitive traps in using margin.

Lastly, anything under 25% should be safe. However, to get that extra return you should rebalance often- weather the market is up or down.
Thanks, good input!

Why would you suggest you can't get a higher return with margin? Fair point on mortgage. I rent now so haven't really considered it that way (I get moved a lot for my career so a mortgage would likely be at least a few years down the road up until never...)
If you're borrowing at a higher ratio of your investment, there's lots of ugly possibilities with margin calls.
If not, it depends a lot on the rate you're borrowing on to do it at. To state the obvious, borrowing at 1.5% is a lot different than borrowing at 5%.
You can borrow at IBKR at 1.5% under $100k and 1% over $100k. How does 10% margin at those rates sound?
seajay
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by seajay »

Stocks are already leveraged. Many firms issue corporate bonds, borrow. Broadly to around half of book value, so are 1.5x leveraged. That provides some protection in periods when real yields are negative and holding debt can be a asset.

Leverage broadly just scales up volatility, where the overall broad rewards are much the same to un-leveraged, accordingly some investors opt to de-leverage, hold 67/33 stock/bonds, which is like investing 67 into a stock and then 33 used to also buy its corporate bonds.

PV examples

Choice of start and end dates can indicate differences, as a more volatile similar reward choice will tend to zigzag around so if you wanted to paint a good picture you might select a peak to trough period, or to paint a bad picture pick a trough to peak period.

Anover PV example
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by Sandtrap »

2tall4economy wrote: Tue Jun 08, 2021 7:13 pm I'm nearly finished selling off my rental property portfolio and going fully into the market (for many reasons, partly because of the RE opportunity we're living in, but also to make things simpler for my family if I kick off and also to mitigate the risk of my local team as they enter retirement age and exit the business), and my taxable balance has therefore become larger than I was planning on having previously.

I obviously used leverage alot when managing my RE portfolio but have never done margin investing on the equity side - so I was thinking - logically there is probably a level of leverage which can make sense to add incremental gain to the portfolio, if you believe the market always goes up and right eventually -- which presumably I am banking on by having equities in the first place).

The normal issue of a margin call can't be done away with completely, but if you money in excess of your planned needs, I should think leveraging a potion (say a loan for 10% of liquid assets) would leave a massive cushion for any margin call and still give you that extra 50 to 70 bps of return per year.

Is that a horrible idea? Am I missing anything?
IMHO, simplicity is better.

One of many options:

1 Retain some of your R/E Residential Income Property Investments and do your "leveraging" there.

2. Strategize your market based investment portfolio as a foundation to the above.
Just as risk/volatility is usually best taken in equities vs fixed, same here in your particular situation and level of R/E experience.

*Other's with different skillsets and business acumen might do things far differently.

This can be metaphored as sort of "3 Legged Stool" (for you, not others).
A. Working Capital, Cash Like, etc.
B. Market Based (Boglehead per wiki) Investment Portfolio (equities and fixed)
C. Properly leveraged, but not over leveraged, physically held R/E Residential Income Property.
The percentage allocation of the above is per your unique needs and long range financial goals.

There are lot's of ways of doing these things based on each person's investing experience and situations.
I hope this is helpful to you.
j :D
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alex_686
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by alex_686 »

2tall4economy wrote: Tue Jun 08, 2021 10:54 pm Why would you suggest you can't get a higher return with margin? Fair point on mortgage. I rent now so haven't really considered it that way (I get moved a lot for my career so a mortgage would likely be at least a few years down the road up until never...)
The short answer is volatility drag.

Generally you will have higher returns. However due to the increased leverage market crashes will wipe out those extra returns, leaving you in a worse spot.

Leveraging up increases your expected returns. This is good.

It also increases the volatility of the portfolio. When the market goes up, your portfolio goes up more. When the market goes down, your portfolio goes down more. Mathematically, increasing the standard deviation of returns reduces the compounding effect of those returns. i.e., lower geometric returns.

There are fact patterns out there where you get higher average monthly returns but a lower 10 year return with margin.

But it depends on your market expectations. The rate of return and volatility of the market. Will the market trend following or mean reverting?
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by alex_686 »

seajay wrote: Wed Jun 09, 2021 4:51 am Stocks are already leveraged. Many firms issue corporate bonds, borrow. Broadly to around half of book value, so are 1.5x leveraged. That provides some protection in periods when real yields are negative and holding debt can be a asset.
I am a bit confused.

Does that mean when companies are deleveraging that you should go on margin to make up for that lost leverage? Or that when companies do leverage up you should deleverage by selling stock and buying bonds? :happy

This framework is not very useful. Stock and bonds yield and volatility change over time for a variety of reasons. Focus on the big picture. If you do think about a corporation's leverage, think about it in a holistic way and review all of the factors.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by afan »

The major advantage of mortgages right now is the possibility of fixed rates. That lets you lock in these rates for years. Margin loans are variable.

OP is comfortable with higher levels of risk than most of us and feels like they are not trying when they have no leverage. I second the advice to bet on their RE skill, rather than leverage up the market.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by BogleFan510 »

Tail risk would be my concern. If the stock market dropped 80% would you be able to live as you were?
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by ckangas »

todaysBob wrote: Tue Jun 08, 2021 11:28 pm
ckangas wrote: Tue Jun 08, 2021 11:17 pm
2tall4economy wrote: Tue Jun 08, 2021 10:54 pm
alex_686 wrote: Tue Jun 08, 2021 7:20 pm I sat on the margin desk.

First, I would contest the idea that you will have higher returns. In my opinion no, but that is just my opinion on market expectations.

Second, the safest leverage to use is a mortgage. It does not matter if you are borrowing against real estate or stocks. You have one portfolio and you are using leverage.

Third, lots of emotional and cognitive traps in using margin.

Lastly, anything under 25% should be safe. However, to get that extra return you should rebalance often- weather the market is up or down.
Thanks, good input!

Why would you suggest you can't get a higher return with margin? Fair point on mortgage. I rent now so haven't really considered it that way (I get moved a lot for my career so a mortgage would likely be at least a few years down the road up until never...)
If you're borrowing at a higher ratio of your investment, there's lots of ugly possibilities with margin calls.
If not, it depends a lot on the rate you're borrowing on to do it at. To state the obvious, borrowing at 1.5% is a lot different than borrowing at 5%.
You can borrow at IBKR at 1.5% under $100k and 1% over $100k. How does 10% margin at those rates sound?
Presuming you're in a position where your investments are a small ratio compared to your human capital, it may sound good. And 50 basis points isn't much, but it adds up.

One thing I like to think about is what would happen during a 50-75% drop in equity prices.
If it would still be a good event for you since the sale price of equities for your regular contributions during the next year or two more than makes for asset losses (including margin), and you're confident that you'll stay the course, then margin is probably a good approach.

If you're not praying for a bear market, then margin doesn't seem appropriate.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by nisiprius »

To state the obvious, since it doesn't seem to have been mentioned upthread. You say "the normal issue of a margin call can't be done away with completely."

There is a form of investment which provides a kind of leverage without any risk of margin call; that is to say, "leveraged ETFs." Personally they are unsuitable for me and I wouldn't touch 'em with a ten-foot pole. FINRA and the SEC have issued alerts about them. An article in the Bogleheads' wiki, Leveraged and inverse ETFs discusses them.

These are often discussed in the forum and controversial because they are rebalanced daily, and thus only achieve their stated goal over single days. The official language for one of them, for example, says
This leveraged ProShares ETF seeks a return that is 3x the return of its underlying benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target return and ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings as frequently as daily. Investors should consult the prospectus for further details on the calculation of the returns and the risks associated with investing in this product.
Arguments in the forum center on
  • Whether buyers of these ETFs understand what they are buying--in my view there are a fair number of users who haven't looked beyond an ETF's name and think it's as simple as 3X leveraged ETF = :moneybag :moneybag :moneybag
  • Whether these products are simply unsuitable for long-term holding, or whether a sophisticated user can design reasonable long-term strategies that rely on combining stocks and bonds and using a carefully designed rebalancing strategy.
One of the tamer of such products is the Wisdomtree US Efficient Core Fund, NTSX, which roughly mimics a "90/60" stock/bond allocation, i.e a 60/40 allocation leveraged 1.5X. I am simply noting its existence. I'm not recommending it. It's not suitable for me. With NTSX there is no risk of a margin call; and the amount of leverage is only 1.5X; and it is not leveraging up an already-risky 100% stocks, but a classic balanced 60/40 portfolio.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by ckangas »

Concerning leveraged ETFs, I don't think holding a 3X fund in isolation has many defenders. 3X funds in isolation simply lose too much on market down movements to take seriously for a long term investment. UPRO might look amazing over the last 10 years. But we've seen a pretty exceptional bull market during that period.

However, they can be rebalanced with an unleveraged ETF in a tax advantaged account to access a smaller amount of leverage. For example, holding 90% of US large cap equities in VOO, and 10% in UPRO. And then rebalancing quarterly or annually. This allows for a more reasonable rate of margin that trades risk for average historical return.

This is likely still a niche product. And all of the normal warnings about leverage.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by Hydromod »

You can perhaps build returns in a mild way by incorporating a small allocation to long treasuries, such as EDV or TMF, which is akin to leveraging up a more balanced portfolio and mitigating volatility. You do need to rebalance occasionally. In essence this is the NTSX strategy.

This strategy is in contrast to adding a portion of UPRO, which makes the portfolio more volatile.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by taojaxx »

Good advises on this thread.
Check also Hedgefundie's Excellent Adventure on this very board. Essentially two broadly uncorrelated 3Xleveraged ETFs held for the long run. Zero margin call whatsoever, low to mild risk of blowup, adult-beverage kind of investment. Not for everyone.
Major drawback is it relies on bonds as the uncorrelated asset, at a time where bonds may (?) have exhausted their bull run, so the future may (?) look very different from the brilliant past.
Stagflation in particular would annihilate the strategy. But there's other uncorrelated assets that could be used: UGL, UUP, IVOL among others.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by kevinf »

nisiprius wrote: Wed Jun 09, 2021 11:10 am One of the tamer of such products is the Wisdomtree US Efficient Core Fund, NTSX, which roughly mimics a "90/60" stock/bond allocation, i.e a 60/40 allocation leveraged 1.5X. I am simply noting its existence. I'm not recommending it. It's not suitable for me. With NTSX there is no risk of a margin call; and the amount of leverage is only 1.5X; and it is not leveraging up an already-risky 100% stocks, but a classic balanced 60/40 portfolio.
WisdomTree 90/60 US Efficient Core Fund [NTSX] (formerly US Balanced Fund)

WisdomTree NTSX now has siblings NTSI and NTSE launched today

No total world fund yet, to many folks dissapointment. It would make a great 1-fund portfolio; broad diversification, internal rebalancing, and a dash of leverage all wrapped up in a reasonable expense ratio.
Last edited by kevinf on Wed Jun 09, 2021 3:20 pm, edited 4 times in total.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by ljford7 »

kevinf wrote: Wed Jun 09, 2021 2:18 pm
nisiprius wrote: Wed Jun 09, 2021 11:10 am One of the tamer of such products is the Wisdomtree US Efficient Core Fund, NTSX, which roughly mimics a "90/60" stock/bond allocation, i.e a 60/40 allocation leveraged 1.5X. I am simply noting its existence. I'm not recommending it. It's not suitable for me. With NTSX there is no risk of a margin call; and the amount of leverage is only 1.5X; and it is not leveraging up an already-risky 100% stocks, but a classic balanced 60/40 portfolio.
WisdomTree 90/60 US Efficient Core Fund [NTSX] (formerly US Balanced Fund)

WisdomTree NTSX now has siblings NTSI and NTSE launched today

No total world fund yet, to many folks dissapointment. It would make a great 1-fund portfolio.
Don't forget PSLDX as well if you want to use some leverage.

https://www.pimco.com/en-us/investments ... -fund/inst
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by afan »

Leveraged funds do not let the OP take advantage of low current interest rates. They WILL increase risk and they MIGHT increase expected return. But they will not permit OP to use the low rates into the future.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by KyleAAA »

Margin isn't an attractive way to get leverage with stocks. Options or futures are better. A fund like NTSX may be what you're looking for. It's a 60/40 portfolio leveraged 1.5x. There are developed international and emerging markets versions that were recently introduced as well.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by hithere »

I generally consider 1.05x stock market leverage as safe. A good strategy is to rebalance back to 1.05x once or twice a year, but only at all-time highs. This will increase your returns and the risk of a margin call, although because of the small amount of leverage and the fact that you will presumably be using broad index funds, a margin call seems unlikely.

That being said, the additional return is fairly insignificant and not worth the risk in my opinion. If I were you, I would seek to increase my returns by either investing in riskier index funds without margin, or using bank loans to invest, provided the interest rates are fixed and reasonably low. Above all, try to figure out if you need to do any of this at all in order to achieve your financial goals.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by alex_686 »

hithere wrote: Thu Jun 10, 2021 9:55 am I generally consider 1.05x stock market leverage as safe. A good strategy is to rebalance back to 1.05x once or twice a year, but only at all-time highs.
Why only at all time highs?
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by ckangas »

alex_686 wrote: Thu Jun 10, 2021 10:32 am
hithere wrote: Thu Jun 10, 2021 9:55 am I generally consider 1.05x stock market leverage as safe. A good strategy is to rebalance back to 1.05x once or twice a year, but only at all-time highs.
Why only at all time highs?
All time highs actually happen quite often.
I'm guessing it wasn't meant literally though.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by alex_686 »

ckangas wrote: Thu Jun 10, 2021 10:36 am
alex_686 wrote: Thu Jun 10, 2021 10:32 am
hithere wrote: Thu Jun 10, 2021 9:55 am I generally consider 1.05x stock market leverage as safe. A good strategy is to rebalance back to 1.05x once or twice a year, but only at all-time highs.
Why only at all time highs?
All time highs actually happen quite often.
I'm guessing it wasn't meant literally though.
Having worked with stuff, you will want to rebalance frequently regardless if the market is up or down.

Also, if you are going to play with fire, don't go 1.05x. It is not going to move the needle much. And there are probably better ways of loading up on risk.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
hithere
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by hithere »

ckangas wrote: Thu Jun 10, 2021 10:36 am
alex_686 wrote: Thu Jun 10, 2021 10:32 am
hithere wrote: Thu Jun 10, 2021 9:55 am I generally consider 1.05x stock market leverage as safe. A good strategy is to rebalance back to 1.05x once or twice a year, but only at all-time highs.
Why only at all time highs?
All time highs actually happen quite often.
I'm guessing it wasn't meant literally though.
I meant that one can rebalance back to 1.05x leverage once or twice a year, but only if the market is at an all-time high at that moment. This approach increases the expected return, at the cost of increasing the probability of a margin call, which at 1.05x leverage is not that high anyway.

I guess another way to do essentially the same is to have more leverage, but rebalance regardless of market conditions and/or more often. It's just that the strategy I outlined incurs less fees, and maybe it's more mentally comfortable to have less leverage.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by hnd »

ljford7 wrote: Wed Jun 09, 2021 2:29 pm
kevinf wrote: Wed Jun 09, 2021 2:18 pm
nisiprius wrote: Wed Jun 09, 2021 11:10 am One of the tamer of such products is the Wisdomtree US Efficient Core Fund, NTSX, which roughly mimics a "90/60" stock/bond allocation, i.e a 60/40 allocation leveraged 1.5X. I am simply noting its existence. I'm not recommending it. It's not suitable for me. With NTSX there is no risk of a margin call; and the amount of leverage is only 1.5X; and it is not leveraging up an already-risky 100% stocks, but a classic balanced 60/40 portfolio.
WisdomTree 90/60 US Efficient Core Fund [NTSX] (formerly US Balanced Fund)

WisdomTree NTSX now has siblings NTSI and NTSE launched today

No total world fund yet, to many folks dissapointment. It would make a great 1-fund portfolio.
Don't forget PSLDX as well if you want to use some leverage.

https://www.pimco.com/en-us/investments ... -fund/inst
I use a dash of PSLDX and PISIX to my VTI/VXUS its only 10% of my total portfolio so will not make a tremendous difference and less paperwork of levering up myself.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by vpiguy88 »

nisiprius wrote: Wed Jun 09, 2021 11:10 am One of the tamer of such products is the Wisdomtree US Efficient Core Fund, NTSX, which roughly mimics a "90/60" stock/bond allocation, i.e a 60/40 allocation leveraged 1.5X. I am simply noting its existence. I'm not recommending it. It's not suitable for me. With NTSX there is no risk of a margin call; and the amount of leverage is only 1.5X; and it is not leveraging up an already-risky 100% stocks, but a classic balanced 60/40 portfolio.
Would you mind sharing why it's not suitable for you? I'm very interested in understand the risks here, and for whom this fund wouldn't be a wise investment.
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Re: Is there a way to work "safe" leverage into a portfolio?

Post by aristotelian »

OP,
Do you currently have a bond allocation? If you are looking to juice returns, why not simply reduce your bond allocation? The risk is the same. It is likely that leverage costs more than you are earning from bonds. If you are looking to reduce risk with bonds, why would you go and borrow money to put at risk in stocks?
Thesaints
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Joined: Tue Jun 20, 2017 12:25 am

Re: Is there a way to work "safe" leverage into a portfolio?

Post by Thesaints »

Buy DITM Calls. Can get a 2x leverage for pennies. All gains are taxed ST though...
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