Why would I not "leverage" buying some index funds at my stage in investing?

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TheBogleWay
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Why would I not "leverage" buying some index funds at my stage in investing?

Post by TheBogleWay »

Hi All,

I hope this question makes sense. I'm actually asking based on the assumption that "leveraging" stocks is a thing, and I know I'm probably butchering the word. The idea I'm thinking of is if I essentially doubled down on my investment, as in... double the risk, double the reward, but for an index fund if that makes sense.



Here's my scenario. I'm in my early 30s, with a total net worth of about $2.5 million, about $1.8 million of that in liquid investments, index funds. I'm a Boglehead style investor, always have been. I started from absolute $0 and at a young age got a good earning career, invested and made my way to where I am now. I earn about $300k/year, give or take, and I'm able to save and invest about $100,000/year from that income after taxes. If you count my wife, we save a bit more and earn about $400k/year.

My invested ~$1.8 M in investments is basically all VTSAX and a smaller portion of VTIAX, not much in bonds. Traditional Boglehead method for the most part. My goal is to reach about $7m invested, give or take (potentially more, fairly conservative with estimates), and then retirement. Retirement for me is probably 15-20 years away.


What I'm wondering is...
given my very stable income, cushion, safety net and timeline, would it make sense for me to "leverage" some investments into index funds as I'm doing now? I don't know the method for doing this but I imagine I could essentially take a higher-risk style investment (into index funds, the same VTSAX type stuff) where when it grows, it grows at twice the rate, and when it goes down, it goes down at twice the rate, roughly speaking.


I'm struggling to see the risk, especially given that my timeline horizon is so long. I don't mean my whole portfolio, but maybe a few hundred thousand. I have 15+ years until retirement. The way I see the risk is:


A. The market goes down and stays down a long, long time. Say, 8 years. Well, I simply won't sell. I won't need to sell for a long time given my income. I ride out downsides in the market.


B. The market takes a hard crash like 2008 size or worse. Again, I ride it out, I have a stable income and safety nets I can rely on.


Given my unique scenario, is it.... completely un-Bogle like to consider something like this?
fwellimort
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by fwellimort »

I mean if you can find a near zero rate margin that isn't affected by interest rates and won't ever margin call you, then please do inform us.

For most people who 'leverage', they leverage through their mortgage (since the rate is set). Brokerage margins and margin requirements can change anytime and while margin rates are low today at brokerages like IBKR Pro, M1 Finance, Robinhood, the requirements for those rates can change at any time.
And the worst part is, the margin requirement for those changes generally at the worst time periods (during corrections/recessions cause that's when people most need money and brokerages are least willing to hand out).

I wouldn't be surprised if one can get away with like 10% on margin at an an account with IBKR Pro.
But 10% is quite... non-existent to begin with and 10% return on 10% is only 1% more return minus fees on the total account for so much 'risk'.

That said, this is my view too on leveraging:
https://youtu.be/n6cX8l8iQKE?t=775
up until 00:15:30

Leveraging works more than 9 out of 10 times. The problem becomes that extreme case. Personally, I think if you already are financially successful, why open up to that small chance of regretting. Have fun enjoying life instead of having to worry for 'a bit more money'.
Plus, just the psychology of seeing negative % on a leveraged account for almost a decade... easier said than done.
intrepid_investor
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by intrepid_investor »

If you haven't already seen it, lots of good reasons to leverage at viewtopic.php?f=10&t=274390
HyperCat
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by HyperCat »

I believe you're looking for a leveraged index fund like UPRO or TQQQ. The pros, cons, and a great many philosophical questions about them have been discussed at length here in other threads. I suggest searching the forum for those ticker symbols or "Hedgefundie's excellent adventure".
Last edited by HyperCat on Wed Nov 24, 2021 7:13 pm, edited 1 time in total.
JBTX
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by JBTX »

Given the amount you have saved so far for your age, are you trying to get to $10 or $20 million by retirement?

I just don't see the point in it. While market timing is not encouraged, going all in with leverage when the market and valuations are at or near historical high seems extraordinary risky for no reason. If the market goes down 50-60%, you could end up losing most of everything.
jarjarM
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by jarjarM »

You should take a look at this thread, Lifetime cycle That probably answers all your questions and more. But if you plan on working ~15-20yrs then you're a prime candidate to take advantage of this. Of course, leverage can be detrimental during market crash as you well know. Good luck :beer
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celia
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by celia »

TheBogleWay wrote: Wed Nov 24, 2021 5:21 pm A. The market goes down and stays down a long, long time. Say, 8 years. Well, I simply won't sell. I won't need to sell for a long time given my income. I ride out downsides in the market.
And how long has it been since Japan’s downturn that they haven’t recorded from yet? …maybe 20 years and counting…
B. The market takes a hard crash like 2008 size or worse. Again, I ride it out, I have a stable income and safety nets I can rely on.
“Life” is not ‘stable’. Your employer could be bought out or go out of business or move.

Or you could become disabled and unable to work.

Or a family situation could occur where you need to move closer to specialized care or closer to relatives and help take care of them.

Or a natural/ man-made disaster could make your area uninhabitable. Ever hear of Paradise, California?

We never know. So, never say “never”!
esteen
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by esteen »

TheBogleWay wrote: Wed Nov 24, 2021 5:21 pm Hi All,

I hope this question makes sense. I'm actually asking based on the assumption that "leveraging" stocks is a thing, and I know I'm probably butchering the word. The idea I'm thinking of is if I essentially doubled down on my investment, as in... double the risk, double the reward, but for an index fund if that makes sense.



Here's my scenario. I'm in my early 30s, with a total net worth of about $2.5 million, about $1.8 million of that in liquid investments, index funds. I'm a Boglehead style investor, always have been. I started from absolute $0 and at a young age got a good earning career, invested and made my way to where I am now. I earn about $300k/year, give or take, and I'm able to save and invest about $100,000/year from that income after taxes. If you count my wife, we save a bit more and earn about $400k/year.

My invested ~$1.8 M in investments is basically all VTSAX and a smaller portion of VTIAX, not much in bonds. Traditional Boglehead method for the most part. My goal is to reach about $7m invested, give or take (potentially more, fairly conservative with estimates), and then retirement. Retirement for me is probably 15-20 years away.


What I'm wondering is...
given my very stable income, cushion, safety net and timeline, would it make sense for me to "leverage" some investments into index funds as I'm doing now? I don't know the method for doing this but I imagine I could essentially take a higher-risk style investment (into index funds, the same VTSAX type stuff) where when it grows, it grows at twice the rate, and when it goes down, it goes down at twice the rate, roughly speaking.


I'm struggling to see the risk, especially given that my timeline horizon is so long. I don't mean my whole portfolio, but maybe a few hundred thousand. I have 15+ years until retirement. The way I see the risk is:


A. The market goes down and stays down a long, long time. Say, 8 years. Well, I simply won't sell. I won't need to sell for a long time given my income. I ride out downsides in the market.


B. The market takes a hard crash like 2008 size or worse. Again, I ride it out, I have a stable income and safety nets I can rely on.


Given my unique scenario, is it.... completely un-Bogle like to consider something like this?
Do you mean $7M+ real (as in, an amount in the future that's worth $7M in today's dollars) or $7M+ nominal (which depending on inflation may have the purchasing power of only $3-4M of today's dollars, or less)?

Assuming you mean real (because most people think of money in today's dollars), that seems a pretty ambitious goal.

Doing some quick excel math based on your figures above, getting $7M in 20 years requires 4.1% real CAGR, or 6.5% real in 15 years. To get to a larger figure like $10M in 15 years, you'd need 9.5% real return. That isn't likely with VTSAX.

Which is where your leverage idea comes in. While that sounds nice, leveraging is expensive and potentially dangerous. As you see from other posters there are a variety of ways to leverage - all cost you a big chunk of your expected gains, and some have scary margin calls attached. But in general, leveraging adds another layer of risk, so I'd only do it if I thought that was my best way forward. However you can get there just as well by increasing your investment contributions each year, and/or decreasing your desired retirement-age number. Both those are much easier than leveraging.

You say you struggle to see the risk, given your time horizon. Two points there:
1) if you are leveraging and you get a margin called due to a crash and you're unable to pay, you won't be able to "ride it out" no matter how long your time horizon is.
2) Just because most of modern US history has stocks rebounding after crashes in a few years' time, doesn't mean it will in the future. No one knows what the future will hold, and frankly every new crash is a new, unexpected series of events because we try to patch the old "holes" in the financial system. Also, other developed countries have had sustained losses for your time horizon. Why can't the US?
This post is for entertainment or information only, and should not be construed as professional financial advice. | | "Invest your money passively and your time actively" -Michael LeBoeuf
bgf
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by bgf »

Target Date funds for your age are probably 90-95% equities. Few here would discourage you from 100% equities. Using a portion of your portfolio for PSLDX/NTSX to reach 1.1 or 1.2x leverage really isn't that far off. It may or may not outperform, but its not like you rolling your life saving away at the craps table.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
mikejuss
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by mikejuss »

What, exactly, is your vision of a leveraged equities bet? Your A and B scenarios can be easily applied to the purchase of any kind of equities (ie, buy and hold). Mind spelling out what kind of purchase you're looking to make?
Bigt3142
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by Bigt3142 »

To specifically answer your question, no this is not something a Boglehead would do. No where does John Bogle say to leverage yourself to invest in more index funds.

You are doing fantastic, you do not need to take on more risk!
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nisiprius
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by nisiprius »

The phrase "risk tolerance" does not appear in your post.

I think your post implicitly assumes one of these assumptions:
  • Stocks have no risk if held for at least fifteen years, therefore leveraged stocks have X times zero = zero risk if held for at least fifteen years; or,
  • Risk tolerance is not a real thing, or
  • Behavioral errors can be eliminated by deciding not to make behavioral errors, or
  • You have unlimited risk tolerance.
Last edited by nisiprius on Wed Nov 24, 2021 6:50 pm, edited 1 time in total.
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Wiggums
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by Wiggums »

You have a good savings rate and a long way to retirement. I’d stick with your current investment style.

I had a margin call during the financial crisis. We had the money and I was given 2-3 days to bring a check to the local Fidelity office. Understand that the broker can sell shares immediately to maintain liquidity. In other words, they won’t ask you which of your funds to sell. Nor will they consider the tax implications.
Investors need to be better informed about the costs they pay. “High fund fees can be hazardous to your wealth in the same way that high calories can be hazardous for your health.”
MarkRoulo
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by MarkRoulo »

TheBogleWay wrote: Wed Nov 24, 2021 5:21 pm Hi All,

I hope this question makes sense. I'm actually asking based on the assumption that "leveraging" stocks is a thing, and I know I'm probably butchering the word. The idea I'm thinking of is if I essentially doubled down on my investment, as in... double the risk, double the reward, but for an index fund if that makes sense.
...
The first thing you must understand is the you don't double the expected, but far from guaranteed return with 2x leverage.

The expected return would be more like: "2x - interest-on-the-margin-loan"

Depending on the interest rate, this might look not very good. As an example (TO ILLUSTRATE! DON'T GET HUNG UP ON THE ACTUAL NUMBERS), if you have an annualized expected return of 8% for stocks and margin loans are 4% then without leverage you'd "expect" 8% per year, but with 2x leverage you'd expect 12%, not 16%. Your losses on the downside are fully 2x ... plus the cost of the margin loan.

So this isn't just a question of scaling everything up by 2x. It is worse than that. Whether it makes sense for you or not is a separate question.
chris319
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by chris319 »

I believe you're looking for a leveraged index fund like UPRO or QQQ.
QQQ is not leveraged.

A 2x leveraged fund is as much leverage as I would go with. There is a mathematical reason for that but that's another discussion.

There is QLD for NASDAQ 100 and SSO for S&P 500. If you own a leveraged ETF outright (no margin) there is no margin interest to pay and no risk of a margin call. There is a risk that your holdings could go to zero. if the index made an unprecedented 50% drop in one day you'd be down to zero. For this reason, and given your current net worth, I would not recommend leveraging your entire portfolio. It's up to you to decide how much leverage to use based on your risk tolerance.

Just as a leveraged ETF could go to zero, so too could an individual company's stock (been there, done that).
The only person you have to please in life is yourself.
dkeeney
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by dkeeney »

Yes, completely un-Bogle like.

Looking at the historical chart of the S&P 500 (https://finance.yahoo.com/quote/%5EGSPC/) you'll see that if you were unfortunate enough to dump your leveraged investment into the S&P 500 the week of 9/2/1929 when the peak (at the end of the week) reached 31.82, you would have *nearly* been able to recoup your investment on the week of 10/25/1954 when the index closed at 31.68.

Obviously, there would have been a margin call in such a scenario that probably would have wiped you out...but let's say you were able to satisfy those and hold your position. Assuming you still had faith in investing, which was not typical in the 1930s, and assuming you still had a job despite the high unemployment that swept all sectors of the economy, you could continue to invest at the lows after the trough reach 4.42 the week of 6/27/1932 and probably would be okay as the market slowly recovered (experiencing several more corrections over the years to come. You would be in your late 50s before you broke even on the original investment, but would have nearly a 10 bagger from the trough.

When assessing risks, you should not only consider the known risks, such as what you've observed and experienced during your lifetime, but the unknown Black Swans, such as what has occurred prior to your lifetime and what has never occurred but could.
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by pkcrafter »

Nisiprius (posted above) has many posts on this subject. Do a search and see what you find. Hint: it isn't worth the risk.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by KRP »

TheBogleWay wrote: Wed Nov 24, 2021 5:21 pm

What I'm wondering is...
given my very stable income, cushion, safety net and timeline, would it make sense for me to "leverage" some investments into index funds as I'm doing now? I don't know the method for doing this but I imagine I could essentially take a higher-risk style investment (into index funds, the same VTSAX type stuff) where when it grows, it grows at twice the rate, and when it goes down, it goes down at twice the rate, roughly speaking.


I'm struggling to see the risk, especially given that my timeline horizon is so long. I don't mean my whole portfolio, but maybe a few hundred thousand. I have 15+ years until retirement. The way I see the risk is:


A. The market goes down and stays down a long, long time. Say, 8 years. Well, I simply won't sell. I won't need to sell for a long time given my income. I ride out downsides in the market.


B. The market takes a hard crash like 2008 size or worse. Again, I ride it out, I have a stable income and safety nets I can rely on.


Given my unique scenario, is it.... completely un-Bogle like to consider something like this?
Leverage isn't what bites you in the a$$. Being in first loss position AND having a explicit or implicit lien on your assets to cover the loan does it.

If you get lucky (no bust), you've successfully picked up $ in front of a steam roller and the creditor takes their interest happily.
If you are unlucky, first loss position (you) is wiped out entirely (no assets to pledge for another hand at the table), and the creditor ends up with the asset(s) at margin call to make themselves whole.
Last edited by KRP on Thu Nov 25, 2021 11:34 am, edited 1 time in total.
chris319
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Re: Why would I not "leverage" buying some index funds at my stage in investing?

Post by chris319 »

In 1928 it was possible to own $1.00 worth of stock for $0.10 (10% margin requirement). After the crash of 1929 the margin requirement was raised and today stands at 50%, making a direct comparison between 1929 and 2021 flawed.
The only person you have to please in life is yourself.
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