Using leverage as a young person

[DMoogle]

I’ve considered this a few times but have never implemented. I keep coming back to several sticking points.
1. What’s the goal? Just more? A specific endpoint? If I cant define the goal, it’s hard to seriously consider the implementation.
Higher rate of return. Same for why someone might choose equities over bonds.
2. How/when to exit. Suppose it works out, do I just pull the plug at my endpoint? Would I be able to or would I let it ride.
Should be aligned with your investment goals. Most investors reduce risk as they age. For this, that might look something like:
Age 20: 2x leverage
Age 25: 1.75x leverage
...
Age 40: 1x (no leverage)
3. If a little works, why not a lot? Suppose it really works. Would I want to increase the risk in the pursuit of more?
This has been well-studied. Too much leverage results in too high a risk of ruin too often. Higher average return means nothing if you end up getting wiped out too often.
4. Would my implementation be strategic investing or gambling?
IMO depends on the implementation. A moderate amount of leverage can be, imo, strategic. There are many people that go overboard and have, imo, too high of a risk of ruin.
5. My spouse definitely wouldn’t do this. Assuming she agreed with my plan, would I do this with our money?
Um, maybe? Not sure how anyone could answer this except for you. If you guys have different risk appetites, that's for y'all to discuss and determine how to address in relation to how you divide your finances.

Responses in-line.

[Valuethinker]

Oct 2007-Mar 2009 wasn't that long ago. Equities were down 50% and in March most of the talking heads were screaming it's going even lower. I think you'd want to examine like minded people with a sizable nest egg in Oct 2007 who were even 10% on margin and see how it turned out (theories and backtesting are great, but watching the market move 3-7% a day (which it did in Sept-Dec 2008 all the time) isn't all that much fun)? If they got out it's probably because they generated income since, not their ability to navigate investment ROI. 100% equities is enough of a roller coaster of risk/reward for 99% of the populace and most of those can't even handle that, nor should they.

I think the worst day was the day the US Congress kicked the TARP out on first reading. The Dow dropped -13% the next day, I believe.

March-April 2020 was a fun time as well.

We've (most of us) memory holed it. It wasn't that bad-- most of us white collar types found we could get work done from home (if you worked in the medical field, it was a completely different experience). Vaccines were developed and deployed rolled out incredibly quickly (possibly the fastest ever, in human history, and certainly on that scale; I believe mothers actually pushed and shoved to get their kids into the queues for the polio vaccine (that may be apocryphal) -- if you knew anyone alive at that time in the 1950s, they may well remember what the days after the Sabin (or Salk?) vaccine became publicly available were like**) -- but even so, the polio rollout was not on the scale of over 5 billion doses in c 18 months).

Coordinated actions by governments and Central Banks led to a rapid turn in the markets.

But. Actually, It was bloody terrifying. Most of us were too worried about doing our jobs, or losing our jobs, or the health and wellbeing of people dear to us (we lost my father in law in the first week of lockdown, we had 10 minutes in a parking lot to say goodbye to a treasured aunt), to spend too much time looking at our portfolios or the stock markets.

But as an investor it was, in fact, bloody terrifying. With no feel for the bottom. If the disease had proven to be more lethal, or the process of vaccination development had not gone so well, who knows where markets might have gotten too.

** Like the Spanish Flu, polio struck late teenagers and young adults disproportionately hard, it seems. That kept it in the forefront of everyone's mind - *everybody* knew of people crippled by polio. Every few summers, the swimming pools and other public facilities were closed due to a polio outbreak.

TL:DR People who don't think stockmarkets can do terrifying things, haven't been following markets for long enough.

[ScubaHogg]

That's not the same thing, though. You don't get margin calls on your house or your education based on moves in the stock market.

Luckily call options exist

Invested leverage (the old fashioned kind) can demand your immediate failure even when things for you personally are going great.

A feature of leveraging while young is that your investment portfolio balance can go to zero and it’s not a big deal, because the tiny financial portfolio makes up such an insignificant fraction of the capital you will gain in your lifetime

OP, fair warning. BHs as a group are much older, very conservative and pretty myopic about leverage. So take feedback appropriately

[Elric]

I think the worst day was the day the US Congress kicked the TARP out on first reading. The Dow dropped -13% the next day, I believe.

You must be a youngster. Black Monday, October 19, 1987. The Dow lost over 22% and the S&P 500 lost over 20%. In a single day.

[QuesadaLover]

That's not the same thing, though. You don't get margin calls on your house or your education based on moves in the stock market.

Luckily call options exist

Invested leverage (the old fashioned kind) can demand your immediate failure even when things for you personally are going great.

A feature of leveraging while young is that your investment portfolio balance can go to zero and it’s not a big deal, because the tiny financial portfolio makes up such an insignificant fraction of the capital you will gain in your lifetime

OP, fair warning. BHs as a group are much older, very conservative and pretty myopic about leverage. So take feedback appropriately

Re failure as a young person - Die with Zero talks about that too. He recommends swing for homers when you're young. If you fail most of your life is in front of you. That would be inappropriate as a middle aged person. My thought was 75/25 first ten years let's say out from first job. 75 VTI/VTSAX/VT whatever you like broad-based index, 25% leveraged ... UPRO/TQQQ/whatever you like. That way you're still building a foundation but also allowing the possibility of out-of-expected outperformance.

[QuesadaLover]

I’ve considered this a few times but have never implemented. I keep coming back to several sticking points.
1. What’s the goal? Just more? A specific endpoint? If I cant define the goal, it’s hard to seriously consider the implementation.
Higher rate of return. Same for why someone might choose equities over bonds.
2. How/when to exit. Suppose it works out, do I just pull the plug at my endpoint? Would I be able to or would I let it ride.
Should be aligned with your investment goals. Most investors reduce risk as they age. For this, that might look something like:
Age 20: 2x leverage
Age 25: 1.75x leverage
...
Age 40: 1x (no leverage)
3. If a little works, why not a lot? Suppose it really works. Would I want to increase the risk in the pursuit of more?
This has been well-studied. Too much leverage results in too high a risk of ruin too often. Higher average return means nothing if you end up getting wiped out too often.
4. Would my implementation be strategic investing or gambling?
IMO depends on the implementation. A moderate amount of leverage can be, imo, strategic. There are many people that go overboard and have, imo, too high of a risk of ruin.
5. My spouse definitely wouldn’t do this. Assuming she agreed with my plan, would I do this with our money?
Um, maybe? Not sure how anyone could answer this except for you. If you guys have different risk appetites, that's for y'all to discuss and determine how to address in relation to how you divide your finances.

Responses in-line.

+1. Exactly my thoughts. Especially for a 21-YO with a first job and no responsibilities. Roll the dice on a meaningful but not critical portion (I would guess 75/25 would be big enough to be meaningful but not so meaningful that if it goes to zero you didn't have that 75 keeping you warm at night).

[ScubaHogg]

Re failure as a young person - Die with Zero talks about that too. He recommends swing for homers when you're young.

I don’t even think of it as swinging for the fences. Read the book I linked above. Done properly it can reduce, not increase, lifetime risks

[moneyflowin]

The appropriate amount of leverage depends on the volatility of the asset. That's why RE tends to be highly levered -- it's less volatile and can't be margin called. Stock ETFs, OTOH, are more volatile and should be minimally levered. However, if you can create a portfolio that contains stocks and other assets in a manner where the entire portfolio has low volatility, then you can lever it. I'm pro-leverage, but only when done in a responsible and prudent manner, and IMO 2-3x is too much leverage for a equities-only portfolio. You'd be levering something that's already levered and volatile.

TQQQ and UPRO are poor choices for buy and hold. Futures and options are also poor choices for B&H, because they aren't tax efficient.

[Hydromod]

+1. Exactly my thoughts. Especially for a 21-YO with a first job and no responsibilities. Roll the dice on a meaningful but not critical portion (I would guess 75/25 would be big enough to be meaningful but not so meaningful that if it goes to zero you didn't have that 75 keeping you warm at night).

I'm assuming 75/25 is VT/UPRO or something like that. That's probably about the highest average leverage to go to, so you'd be advised to not let UPRO get too out of whack. But you'll want to time being 21 during a good period rather than a bad period.

Big drops in UPRO mean big drops in VT. I'd have a hard time thinking of a 50% loss in VT as something to keep me warm at night.

I'd say that the way to use 3x LETFs is as a means to hold lots of ballast, which will have a much better chance of letting you sleep at night. I would consider replacing VT in your portfolio idea with a mix of RSSB, RSST, and GDE, which will get you to around 150/75 equity/ballast (roughly speaking). At least the 75% part with RSSB/RSST/GDE will act like a levered 50/50, which has a better chance of keeping at least tepid at night.

[seajay]

BUT! Is the S&P500 not protected by circuit breakers, where trading is halted if a large single day decline is encountered. The likes of UPRO probably use Futures/Options in order to scale up stock exposure, which may not have such limits protections ???

Futures do have limit protections.

Thanks. So I see. https://www.cmegroup.com/trading/price- ... quityIndex

[international001]

I appreciate that they are not designed to be LT investments, and I appreciate and understand decay and why it happens. And I do not mean this for someone 10y out from retirement. But for a young person starting out, isn't the best choice really UPRO not VTSAX for the first 10 or 20Y or their investing life?

No. UPRO would have gone to zero twice in the last 30 years, once in the dot com bust and once in the financial crisis. There is a reasonable case for perhaps 1.2-1.5x leverage using appropriate instruments (quarterly rolling futures probably being the best way), but 3x leverage is guaranteed to blow up.

I thought UPRO (LEV2) only during the financial crisis.

https://testfol.io/?s=bVlVCaqvstt

Question is LEV1 (1x leverage) would be ok during next 100 years
I would argue it would, but look at that 38% volatility

https://testfol.io/?s=fKkJv7oHn78


If you want to leverage, better to leverage something with less volatility, like a mix of stocks and bonds
https://testfol.io/?s=gVWoCrPVYjo

Note that still 2x leverage of stocks and bonds has a high volatility, and may underperform for decades x1 leverage of stocks and bonds

I use x1 leverage of stocks and bonds via PSLDX.

[Hydromod]

BUT! Is the S&P500 not protected by circuit breakers, where trading is halted if a large single day decline is encountered. The likes of UPRO probably use Futures/Options in order to scale up stock exposure, which may not have such limits protections ???

UPRO uses swaps, not futures or options.

[arcticpineapplecorp.]

“In theory, theory and practice are the same. In practice, they are not.”

[Valuethinker]

I think the worst day was the day the US Congress kicked the TARP out on first reading. The Dow dropped -13% the next day, I believe.

You must be a youngster. Black Monday, October 19, 1987. The Dow lost over 22% and the S&P 500 lost over 20%. In a single day.

No. I remember that day as well. Lost quite a bit of money. The FTSE dropped more than Wall Street** -- it was an odd one, because there had been a big hurricane on Sunday night https://en.wikipedia.org/wiki/Great_storm_of_1987 the worst storm in Southern England since the early 1700s.

Because it was on a Sunday night, the death toll was much less than it would otherwise have been.

The market downturn began that Monday in London-- many people couldn't get to work, because the train lines were blocked - and turned into the Wall Street Crash when Wall Street opened, then London followed it down further on Tuesday.

I think the context of my point was "during the 2008-09 crash".


** EDIT. Maybe not. Due to time zones the FTSE Crash was over 2 days (ie Monday then Tuesday). It would appear to be about the same as the Dow (a bit more, because of compounding).

The 10.84% fall that the FTSE-100 suffered that day and the 12.22% fall it endured the following day remain the biggest one-day falls, in percentage terms, that the index has suffered in its 33-year history

[986racer]

Been there, done that.

Used leverage on the way up in the dot-com era. Told myself that I would get out once I reached a certain number and then didn't. Rode the wave down and was happy to end up with slightly more than 0 as it easily could've been worse

It took about 14 years to reach that number again

[er999]

I’d suggest focusing on increasing income when young and investing 100% stocks (less an emergency fund) will probably give better results than bothering with substantial degrees of leverage in stocks. However I do have a small portion in the hedge fund excellent adventure (TMF/UPRO) but wasn’t young when I started, mid 40s.

If want to use leverage in your 20s and 30s consider real estate instead of stocks.

[nisiprius]

Been there, done that.

Used leverage on the way up in the dot-com era. Told myself that I would get out once I reached a certain number and then didn't. Rode the wave down and was happy to end up with slightly more than 0 as it easily could've been worse

It took about 14 years to reach that number again

This.

[Valuethinker]

Been there, done that.

Used leverage on the way up in the dot-com era. Told myself that I would get out once I reached a certain number and then didn't. Rode the wave down and was happy to end up with slightly more than 0 as it easily could've been worse

It took about 14 years to reach that number again

Not the only one.

Well. I had a mortgage. I wasn't leveraged. Except 90% of it was my employer's stock. So leveraged into my career.

In some senses I have never really recovered (but it's alright). Eventually I repurposed my life, got married, began to accept my mortality and the finitude of human passage through life.

[986racer]

Been there, done that.

Used leverage on the way up in the dot-com era. Told myself that I would get out once I reached a certain number and then didn't. Rode the wave down and was happy to end up with slightly more than 0 as it easily could've been worse

It took about 14 years to reach that number again

Not the only one.

Well. I had a mortgage. I wasn't leveraged. Except 90% of it was my employer's stock. So leveraged into my career.

In some senses I have never really recovered (but it's alright). Eventually I repurposed my life, got married, began to accept my mortality and the finitude of human passage through life.

Yes, that didn’t help me either as my college savings plan was to use the RSUs from my company as I vested. It was a five-year vest with a significant portion of compensation held back as RSUs. My first vesting date was in November 2008 and the company was Lehman Brothers…

[Drsteamfitter]

Hi everyone.

I started thinking about this in another thread and thought to start this so as not to derail the other thread.

The USA market generally goes up. Not every day of course but generally up. This is why we invest. Obviously we invest with the understanding there can be a large correction and the correction can last a long time, though historically not longer than about 20Y. Nearly all my investing life I have been in some combination of VG SP500 and TSM. Now that I am beginning to approach the end of my accumulation phase, I'm thinking ... in light of that said, wouldn't we all have been better off - assuming we can stomach the downturns - to have leveraged? That is to say - most of us do not DCA, most of us invest everything we have every two weeks through our paychecks. If UPRO or TQQQ existed 30Y ago, would it not have been better at least for the first 10 or 20 Y to have invested those biweekly paychecks in UPRO instead of VTSAX?

I appreciate that they are not designed to be LT investments, and I appreciate and understand decay and why it happens. And I do not mean this for someone 10y out from retirement. But for a young person starting out, isn't the best choice really UPRO not VTSAX for the first 10 or 20Y or their investing life?

You are asking a biased sample (BH). Just do it if it's what you want to do. Go 100% TQQQ. If what many people believe to be true comes to fruition, you will look like a genius in 20 years. Why do I say this? Because conventionally bad investing seems to lead to the best returns, and people come back to brag/push FOMO and imply we were all too dumb to know what they did and now they are sitting on millions. I've seen this personally and online.

[Valuethinker]

You are asking a biased sample (BH). Just do it if it's what you want to do. Go 100% TQQQ. If what many people believe to be true comes to fruition, you will look like a genius in 20 years. Why do I say this? Because conventionally bad investing seems to lead to the best returns, and people come back to brag/push FOMO and imply we were all too dumb to know what they did and now they are sitting on millions. I've seen this personally and online.

Survivor bias in the data. Like actively managed funds.

Market timer was unusual in that he showed his strategy failing in real time. And then came back and told us how he dug himself out of the hole. But he was doing an advanced degree and went on to work (I believe) for a top percentile employer. And he had a rough time of it.

The guy who bought Tesla calls and made himself many millions (about 6 from memory)? He came back, to outline his option-based strategy to do it again with Nvidia-- another company whose strategy and technology he felt he knew well from his profession. It became clear in the discussion that he did not have a clear understanding of the payout structure of that strategy - which seemed so incredible to me that I wondered if he was a "for real" poster (but I think he was)? Anyways he then came back and said that he had closed out his positions, and put himself over the $10m that he felt (in his early 40s) he needed to sustain him and his family's lifestyle indefinitely.

I did think that given he had gambled, and made a fortune twice, this wouldn't be the last time we saw him.

OTOH there was a European engineer who had borrowed money to buy Tesla stock. And we have not heard from him, again.

I guess I'd summarise it that right skewed investments can work, and do work - definitionally. But you have to have a clear idea of what you will do if they do not - because again by definition the median return is below what you would hope for.