Should I utilize M1 Finance's 2% borrowing rate for leverage?

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Nathan Drake
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Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by Nathan Drake »

The concept of leverage has never really been in my portfolio strategy. I've recently moved to M1 Finance and am intrigued by their 2% borrowing rate. I realize this is variable, and based on the federal funds rate, so it may not be as attractive in the future.

Information:

Mid 30s, 1M+ Portfolio, Save about ~100K/year in investment accounts, No Real Estate (currently rent)

I have never really had a problem "staying the course". COVID was certainly a scary time, but these 20+% corrections to me are just part of the course and I don't worry about them a whole lot (other than wishing I could invest more when they happen). I am curious if it's worth taking advantage of the borrowing rates to increase the amount I can invest? What I can't really wrap my head around are all the details you need to be aware of and what could happen when taking advantage of leverage. Obviously, I would want to avoid any margin calls completely. I would also like to increase my expected returns.

I already have a SCV tilted portfolio (33%), and am 100% in equities. Is it worth taking the additional risk when it hasn't been needed in my strategy previously? I just look at the rates being so low and they seem fairly attractive as long as they stay low. But at the same time, I haven't needed leverage to get to where I am either.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by arcticpineapplecorp. »

the amount of risk is based on need, ability and willingness. sounds like you have the last 2 but not the need. why do it if you don't need to?

greed.

what could go wrong?

need to read up on margin calls if that would be an issue.

Also where's the money coming from to pay back the loan? Why wouldn't you just invest that instead?

remember leverage cuts both ways. magnifies gains but also magnifies losses. you want that?
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by Wiggums »

The broker can liquidate enough of your funds to get their money back. You have no control over what they sell or which lots. In extreme circumstances, they may not even tell you ahead of time. When do you get a margin call? When liquidity is a problem and the markets are under stress. Not a great environment to sell. If you had cash, you wouldn’t be leveraged.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by Nathan Drake »

All good points, I guess I was only thinking about taking out 200k total in debt, and pay it back with my salary (or gains).

But perhaps I should just keep up regular investing instead
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by nisiprius »

1) Some new investors may be overestimating their risk tolerance if they are using 2020 as their measuring stick.

From 8/31/2000, it took Total Stock over five years to get back to even.
From 10/31/2007, over three years.
From 2/14/2020, six months.

2007-2009 was marked by collapse after collapse after collapse after collapse of giant household-name financial institutions, so many that it is impossible to remember them all without checking. Bear Sterns. Lehman Brothers. Merrill Lynch. Citibank. Washington Mutual. Fannie Mae and Freddie Mac. Some were resuscitated or reincarnated. Did I get 'em all? (Checking) Nope. I forgot IndyMac. AIG. And the Reserve Primary Money Market Fund. Lehman Brothers being gone is like the Old Man of the Mountain being gone. In the financial markets, nothing like that happened in 2020.

2) If you have a portfolio of ETFs with an average expense ratio of 0.10%, and you leverage them 50% by borrowing money at 2%, what do you calculate is your effective expense ratio on the leveraged portfolio? What is the calculation for your actual ETFs and your actual proposed amount of leverage?
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by TurtleBeatsHare »

I am okay with (and indeed use) fixed rate loans (my 2.5% 30 year fixed mortgage) to increase the amount I have invested. The most important part of this trade-off is FIXED. You mention that these are variable rate loans based on federal funds plus some basis points (I’m assuming the latter). Here’s the situation you need to be afraid of: you buy equities at all time, P/E highs that in some part are inflated because of the Federal Reserve’s price controls on interest rates and their QE interventions in treasuries and mortgages. Inflation hits (like 5.5% annualized rates in June 2021). The rest of the world catches up to the US on vaccinations (like the UK has done), improving economic growth in the rest of the world and making those equities comparatively more attractive due to higher earnings and less inflation pressure. Investors shift to these options, converting their dollars to foreign currency to buy foreign equities. This lessens demand for dollars, causing the exchange rate to decline and inflating prices for imports, causing inflation for consumer goods and increasing COGS for businesses that import intermediate goods. The Federal Reserve recognizes the inflationary risk associated with printing money and devaluing the currency, and increases short term interest rates. You are now paying a higher interest rate on your loan, and the equities that you have purchased have now lost value because equity investors are moving to bonds as they are attracted by raising rates. And the equities are less profitable due to higher COGS. Maybe you work for one of these less profitable companies, and they cut your bonus, etc.

Will this happen—I have no idea. Could it happen—absolutely. Margin is great on the upside, but terrible on the downside (you in effect are paying interest for the privilege of losing more money). And with a variable rate, callable loan (likely the case), you are facing this situation at your lender’s timing discretion. Ask yourself: when might my lender call my loan? Probably if they can get a better return at a higher interest rate, or possibly if money is now tight and the lender is having difficulty finding extra financing. In either of those environments, would it be easy to find a replacement loan at an acceptable rate or would you be forced to sell the equities? And how do you see equity pricing being in this tight money, high interest rate environment, which raises borrowing cost for companies and makes bonds a relatively more attractive option relatively to equities? To guard against this risk, you would wisely hedge by keeping a sufficiently large cash reserve to pay the loan—but the low ROI for the hedge cash now offsets the greater return from the margin. I wouldn’t do it for a variable rate/callable loan, unless the loan was small enough relative to my fixed income/salary income and cash reserve that I could pay it very quickly. But then it’s small relative to the portfolio, or it requires increasing cash/near-cash reserves. Some people get rich from this, but other people lose greatly on leverage.
Last edited by TurtleBeatsHare on Sun Aug 01, 2021 8:18 pm, edited 1 time in total.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by Zeno »

nisiprius wrote: Sun Aug 01, 2021 7:48 pm 1) Some new investors may be overestimating their risk tolerance if they are using 2020 as their measuring stick.

From 8/31/2000, it took Total Stock over five years to get back to even.
From 10/31/2007, over three years.
From 2/14/2020, six months.
+1

I vaguely remember the first two only because I stopped looking at my statements (and for the 2000 event the statements came in the mail). We didn’t sell though and just kept DCA’ing in. Challenging times though.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by FrugalInvestor »

Nathan Drake wrote: Sun Aug 01, 2021 7:11 pm But perhaps I should just keep up regular investing instead
Yes, that would be the thing to do IMO.
Last edited by FrugalInvestor on Sun Aug 01, 2021 10:35 pm, edited 1 time in total.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by reln »

Nathan Drake wrote: Sun Aug 01, 2021 3:45 pm The concept of leverage has never really been in my portfolio strategy. I've recently moved to M1 Finance and am intrigued by their 2% borrowing rate. I realize this is variable, and based on the federal funds rate, so it may not be as attractive in the future.

Information:

Mid 30s, 1M+ Portfolio, Save about ~100K/year in investment accounts, No Real Estate (currently rent)

I have never really had a problem "staying the course". COVID was certainly a scary time, but these 20+% corrections to me are just part of the course and I don't worry about them a whole lot (other than wishing I could invest more when they happen). I am curious if it's worth taking advantage of the borrowing rates to increase the amount I can invest? What I can't really wrap my head around are all the details you need to be aware of and what could happen when taking advantage of leverage. Obviously, I would want to avoid any margin calls completely. I would also like to increase my expected returns.

I already have a SCV tilted portfolio (33%), and am 100% in equities. Is it worth taking the additional risk when it hasn't been needed in my strategy previously? I just look at the rates being so low and they seem fairly attractive as long as they stay low. But at the same time, I haven't needed leverage to get to where I am either.
You're on the right track. I've maintained a 100% stock portfolio for 4 decades and it has been great. I never used leverage although if I had, I would have made much more money. So, do it!
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by babystep »

arcticpineapplecorp. wrote: Sun Aug 01, 2021 5:01 pm the amount of risk is based on need, ability and willingness. sounds like you have the last 2 but not the need. why do it if you don't need to?

greed.

what could go wrong?

need to read up on margin calls if that would be an issue.

Also where's the money coming from to pay back the loan? Why wouldn't you just invest that instead?

remember leverage cuts both ways. magnifies gains but also magnifies losses. you want that?
I really liked the way you put it.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by ivgrivchuck »

Nathan Drake wrote: Sun Aug 01, 2021 3:45 pm The concept of leverage has never really been in my portfolio strategy. I've recently moved to M1 Finance and am intrigued by their 2% borrowing rate. I realize this is variable, and based on the federal funds rate, so it may not be as attractive in the future.
1) There is so much greed on the streets that in my opinion one should be fearful rather than greedy.
2) But if you decide to go ahead, I believe that Interactive Brokers probably has a better rate.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by JBTX »

No...
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by whodidntante »

I can't really recommend investing with leverage, but it worked great for me. I'm fully deleveraged at this point though.

The thing about low rates is they tend to lead to higher valuations and thus lower expected returns. So it's not necessarily more attractive to invest with leverage now than if short-term rates were 5%.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by Nathan Drake »

nisiprius wrote: Sun Aug 01, 2021 7:48 pm 1) Some new investors may be overestimating their risk tolerance if they are using 2020 as their measuring stick.

From 8/31/2000, it took Total Stock over five years to get back to even.
From 10/31/2007, over three years.
From 2/14/2020, six months.

2007-2009 was marked by collapse after collapse after collapse after collapse of giant household-name financial institutions, so many that it is impossible to remember them all without checking. Bear Sterns. Lehman Brothers. Merrill Lynch. Citibank. Washington Mutual. Fannie Mae and Freddie Mac. Some were resuscitated or reincarnated. Did I get 'em all? (Checking) Nope. I forgot IndyMac. AIG. And the Reserve Primary Money Market Fund. Lehman Brothers being gone is like the Old Man of the Mountain being gone. In the financial markets, nothing like that happened in 2020.

2) If you have a portfolio of ETFs with an average expense ratio of 0.10%, and you leverage them 50% by borrowing money at 2%, what do you calculate is your effective expense ratio on the leveraged portfolio? What is the calculation for your actual ETFs and your actual proposed amount of leverage?
1) I would be evenly investing this into a more diverse pool of assets than US TSM. Obviously, no guarantee they don't all move in the same general direction for years at time, but generally while some will be sideways/down, others may be up quite a bit. 2000-2009 was only painful for US TSM, but if you had some International or SCV, you would have been OK

2) Depends on if you roll the interest costs into the expense ratio. It's definitely high when you look at it from that perspective.
reln wrote: Sun Aug 01, 2021 8:33 pm
You're on the right track. I've maintained a 100% stock portfolio for 4 decades and it has been great. I never used leverage although if I had, I would have made much more money. So, do it!

The mechanics of leverage just have me a bit...worried. You obviously have to be a lot more "active" to monitor the risks. I was thinking maybe just paying the interest every month, and continue investing as I normally would (which should help with the maintenance requirements over time, but not really pay off the balance until the rates start rising.

I have the ability to invest up to 35% of my balance, but would probably only use 10-20% tops. I've read through the "market timer" poster who had his account blow up, but I wouldn't be anywhere near as aggressive.
TurtleBeatsHare wrote: Sun Aug 01, 2021 8:11 pm I am okay with (and indeed use) fixed rate loans (my 2.5% 30 year fixed mortgage) to increase the amount I have invested. The most important part of this trade-off is FIXED. You mention that these are variable rate loans based on federal funds plus some basis points (I’m assuming the latter). Here’s the situation you need to be afraid of: you buy equities at all time, P/E highs that in some part are inflated because of the Federal Reserve’s price controls on interest rates and their QE interventions in treasuries and mortgages. Inflation hits (like 5.5% annualized rates in June 2021). The rest of the world catches up to the US on vaccinations (like the UK has done), improving economic growth in the rest of the world and making those equities comparatively more attractive due to higher earnings and less inflation pressure. Investors shift to these options, converting their dollars to foreign currency to buy foreign equities. This lessens demand for dollars, causing the exchange rate to decline and inflating prices for imports, causing inflation for consumer goods and increasing COGS for businesses that import intermediate goods. The Federal Reserve recognizes the inflationary risk associated with printing money and devaluing the currency, and increases short term interest rates. You are now paying a higher interest rate on your loan, and the equities that you have purchased have now lost value because equity investors are moving to bonds as they are attracted by raising rates. And the equities are less profitable due to higher COGS. Maybe you work for one of these less profitable companies, and they cut your bonus, etc.

Will this happen—I have no idea. Could it happen—absolutely. Margin is great on the upside, but terrible on the downside (you in effect are paying interest for the privilege of losing more money). And with a variable rate, callable loan (likely the case), you are facing this situation at your lender’s timing discretion. Ask yourself: when might my lender call my loan? Probably if they can get a better return at a higher interest rate, or possibly if money is now tight and the lender is having difficulty finding extra financing. In either of those environments, would it be easy to find a replacement loan at an acceptable rate or would you be forced to sell the equities? And how do you see equity pricing being in this tight money, high interest rate environment, which raises borrowing cost for companies and makes bonds a relatively more attractive option relatively to equities? To guard against this risk, you would wisely hedge by keeping a sufficiently large cash reserve to pay the loan—but the low ROI for the hedge cash now offsets the greater return from the margin. I wouldn’t do it for a variable rate/callable loan, unless the loan was small enough relative to my fixed income/salary income and cash reserve that I could pay it very quickly. But then it’s small relative to the portfolio, or it requires increasing cash/near-cash reserves. Some people get rich from this, but other people lose greatly on leverage.

ivgrivchuck wrote: Sun Aug 01, 2021 8:58 pm
Nathan Drake wrote: Sun Aug 01, 2021 3:45 pm The concept of leverage has never really been in my portfolio strategy. I've recently moved to M1 Finance and am intrigued by their 2% borrowing rate. I realize this is variable, and based on the federal funds rate, so it may not be as attractive in the future.
1) There is so much greed on the streets that in my opinion one should be fearful rather than greedy.
2) But if you decide to go ahead, I believe that Interactive Brokers probably has a better rate.
For both of these posts, I've thought about this as well. Would it be better to "time" the use of leverage? I.e., only when equities have had a pretty big pullback (20% or so)?

whodidntante wrote: Sun Aug 01, 2021 9:18 pm I can't really recommend investing with leverage, but it worked great for me. I'm fully deleveraged at this point though.

The thing about low rates is they tend to lead to higher valuations and thus lower expected returns. So it's not necessarily more attractive to invest with leverage now than if short-term rates were 5%.
Doesn't this depend on whether or not assets you're investing in have higher expected returns? I would not be investing this into US TSM funds.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by aristotelian »

arcticpineapplecorp. wrote: Sun Aug 01, 2021 5:01 pm the amount of risk is based on need, ability and willingness. sounds like you have the last 2 but not the need. why do it if you don't need to?

greed.

what could go wrong?
+1, with $1M saved at a young age, all OP has to do is not screw up. It is true they are young and have a long timeframe, but why bother borrowing money to boost returns when you have essentially won the game? I would be looking to derisk and start adding bonds if anything.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by luckyducky99 »

Kind of a personal decision based on your risk tolerance, so it's neither a good or bad idea on its face.

If you do want to do this, you should have a strategy though for how much leverage and how to manage it. Generally, deleverage if things start going south and add leverage as they climb to maintain your desired leverage ratio, with a timeline for how you'll reduce leverage over time -- both how fast, and how you'll do it (selling vs just paying down with new contributions/savings). You're pretty young so read up on lifecycle investing. A lot of behavioral pitfalls in there, so make sure you know yourself well, and trust yourself to behave according to plan before pulling the trigger.

Have a game plan for how you'd evaluate what to do if borrow rates change. Know what you'll do if you do plan to buy a home with a mortgage. That kind of stuff. It's a tool so just be responsible and plan for common scenarios.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by luckyducky99 »

Nathan Drake wrote: Sun Aug 01, 2021 10:47 pm For both of these posts, I've thought about this as well. Would it be better to "time" the use of leverage? I.e., only when equities have had a pretty big pullback (20% or so)?
I mean, no? 100% is actually kind of an arbitrary line when it comes to your allocation. Are you planning to sell to <100% equities and wait for a pullback to buy back in? Functionally that's the same thing as what you're describing. That whole "time in the market beats timing the market" applies regardless of where the money is coming from (borrowed vs not).
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by Invictus002 »

Do you have the risk appetite? Or know how to mitigate when risk arises?

No risk gets no extra gains.

You can use the leverage, if you find an investment with higher returns, in a short timeframe and which is also not the same funds/ETFs you are already invested in.

I know a group of people who are borrowing from IBKR at <2% and their annual ROI is about 22% on the borrowed amount. They pay back the 2% and pocket the 20%. :moneybag
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by mffl »

TurtleBeatsHare wrote: Sun Aug 01, 2021 8:11 pm I am okay with (and indeed use) fixed rate loans (my 2.5% 30 year fixed mortgage) to increase the amount I have invested. The most important part of this trade-off is FIXED.
Well yeah, but I'll just sell when the interest rates go up, right?
TurtleBeatsHare wrote: Sun Aug 01, 2021 8:11 pm You are now paying a higher interest rate on your loan, and the equities that you have purchased have now lost value because equity investors are moving to bonds as they are attracted by raising rates. And the equities are less profitable due to higher COGS.
OH. Whoops. :)

In all seriousness, thanks, this is a great explanation for why someone ok with using a mortgage to get 100%+ stocks should have serious pause using an adjustable rate loan to take it to the next level.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by TimeTheMarket »

If I could borrow a guaranteed fixed 2% I would absolutely do it. But with it variable, and margin call possibility that sounds a great deal less enticing.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by KlangFool »

Nathan Drake wrote: Sun Aug 01, 2021 3:45 pm
Mid 30s, 1M+ Portfolio, Save about ~100K/year in investment accounts,
Nathan Drake,

It is very simple.

The answer is NO. It is totally pointless. It won't make a bit of difference to you. So, why should you gamble at all?

Just use a spreadsheet and put in your portfolio size, annual savings, and return rate. Then, do the same with the leverage (borrowed X amount). You would find that it won't matter a bit.

Why gamble when even if you win, it won't matter to you? It is a lose-lose bet. If you are right, you win nothing. If you are wrong, you lose a lot.

In fact, I would go one step further. It is pointless for you to be 100% stock too. You are making a lose-lose bet too.

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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by Dontsell1 »

You are doing very well. Things don’t usually blow up without leverage.
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by Nathan Drake »

Invictus002 wrote: Mon Aug 02, 2021 1:59 pm Do you have the risk appetite? Or know how to mitigate when risk arises?

No risk gets no extra gains.

You can use the leverage, if you find an investment with higher returns, in a short timeframe and which is also not the same funds/ETFs you are already invested in.

I know a group of people who are borrowing from IBKR at <2% and their annual ROI is about 22% on the borrowed amount. They pay back the 2% and pocket the 20%. :moneybag
I have the risk appetite when interest rates are low, but it's always risk...the group you are talking about won't always be so lucky though.
KlangFool wrote: Mon Aug 02, 2021 4:18 pm
Nathan Drake wrote: Sun Aug 01, 2021 3:45 pm
Mid 30s, 1M+ Portfolio, Save about ~100K/year in investment accounts,
Nathan Drake,

It is very simple.

The answer is NO. It is totally pointless. It won't make a bit of difference to you. So, why should you gamble at all?

Just use a spreadsheet and put in your portfolio size, annual savings, and return rate. Then, do the same with the leverage (borrowed X amount). You would find that it won't matter a bit.

Why gamble when even if you win, it won't matter to you? It is a lose-lose bet. If you are right, you win nothing. If you are wrong, you lose a lot.

In fact, I would go one step further. It is pointless for you to be 100% stock too. You are making a lose-lose bet too.

KlangFool
Good point. I don't have a need really. Just trying to think of whether it's "optimal" to use a little bit of leverage in a lower-risk fashion.

I am 100% stocks because I don't really feel I have a need for bonds yet. As I approach early retirement I will then gradually go to 20% bonds and leave my allocation at 80/20 for life with a fairly low SWR (<3%)
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by KlangFool »

Nathan Drake wrote: Mon Aug 02, 2021 7:36 pm
Good point. I don't have a need really. Just trying to think of whether it's "optimal" to use a little bit of leverage in a lower-risk fashion.

I am 100% stocks because I don't really feel I have a need for bonds yet. As I approach early retirement I will then gradually go to 20% bonds and leave my allocation at 80/20 for life with a fairly low SWR (<3%)
Nathan Drake,

1) What is your number?

2) Have you calculated how far you are from early retirement?

3) If you have not calculated, how do you know that you are not approaching early retirement NOW?

<<I will then gradually go to 20% bonds and leave my allocation at 80/20 for life with a fairly low SWR (<3%) >>

4) That means you will be about 30X at that point. If the stock market drops 50%, you lose 40%. You are down to 18X. You can no longer retire.

5) The average annual return between 100/0 versus 70/30 is less than 1% per year. Why are you taking RISK that are unnecessary and give you close to NOTHING?

https://investor.vanguard.com/investing ... allocation

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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by Nathan Drake »

KlangFool wrote: Mon Aug 02, 2021 7:47 pm
Nathan Drake wrote: Mon Aug 02, 2021 7:36 pm
Good point. I don't have a need really. Just trying to think of whether it's "optimal" to use a little bit of leverage in a lower-risk fashion.

I am 100% stocks because I don't really feel I have a need for bonds yet. As I approach early retirement I will then gradually go to 20% bonds and leave my allocation at 80/20 for life with a fairly low SWR (<3%)
Nathan Drake,

1) What is your number?

2) Have you calculated how far you are from early retirement?

3) If you have not calculated, how do you know that you are not approaching early retirement NOW?

<<I will then gradually go to 20% bonds and leave my allocation at 80/20 for life with a fairly low SWR (<3%) >>

4) That means you will be about 30X at that point. If the stock market drops 50%, you lose 40%. You are down to 18X. You can no longer retire.

5) The average annual return between 100/0 versus 70/30 is less than 1% per year. Why are you taking RISK that are unnecessary and give you close to NOTHING?

https://investor.vanguard.com/investing ... allocation

KlangFool
I am at 60X LeanFI....probably 30X "normal FI" with some flexibility. But I'm still working for a few more years at least. I guess my goal may be to get to FatFI by mid 40s.

SWR is based on all-time highs, not a market drop. It's a bit of a flaw, but it's still how it works. If the market drops 50% in the next few years I will continue to invest through it.

1% per year annualized over a lifetime is a lot. I am much more comfortable with long-term equity risk than I am bond-risk, and the larger market drops don't worry me too much. If I end up retiring with a 1-2% WR....I don't think I need to worry too much about extended market drops.
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BogleFan510
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by BogleFan510 »

Agree with Klangfools points. IMHO, leverage is not worth it, as most companies in index funds are already using leverage and your personal leverage is adding to the economic risk in a way that is a bit 'unbalanced to the rewards. Under a black swan type economic crisis, the cards could tumble down in a way that costs you most of your assets.

If you are the type that could lose everything and feel fine rebuilding wealth from scratch, maybe. But those types are generally creating new companies, which have massive payoff potential in exchange for the debt, not buying passive funds. The leverage for equities is not gaining all that much, unless you are speculating of individual stocks and that is more risky. Personally dont think a few extra % of annual gains under good times is worth catastrophic losses under the worst times, but that is me and worst times may not happen.

If you want to use leverage for a home or rental property, or to start a business with good economics (like a pizzaria), my answer would be different. Many people are successful business people or real estate bargain finders, but few are proven stock pickers (and markets can be fickle...says someone who had a Japanese stock account with Nomura in 1990, but fortunately not much to invest in Japanese index funds while working in Japan).

Edit: I posted before your reply above. Given your situation, and the leverage level you mention, it would not move the dial much either way, so do what feels best.
KlangFool
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by KlangFool »

Nathan Drake wrote: Mon Aug 02, 2021 7:54 pm
I am at 60X LeanFI....probably 30X "normal FI" with some flexibility. But I'm still working for a few more years at least. I guess my goal may be to get to FatFI by mid 40s.

SWR is based on all-time highs, not a market drop. It's a bit of a flaw, but it's still how it works. If the market drops 50% in the next few years I will continue to invest through it.

1% per year annualized over a lifetime is a lot. I am much more comfortable with long-term equity risk than I am bond-risk, and the larger market drops don't worry me too much. If I end up retiring with a 1-2% WR....I don't think I need to worry too much about extended market drops.
Nathan Drake,

<< But I'm still working for a few more years at least. I guess my goal may be to get to FatFI by mid 40s.>>

That means you are around 10 years from reaching your goal.

<<SWR is based on all-time highs, not a market drop. It's a bit of a flaw, but it's still how it works. If the market drops 50% in the next few years I will continue to invest through it.>>

Only if you are lucky enough not to be unemployed at the same time. Can you guarantee that in the coming recession?

<<1% per year annualized over a lifetime is a lot.>>

You do not have a life time. You are about 10 years from reaching your goal. Historically, 100% stock have been known to lose money over a 10 years period.

A) If you are right, you gain about 10% to 15% more. Which would not matter to you. It is too small to matter.

B) If you are wrong, you lose 50% and cannot retire

It is a lose-lose bet. If you are right, your win does not matter. If you are wrong, it is going to cost a few years of your life. Why are you doing this to yourself?

KlangFool
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Topic Author
Nathan Drake
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by Nathan Drake »

KlangFool wrote: Mon Aug 02, 2021 8:16 pm
Nathan Drake wrote: Mon Aug 02, 2021 7:54 pm
I am at 60X LeanFI....probably 30X "normal FI" with some flexibility. But I'm still working for a few more years at least. I guess my goal may be to get to FatFI by mid 40s.

SWR is based on all-time highs, not a market drop. It's a bit of a flaw, but it's still how it works. If the market drops 50% in the next few years I will continue to invest through it.

1% per year annualized over a lifetime is a lot. I am much more comfortable with long-term equity risk than I am bond-risk, and the larger market drops don't worry me too much. If I end up retiring with a 1-2% WR....I don't think I need to worry too much about extended market drops.
Nathan Drake,

<< But I'm still working for a few more years at least. I guess my goal may be to get to FatFI by mid 40s.>>

That means you are around 10 years from reaching your goal.
10 years away from a lofy-nice-to-have-not-really-necessary goal.
<<SWR is based on all-time highs, not a market drop. It's a bit of a flaw, but it's still how it works. If the market drops 50% in the next few years I will continue to invest through it.>>

Only if you are lucky enough not to be unemployed at the same time. Can you guarantee that in the coming recession?
There's a book called "are you a stock or are you a bond?". My industry is pretty stable, more bond-like. Nothing is guaranteed, but highly likely I can remain employed in some capacity.
<<1% per year annualized over a lifetime is a lot.>>

You do not have a life time. You are about 10 years from reaching your goal. Historically, 100% stock have been known to lose money over a 10 years period.
I disagree. You do not stop investing when you reach your FIRE goals. You continue to invest for a lifetime. Historically 100% stock can lose money over a 10 year period, but my portfolio within equities is highly diversified. With an earlier retirement, I believe having a higher equity allocation combined with lower SWR is important.
A) If you are right, you gain about 10% to 15% more. Which would not matter to you. It is too small to matter.

B) If you are wrong, you lose 50% and cannot retire

It is a lose-lose bet. If you are right, your win does not matter. If you are wrong, it is going to cost a few years of your life. Why are you doing this to yourself?

KlangFool
I don't agree with these two outcomes. Having higher equity allocation over the course of decades will lead to many multiples more, and I can still manage to meet my goals - remember, my FatFIRE goals will not be fixed; they are just extra margin for things I can scale back to normal FI or even lean FI.

I'm now convinced that leverage may be a little too much, but I'm content with the risks of more equities.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
KlangFool
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by KlangFool »

Nathan Drake wrote: Mon Aug 02, 2021 10:06 pm

There's a book called "are you a stock or are you a bond?". My industry is pretty stable, more bond-like. Nothing is guaranteed, but highly likely I can remain employed in some capacity.
Nathan Drake,

Didn't they said the same thing about the 100+ years old Telecom industry right before the Telecom Bust? And, if that could happened to the 100+ years old Telecom industry.....

I know that I know nothing....

KlangFool
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evoila
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Joined: Fri Jan 20, 2017 1:31 am

Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by evoila »

Leverage is a great tool, assuming you can not only continue to service the debt in a calamity, but continue to buy.
TurtleBeatsHare
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Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by TurtleBeatsHare »

@ Nathan Drake. You wrote this:

“For both of these posts, I've thought about this as well. Would it be better to "time" the use of leverage? I.e., only when equities have had a pretty big pullback (20% or so)?”

If you can consistently time the market, you won’t need leverage. You’ll make a killing with your starting capital.

However, that’s a big “if”. I’m skeptical that people can time the market consistently. Certainly we can all time the market some of the time—even guessing randomly will work some of the time. But to time the market consistently, you have to outperform your mistiming plus the baseline market average while overcoming higher trading costs and tax drag. You also have to do this while competing against other institutions, in particular hedge funds, have similar strategies of profiting from market volatility and have a greater capacity to analyze data and execute trading strategies faster than you likely ever will (not a knock on you—just a knock on the power of a human mind vs a supercomputer and an algorithm). All of the data that I’ve seen suggests that most/nearly all investors horribly mistime the market due to behavioral limitations (largely sell offs during down markets due to fear and buying high because of excitement/greed). Moreover, the fact that 90% of passive index funds outperform active managers over a 10-15 period suggests that even trained professionals have trouble timing the market. We as a species have certainly behavioral habits that aren’t optimal for investing—namely recency bias, relying on trends to extrapolate the future, overvaluing loss avoidance relative to gain, overvaluing now relative to the future, etc. I’m not arrogant enough to pretend that I’m immune from these weaknesses, and I don’t recommend that others should adopt this admittedly satisfying illusion either.

Finally, I’d add that leverage timing is even more difficult that regular timing because you have to line up the credit faculty ahead of time and usually pay some sort of fee to have that privilege. It usually involves additional costs. If
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Should I utilize M1 Finance's 2% borrowing rate for leverage?

Post by KlangFool »

evoila wrote: Mon Aug 02, 2021 11:21 pm Leverage is a great tool, assuming you can not only continue to service the debt in a calamity, but continue to buy.
In summary, it is great if the person can predict the future. It is obvious that we can't.

Folks should learn from LTCM.

https://en.wikipedia.org/wiki/Long-Term ... Management

KlangFool
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