Taxable question for a professor's portfolio with some leverage

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Professoro
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Taxable question for a professor's portfolio with some leverage

Post by Professoro »

I am a tenured professor who prefers to have a riskier portfolio than most of my peers. Due to the length of their education, most professors only start investing in their 30s. At this point in my early 40s, I got to the point that I am able to max out my ROTH and 403B and the house will be paid off in a few years. I have a taxable account that I would like to grow a bit more aggressively in the upcoming years. I am very healthy and expect to work until 70 (The average retirement age in my department has been around 75!).

403B is 100% in low cost US and EU total stock index.
ROTH is 1.8X leveraged stock/bond portfolio based on viewtopic.php?t=288192 - UPRO/CURE/TMF
Taxable 100% VTI

I use some leverage through LETF in ROTH. I will use leverage until 55 toning down the leverage ratio every 5 years and add 10% bond every 5 years after that. My desired leverage at this point is around 1.2. It will be 1.1 at 50 and no leverage after 55.

I have two questions:

1. I am still a bit below my desired leverage level as 403B has the largest weight. I can get 2% borrowing rate through M1 Finance. I am considering moving the taxable from Vanguard to M1 to get %35 margin. I considered IBKR but the lack of margin call and already having the M1 Finance account would makes my prefer M1. As I am not very familiar with options, I would prefer to stick to LETF in ROTH and using margin in taxable. Is there any other way to increase leverage?

2. What should I buy with the margin? I considered buying more VTI and keep it to a single fund. I am also considering NTSX, perhaps NTSE as I have no exposure to emerging markets at this point. Based on my IPS, I can accept any low-cost tax efficient index fund. I have been 70% US/30% exUS. This choice may shift the allocation one way or another but I can rebalance through 403B.
Last edited by Professoro on Sun Oct 17, 2021 6:26 pm, edited 1 time in total.
adamthesmythe
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Re: Taxable question for a professor's portfolio with some leverage

Post by adamthesmythe »

When I started my academic job in my early 30s I just invested through the university plan. I only invested in tax-deferred and retired with a healthy portfolio at about 65.

While no one can predict the future I do not believe that OP HAS to leverage up. And personally being able to put investments on autopilot (and not have anything to think or worry about) made it possible to ignore the investments and just think about my profession.
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Re: Taxable question for a professor's portfolio with some leverage

Post by student »

Do you really need to take on additional risk? Even you started late, it seems that you are doing fine if your house is going to be paid off in a few years. You said you plan to work until 70. Do you like you job? Do you want to retire earlier than 70? As a fellow academic, I understand the feeling of needing to catch up because of the late start...

To you question to what to buy, your plan of buying VTI seems good.
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Re: Taxable question for a professor's portfolio with some leverage

Post by ApeAttack »

I'm in academia as well, but don't feel a need to be more aggressive than a 90/10 portfolio because of my pension. My goal is to have the option of retiring at 60, but I can stay longer if I still have the desire to work full time or the markets aren't very nice over the next couple decades. I'll reduce risk in my portfolio after I reach 50 or so.

Do you have a pension? Do you really need to take the additional risk if you plan to retire at age 70?

If you are maxing out your 403b and Roth IRA, and will have a paid off house by age 70, you'll probably be fine regardless of what you do.

Do you have access to a 457b too? I didn't know that I had access to such an account until I inquired with HR.
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Re: Taxable question for a professor's portfolio with some leverage

Post by whyme »

My 2¢, speaking as a tenured college faculty member approaching retirement. I'm basing this on the information you've provided, though it would be helpful to know more, including whether you have any expected pension or recieve any employer matches in the 403b.

I think your plan to leverage your portfolio for an indefinite term is unwise. You may have experienced the largely upward "bull" market of the past decade, with only transient dips along the way, but rest assured that is not how it always goes. The probability is very high that during the decades ahead there will be one or more protracted downturns--potentially lasting for years--that will create very unfavorable conditions for those using leverage, including forced liquidation at rock-bottom prices and large jumps in the margin requirements and rates of interest you are being charged. As an aggressive investor, you want to be in a position to hold your existing assets and continue to buy more during periods of "blood in the streets" decline; leverage pushes you in the opposite direction--some of that blood will be yours. Not to mention that you have been paying for this privilege the whole time you had leveraged assets.

It seems clear that there is no need for you to involve leverage in terms of building financial independence. If you want to invest aggressively, 100% stock index funds is plenty aggressive (while avoiding the potential for disaster that comes with margin borrowing or options). As you tell it, you have another 30 years or so of accumulating through regular contributions. Presumably you are also building a future pension or a Social Security benefit (or both) along with the tax-advantaged retirement accounts. You should do well by making consistent contributions to low cost funds in the retirement accounts and otherwise adhering to the boring, passive course you'll find outlined here among the Bogleheads.

My guess is that you find the prospect of a big financial win and beating the market fun and exciting. In other words, you like to gamble. If that's true, that's ok, own it. But rigorously separate your "play money" from your investment portfolio--it'd probably be a good idea to open a separate gambling account at a different broker. And sharply limit the amount you use for play: I'd say maybe 2% of your portfolio, 5% as a maximum. Then, with that money only, indulge yourself, knowing that this is money you are comfortable losing. Just be sure to avoid any scenario where you can be liable for more than 100% of your total investment. But if you want to buy penny stocks, gold, Pokemon cards, whatever, enjoy yourself.

A couple of other notes:

1. If you want more replies here, I suggest you edit your original post to spell out the names of your investments. Many readers will have no idea what "HFEA - UPRO/CURE/TMF" means, and they will not take the time to look up the acronyms.

2. It sounds like you are in a good position to work until 70 or 75, this is one of the advantages of being a tenured professor. But it makes sense to plan for an earlier retirement, just in case. A large fraction of people who intend to work to some age above 60 don't manage to do so. Even if your health remains good and job is secure, you may find yourself responsible for an ailing family member, or your working/teaching environment may change in disappointing ways such that you want to move on earlier than you had planned.
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Re: Taxable question for a professor's portfolio with some leverage

Post by Professoro »

I do not have a pension. I have access to a 457b, however I have doubts in putting money in as I am planning to live mostly abroad during retirement. I have dual citizenship and the country that I plan to move back has much lower insurance rates for health and disability.

I would likely be fine with or without leverage, however taking a little more risk at this point may give me the option to retire early if unexpected events happen. I do like my job very much but there are many things out of my control: Changing environment in education may impact our enrollment, health/life events, political instability, etc.

The leverage will not be for an indefinite term. It will be at 1.2 until 50 and 1.1 until 55. After 60, portfolio will be shifting to bonds by 10% each 5 years. I do not see any of the leverage as "play money". I never bought a single stock in my life and I have no expectation of beating the market. Almost all funds are low cost index funds except the ROTH which is less than 5% of the total portfolio. The ROTH portfolio will also shift to a more conservative one during deleveraging.
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Re: Taxable question for a professor's portfolio with some leverage

Post by epictetus »

are you 100% stocks now?

that would be risky enough
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Re: Taxable question for a professor's portfolio with some leverage

Post by whyme »

Professoro wrote: Sun Oct 17, 2021 1:46 pm I do not have a pension. I have access to a 457b, however I have doubts in putting money in as I am planning to live mostly abroad during retirement.
I don't understand the connection between 457b contributions and living abroad. So long as you have US citizenship, the tax advantages of the 457b and 403b will apply. Even if you are planning to renounce your citizenship eventually, you'll get lower income taxes now and untaxed growth until then. Once you retire (or hit age 59 1/2) 457b (and 403b) money can be rolled into a traditional IRA account--tax deferred, low cost, flexible. There's also a window of two or three years when you can make oversized 457b contributions when approaching whatever your employer has designated as "normal" retirement age. I'd look into that 457b as a supplement to your retirement nest egg, if you're already topping out the 403b.
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Re: Taxable question for a professor's portfolio with some leverage

Post by willthrill81 »

Professoro wrote: Sun Oct 17, 2021 1:46 pm I do not have a pension. I have access to a 457b, however I have doubts in putting money in as I am planning to live mostly abroad during retirement. I have dual citizenship and the country that I plan to move back has much lower insurance rates for health and disability.
I'm not sure why living abroad would mean that you shouldn't contribute to a 457 plan. I have access to one, and it will be a huge help in my own early retirement plans from academia.
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Re: Taxable question for a professor's portfolio with some leverage

Post by ApeAttack »

whyme wrote: Sun Oct 17, 2021 2:03 pm
Professoro wrote: Sun Oct 17, 2021 1:46 pm I do not have a pension. I have access to a 457b, however I have doubts in putting money in as I am planning to live mostly abroad during retirement.
I don't understand the connection between 457b contributions and living abroad. So long as you have US citizenship, the tax advantages of the 457b and 403b will apply. Even if you are planning to renounce your citizenship eventually, you'll get lower income taxes now and untaxed growth until then. Once you retire (or hit age 59 1/2) 457b (and 403b) money can be rolled into a traditional IRA account--tax deferred, low cost, flexible. There's also a window of two or three years when you can make oversized 457b contributions when approaching whatever your employer has designated as "normal" retirement age. I'd look into that 457b as a supplement to your retirement nest egg, if you're already topping out the 403b.
I was about to inquire about the 457b / retiring abroad item too. I thought I was missing something important about 457b plans.
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Re: Taxable question for a professor's portfolio with some leverage

Post by delamer »

Most posters aren’t going to know what these tickers or HFEA represent: HFEA - UPRO/CURE/TMF
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Re: Taxable question for a professor's portfolio with some leverage

Post by Professoro »

whyme wrote: Sun Oct 17, 2021 2:03 pm
Professoro wrote: Sun Oct 17, 2021 1:46 pm I do not have a pension. I have access to a 457b, however I have doubts in putting money in as I am planning to live mostly abroad during retirement.
I don't understand the connection between 457b contributions and living abroad. So long as you have US citizenship, the tax advantages of the 457b and 403b will apply. Even if you are planning to renounce your citizenship eventually, you'll get lower income taxes now and untaxed growth until then. Once you retire (or hit age 59 1/2) 457b (and 403b) money can be rolled into a traditional IRA account--tax deferred, low cost, flexible. There's also a window of two or three years when you can make oversized 457b contributions when approaching whatever your employer has designated as "normal" retirement age. I'd look into that 457b as a supplement to your retirement nest egg, if you're already topping out the 403b.
Thank you for your feedback. Unfortunately I was wrong about having access to 457, I only have access to Flexible and Health Saving accounts (FSA) and (HSA). I am working for a private university and that may be the reason I don't have 457. FSA is on a use it or lose it basis and HSA is used in conjunction with a high-deductible plan so I did not get either. At this point, I don't have tax advantaged space. If I go to a university that offers a 457 plan, it is definitely a good choice with the option to roll into IRA.
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Re: Taxable question for a professor's portfolio with some leverage

Post by Professoro »

After all, I decided against adding leverage through margin. Having a decent sized taxable account has been a good thing as it is part of a larger emergency fund. Adding margin to it was no doubt going to decrease its liquidity due to margin requirements. I will still have some leverage due to leverage ETFs in ROTH but it is a smaller portion of the portfolio and does not make me lose sleep over it even in a downturn (at least it did not in March 2020!). Thanks all for the feedback.
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Re: Taxable question for a professor's portfolio with some leverage

Post by ApeAttack »

Professoro wrote: Sun Oct 17, 2021 10:51 pm After all, I decided against adding leverage through margin. Having a decent sized taxable account has been a good thing as it is part of a larger emergency fund. Adding margin to it was no doubt going to decrease its liquidity due to margin requirements. I will still have some leverage due to leverage ETFs in ROTH but it is a smaller portion of the portfolio and does not make me lose sleep over it even in a downturn (at least it did not in March 2020!). Thanks all for the feedback.
Glad we could help. :)
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Re: Taxable question for a professor's portfolio with some leverage

Post by William Million »

If you plan to retire fulltime to your home country (whatever it is), you should take into account how that country taxes worldwide income. You might find that your Roth withdrawals are taxed.

Also, I've met very, very few tenured faculty who do not work toward traditional pensions. Unless you're being compensated at a higher rate than faculty who ultimately receive pensions, the smartest financial move you might make is look for a different institution to work for.
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Re: Taxable question for a professor's portfolio with some leverage

Post by whyme »

ApeAttack wrote: Sun Oct 17, 2021 10:59 pm
Glad we could help. :)
+1
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Re: Taxable question for a professor's portfolio with some leverage

Post by ApeAttack »

William Million wrote: Sun Oct 17, 2021 11:03 pm If you plan to retire fulltime to your home country (whatever it is), you should take into account how that country taxes worldwide income. You might find that your Roth withdrawals are taxed.

Also, I've met very, very few tenured faculty who do not work toward traditional pensions. Unless you're being compensated at a higher rate than faculty who ultimately receive pensions, the smartest financial move you might make is look for a different institution to work for.
The process of getting hired, then getting tenure and promotion is exhausting and very time consuming. I would be reluctant to go through it again if I were happy with my salary but had no pension.

(Fortunately for me, I have a pension and I'm satisfied with my salary.)
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Re: Taxable question for a professor's portfolio with some leverage

Post by whyme »

William Million wrote: Sun Oct 17, 2021 11:03 pm I've met very, very few tenured faculty who do not work toward traditional pensions. Unless you're being compensated at a higher rate than faculty who ultimately receive pensions, the smartest financial move you might make is look for a different institution to work for.
Faculty pensions are common at state-sponsored institutions, but are increasingly scarce at private universities or colleges, even well-established schools with substantial endowments. More typical for those is a 403b program with an employer salary match. The private schools used to offer pensions, but the corporate world's elimination of pensions in favor of 401k plans seems to have influenced college administrators.
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Re: Taxable question for a professor's portfolio with some leverage

Post by William Million »

whyme wrote: Sun Oct 17, 2021 11:28 pm
William Million wrote: Sun Oct 17, 2021 11:03 pm I've met very, very few tenured faculty who do not work toward traditional pensions. Unless you're being compensated at a higher rate than faculty who ultimately receive pensions, the smartest financial move you might make is look for a different institution to work for.
Faculty pensions are common at state-sponsored institutions, but are increasingly scarce at private universities or colleges, even well-established schools with substantial endowments. More typical for those is a 403b program with an employer salary match. The private schools used to offer pensions, but the corporate world's elimination of pensions in favor of 401k plans seems to have influenced college administrators.
But what's the point of tenure is it doesn't include a pension? Without a pension, a faculty type might be better off hopping around every few years to the highest bidder (like private sector types).
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Re: Taxable question for a professor's portfolio with some leverage

Post by ApeAttack »

William Million wrote: Mon Oct 18, 2021 12:10 am
whyme wrote: Sun Oct 17, 2021 11:28 pm
William Million wrote: Sun Oct 17, 2021 11:03 pm I've met very, very few tenured faculty who do not work toward traditional pensions. Unless you're being compensated at a higher rate than faculty who ultimately receive pensions, the smartest financial move you might make is look for a different institution to work for.
Faculty pensions are common at state-sponsored institutions, but are increasingly scarce at private universities or colleges, even well-established schools with substantial endowments. More typical for those is a 403b program with an employer salary match. The private schools used to offer pensions, but the corporate world's elimination of pensions in favor of 401k plans seems to have influenced college administrators.
But what's the point of tenure is it doesn't include a pension? Without a pension, a faculty type might be better off hopping around every few years to the highest bidder (like private sector types).
Job security and prestige matter a lot too.
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Re: Taxable question for a professor's portfolio with some leverage

Post by 22twain »

William Million wrote: Mon Oct 18, 2021 12:10 amWithout a pension, a faculty type might be better off hopping around every few years to the highest bidder (like private sector types).
At the lower levels of academia (small non-elite private colleges), competition for tenure-track positions is brutal, and mobility is limited. People that my wife and I have known who have moved on to other colleges have done so mainly because of strong incompatibilities with other people in their departments, or with college policies as a whole, not because of salary per se.

My wife has regularly sent letters of recommendation for a colleague in her department. He hasn't found a tenure-track position elsewhere, despite doing as well as could be expected under the conditions here, where his major is on the edge of being eliminated.
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Re: Taxable question for a professor's portfolio with some leverage

Post by Belvoir57 »

whyme wrote: Sun Oct 17, 2021 1:25 pm I think your plan to leverage your portfolio for an indefinite term is unwise. You may have experienced the largely upward "bull" market of the past decade, with only transient dips along the way, but rest assured that is not how it always goes. The probability is very high that during the decades ahead there will be one or more protracted downturns--potentially lasting for years--that will create very unfavorable conditions for those using leverage, including forced liquidation at rock-bottom prices and large jumps in the margin requirements and rates of interest you are being charged. As an aggressive investor, you want to be in a position to hold your existing assets and continue to buy more during periods of "blood in the streets" decline; leverage pushes you in the opposite direction--some of that blood will be yours. Not to mention that you have been paying for this privilege the whole time you had leveraged assets.

My guess is that you find the prospect of a big financial win and beating the market fun and exciting. In other words, you like to gamble. If that's true, that's ok, own it. But rigorously separate your "play money" from your investment portfolio--it'd probably be a good idea to open a separate gambling account at a different broker. And sharply limit the amount you use for play: I'd say maybe 2% of your portfolio, 5% as a maximum. Then, with that money only, indulge yourself, knowing that this is money you are comfortable losing. Just be sure to avoid any scenario where you can be liable for more than 100% of your total investment. But if you want to buy penny stocks, gold, Pokemon cards, whatever, enjoy yourself.

2. It sounds like you are in a good position to work until 70 or 75, this is one of the advantages of being a tenured professor. But it makes sense to plan for an earlier retirement, just in case. A large fraction of people who intend to work to some age above 60 don't manage to do so. Even if your health remains good and job is secure, you may find yourself responsible for an ailing family member, or your working/teaching environment may change in disappointing ways such that you want to move on earlier than you had planned.
whyme makes some very spot-on points here.

Regarding future market gains, I agree with whyme that the last decade has conditioned many investors to think the market always advances. It does, but sometimes there are decades or longer in which it's down or flat. We have lived through a number of these ourselves. Think the 70's. And the early 2000's, for example.

There are also times when the market crashes. It's hard to know where the bottom is when that happens but we have seen 3 that I can remember. I would hate to be leveraged at that time.

Re being prepared to retire early, that is very important. I was guaranteed lifetime employment with my current company but I got a new boss and I was fired last week at 64. I have met other people in very similar circumstances. So putting yourself in a position where you are able to live without a paycheck gives you freedom just in case.
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Re: Taxable question for a professor's portfolio with some leverage

Post by whyme »

William Million wrote: Mon Oct 18, 2021 12:10 am But what's the point of tenure is it doesn't include a pension? Without a pension, a faculty type might be better off hopping around every few years to the highest bidder (like private sector types).
Tenure is primarily there to protect academic freedom. The idea is that it is a good thing for academics to pursue research and present the results of their research in the classroom and to the public without political or corporate interference. (One can argue whether or not tenure functions this way in practice, but that is the clear origin of tenure, at least in the US.)

As to hopping around to the highest bidder, this is less possible in academia than in the corporate world. Some of that does occur, often among people who are very high-profile in their fields (when you hear that someone has an endowed professorship--there will be a name attached, the so-and-so professor of political science, say--that often means they were recruited or offered a beneficial contract to keep them from being lured away by another offer). Truth is that the supply of trained academics outnumbers available tenured positions in most fields (an increasing percentage of college faculty are there as relatively low-pay adjuncts with little job security and not much connection to administrative decisions about their programs, curriculum, or their school as a whole). People who have secured a tenured position almost anywhere count themselves as lucky.
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