Lifecycle Investing vs. Hedgefundie's Excellent Adventure

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skierincolorado
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by skierincolorado »

DMoogle wrote: Thu Sep 16, 2021 10:09 am
skierincolorado wrote: Thu Sep 16, 2021 8:05 amIn order of risk:
-leveraging 2x against net worth (SSO), or 3x (UPRO)
-leveraging 4x against net worth
-taking fixed loans using your future income as collateral via credit cards, mortgages, personal loans. This allows for leverage higher than 4x, and can very easily turn into infinite leverage if one's net worth becomes negative
-taking more fixed loans than you'd be able to sustain in a market down turn or loss of job
I think we need a new framework for talking about leverage ratios in a non-LETF context. 4x against net worth sounds sky-high and very scary to most, but if a portfolio was actually 0.5x SPY and 3.5x STTs, then it's actually a reasonably safe portfolio. Even 1x SPY and 8x STTs looks to be less risky than HFEA. Using a flat number to discuss leverage ratios really doesn't hold up well at all when not considering the context of the underlying assets.

I'm not really sure what this framework should look like, but I think the more we can point to long-term results (i.e. at least 3 decades) and discuss volatility and drawdowns, the better off we'll be.
When talking about bonds I usually use the framework of percent net worth specified by asset type, for example 150%/300% stocks/bonds. To me, that’s the most clear. A few people still seem to get confused but the information is there if they want to try to understand what it means.

In the above examples though I really am talking about being 3x or 4x in only stocks. Or even having stock exposure on a negative net worth such as student loans if the interest rate is low. Which is technically infinite leverage. I think that much leverage is acceptable for a recent college grad in a highly employable field. But personally I didn’t have the know how or discipline to execute such a plan after college. Very few do. Which is probably why Ayres and nalebuff avoid going there.
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Bentonkb
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by Bentonkb »

As leverage increases it crosses from investing into gambling. I don't know what the cut off is, but it is probably around 3x on an all stock portfolio. Higher than that and you are playing a game with a negative expected return in the long run.
skierincolorado
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by skierincolorado »

Bentonkb wrote: Thu Sep 16, 2021 10:58 am As leverage increases it crosses from investing into gambling. I don't know what the cut off is, but it is probably around 3x on an all stock portfolio. Higher than that and you are playing a game with a negative expected return in the long run.
I graduated college with 15k in interest free loans with a 30 year payoff. By your standard I shouldn’t invest in any stocks until it’s all paid off. But the ER is quite positive on investing this money. If I had 5k in cash, should I pay off the loan or invest it, possibly with even further leverage? Id choose the latter. In reality, I didn’t invest the 5k in cash with additional leverage but I did invest it, and I still have the loans.

Most people don’t have 0% student loans, but you can substitute in credit card balance transfers or any other low interest loan and the same principles apply.

I have young family in college invested in sso ( 2x leverage) while also taking out student loans with low interest rates. Technically the leverage ratio is infinite, but the amounts invested are trivial compared to future earnings. It’s risky but they are In a highly employable field so the bet should pay off.

Most people mess this up and are bad with money, so it gets a bad rap. But for a young person with the right discipline, the theory is sound and completely consistent with ayres and nalebuff. The title of one of their papers was “mortgage your retirement” and they talk about how if you could borrow against all your future earnings you should. But most of the time you can’t. But if you can find ways to do it, you should.
Last edited by skierincolorado on Thu Sep 16, 2021 11:37 am, edited 1 time in total.
DMoogle
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by DMoogle »

Bentonkb wrote: Thu Sep 16, 2021 10:58 am As leverage increases it crosses from investing into gambling. I don't know what the cut off is, but it is probably around 3x on an all stock portfolio. Higher than that and you are playing a game with a negative expected return in the long run.
Expected value starts to decrease a little over 2x for an all-stock portfolio, IIRC. For it to actually be negative, however, I think it's higher than 3x... I'd guess 4x-5x. However, this also gets further complicated if you're talking about daily rebalanced vs. some other periodicity like quarterly.

THAT SAID, if using a balanced portfolio, then the stock portion of the portfolio can profitably be a LOT higher. I was playing around with this the other day - holding 400% stocks 800% ITTs yields over 48% CAGR back through 1992 (rebalanced monthly), which is higher than 300%/600%, which is higher than 200%/400%. Of course, the max drawdown is 96%, but still, the return was higher. Not sure if those actual results are representative of the expected return, but the point is clear - you can, on an absolute basis, profitably leverage stocks more highly on an absolute basis if it's part of a balanced portfolio (of course, if you're OK with the insane amount of risk). Similarly, there's obviously a point where the CAGR will start to decrease, but it's certainly higher than a 2x all-stock portfolio.
skierincolorado
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by skierincolorado »

DMoogle wrote: Thu Sep 16, 2021 11:37 am
Bentonkb wrote: Thu Sep 16, 2021 10:58 am As leverage increases it crosses from investing into gambling. I don't know what the cut off is, but it is probably around 3x on an all stock portfolio. Higher than that and you are playing a game with a negative expected return in the long run.
Expected value starts to decrease a little over 2x for an all-stock portfolio, IIRC. For it to actually be negative, however, I think it's higher than 3x... I'd guess 4x-5x. However, this also gets further complicated if you're talking about daily rebalanced vs. some other periodicity like quarterly.

THAT SAID, if using a balanced portfolio, then the stock portion of the portfolio can profitably be a LOT higher. I was playing around with this the other day - holding 400% stocks 800% ITTs yields over 48% CAGR back through 1992 (rebalanced monthly), which is higher than 300%/600%, which is higher than 200%/400%. Of course, the max drawdown is 96%, but still, the return was higher. Not sure if those actual results are representative of the expected return, but the point is clear - you can, on an absolute basis, profitably leverage stocks more highly on an absolute basis if it's part of a balanced portfolio (of course, if you're OK with the insane amount of risk). Similarly, there's obviously a point where the CAGR will start to decrease, but it's certainly higher than a 2x all-stock portfolio.
The expected return is always higher with more leverage if you don’t rebalance at all. Of course, this allows for the possibility of negative net worth but the expected return is always higher than borrowing less or not borrowing at all. You just have to be able to hold through the negative net worth. For example 1k net worth, borrow 10k. Expected return is higher than not borrowing or borrowing less... assuming you never pay the 10k back and that eventually the stock market has a positive return.
DMoogle
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by DMoogle »

skierincolorado wrote: Thu Sep 16, 2021 11:48 amThe expected return is always higher with more leverage if you don’t rebalance at all. Of course, this allows for the possibility of negative net worth but the expected return is always higher than borrowing less or not borrowing at all. You just have to be able to hold through the negative net worth. For example 1k net worth, borrow 10k. Expected return is higher than not borrowing or borrowing less... assuming you never pay the 10k back and that eventually the stock market has a positive return.
OK fair point, but I'm viewing it more from a Kelly Criterion point of view - expected value with lower bound limitations is not the same as expected value when you have an infinite "bankroll," so to speak.
skierincolorado
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by skierincolorado »

DMoogle wrote: Thu Sep 16, 2021 11:53 am
skierincolorado wrote: Thu Sep 16, 2021 11:48 amThe expected return is always higher with more leverage if you don’t rebalance at all. Of course, this allows for the possibility of negative net worth but the expected return is always higher than borrowing less or not borrowing at all. You just have to be able to hold through the negative net worth. For example 1k net worth, borrow 10k. Expected return is higher than not borrowing or borrowing less... assuming you never pay the 10k back and that eventually the stock market has a positive return.
OK fair point, but I'm viewing it more from a Kelly Criterion point of view - expected value with lower bound limitations is not the same as expected value when you have an infinite "bankroll," so to speak.
I think the expected return is higher for 4x or 5x if you have instantaneous or at least daily rebalancing. I know 4x does worse than 3x with monthly rebalance in pv, but the problem with monthly rebalancing is you can rebalance down very close to zero or below zero. With daily, you’ll rebalance long before you get close to zero. There is a limit with daily as well, but it’s higher than 3x I think.
Rob Bertram
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by Rob Bertram »

millennialmillions wrote: Wed Sep 15, 2021 7:07 pm
DMoogle wrote: Wed Sep 15, 2021 3:18 pm Speaking of, I *still* don't think margin calls are the devil that people here make them out to be. I've said this before, and haven't been convinced by the responses. A margin call is nothing more than a forced rebalance to a target ratio, really. LETFs rebalance to a target ratio every day - a margin call isn't fundamentally any different.
I agree with DMoogle and skierincolorado. Obviously not incorporating margin calls into my simulations makes my analysis imperfect. But in practice forced periodic rebalancing of leverage isn't that bad (as shown by the similarity of results using margin vs. using LETFs that rebalance daily).
There might be some recency bias in that perspective. The major difference between a margin call and the way a LETF behaves is that the margin call sells when the market is low and does nothing when the market goes up. The LETF refactors leverage daily. It does micro "sell low" and "buy high" transactions. This is generally a poor strategy. The only reason that LETFs have reasonable returns is that the market tends to go up. (See the "Lost Decade" comment below.)

Leveraged ETFs perform worse when volatility goes up. On average, the market switches direction on a daily basis around 52% of the time. Think of that when you look at this chart that was posted on Page 1 of this thread:
PicassoSparks wrote: Sat Aug 14, 2021 2:49 pm
Rob Bertram wrote: Fri Aug 13, 2021 11:26 am For the record, leveraged ETFs have all of the downside of 3x leverage but only a fraction of the upside. You don't have to go far back to see this in action. Look at 2020. Compare UPRO (3x S&P500) to VTI (Vanguard total-stock market) from the beginning of the year through December (Portfolio Visualizer). UPRO has a negative return while VTI is up over 15%. Yet UPRO had 3x the downside.
This is a little misleading. In some circumstances — such as the one you constructed — UPRO has 3x the downside and less of the upside than a 3x leverage. In other circumstances, it has less of the downside and more upside. Compounding is weird.

The UPRO prospectus has a chart that is very helpful for understanding this. The dark grey sections are where UPRO underperforms 3x the index. But look at what's happening in the light grey areas.
Image
Remember that the 2000s were known as the "Lost Decade". The Dot Com bubble in 2000 followed by the global financial crisis from 2007-2009 resulted in a decade of low or poor returns. This was discussed almost a year ago:
nisiprius wrote: Fri Sep 18, 2020 10:33 am (Vineviz scooped me. Read his posting. But I've spent too much time on this not to post it).

The biggest problem with them is that they simply do not do what many people think they do. This is enough of a problem that FINRA, the financial industry's self-regulating body, has issued a warning about the products, and the SEC and FINRA believe
individual investors may be confused about the performance objectives of leveraged and inverse exchange-traded funds (ETFs).
Leveraged ETFs may be a legitimate tool for sophisticated investors who are doing financial engineering within their personal portfolios.

Test yourself to see whether you know enough to be considering investing in leveraged ETFs.

ULPIX, the Profunds UltraBull Fund, is a 2X leveraged S&P 500 fund, and one of the oldest products of its kind. Thus, it gives us the longest-term view of what has happened in the real world with this kind of product. It's stated goal is to double the daily returns of the S&P 500 and if you examine it closely you will find that it has met that stated goal quite faithfully.

And yet.

If you had invested $10,000 in ULPIX on 11/26/1997 and I had invested $10,000 into a plain, unleveraged S&P 500 index fund on the same day, I would, today, have more money than you. And I would have experienced far less risk. 2008-2009, I was agonizing because my stock fund dropped -50%, losing half its value. But ULPIX dropped -80%, losing all but a fifth of its value. That put it so far behind that a decade later it has still not caught up.

Source

Image

So here are the questions.

1) Are you surprised, or did you already know this?

2) Looking overall at the two curves, which one would you have preferred to experience in your own account, blue or orange? Do you honestly have believed you would have been able to set there and do nothing at all while you lost 4/5ths of your money, and then patiently waited long enough to recoup and then long enough to match the unleveraged fund?

3) Do you understand how and why this happened?

If you were surprised and do not understand, then begin by reading at least these two articles. These are potentially very risky investments, you really need to know what you are doing before you risk your money in them. Do not treat this casually.

Leveraged and inverse ETFs

FINRA Investor Alert--Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors
Strategies that involve leverage should have a worst-case plan that accounts for a margin call and selling when the market drops, but it should not be expected behavior. A strategy with moderate leverage (e.g., 1.5-2x) can easily outperform a high-leverage strategy (e.g., 3-4x) that involves frequent margin calls.
skierincolorado
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by skierincolorado »

Rob Bertram wrote: Thu Sep 16, 2021 12:08 pm
millennialmillions wrote: Wed Sep 15, 2021 7:07 pm
DMoogle wrote: Wed Sep 15, 2021 3:18 pm Speaking of, I *still* don't think margin calls are the devil that people here make them out to be. I've said this before, and haven't been convinced by the responses. A margin call is nothing more than a forced rebalance to a target ratio, really. LETFs rebalance to a target ratio every day - a margin call isn't fundamentally any different.
I agree with DMoogle and skierincolorado. Obviously not incorporating margin calls into my simulations makes my analysis imperfect. But in practice forced periodic rebalancing of leverage isn't that bad (as shown by the similarity of results using margin vs. using LETFs that rebalance daily).
There might be some recency bias in that perspective. The major difference between a margin call and the way a LETF behaves is that the margin call sells when the market is low and does nothing when the market goes up. The LETF refactors leverage daily. It does micro "sell low" and "buy high" transactions. This is generally a poor strategy. The only reason that LETFs have reasonable returns is that the market tends to go up. (See the "Lost Decade" comment below.)

Leveraged ETFs perform worse when volatility goes up. On average, the market switches direction on a daily basis around 52% of the time. Think of that when you look at this chart that was posted on Page 1 of this thread:
PicassoSparks wrote: Sat Aug 14, 2021 2:49 pm
Rob Bertram wrote: Fri Aug 13, 2021 11:26 am For the record, leveraged ETFs have all of the downside of 3x leverage but only a fraction of the upside. You don't have to go far back to see this in action. Look at 2020. Compare UPRO (3x S&P500) to VTI (Vanguard total-stock market) from the beginning of the year through December (Portfolio Visualizer). UPRO has a negative return while VTI is up over 15%. Yet UPRO had 3x the downside.
This is a little misleading. In some circumstances — such as the one you constructed — UPRO has 3x the downside and less of the upside than a 3x leverage. In other circumstances, it has less of the downside and more upside. Compounding is weird.

The UPRO prospectus has a chart that is very helpful for understanding this. The dark grey sections are where UPRO underperforms 3x the index. But look at what's happening in the light grey areas.
Image
Remember that the 2000s were known as the "Lost Decade". The Dot Com bubble in 2000 followed by the global financial crisis from 2007-2009 resulted in a decade of low or poor returns. This was discussed almost a year ago:
nisiprius wrote: Fri Sep 18, 2020 10:33 am (Vineviz scooped me. Read his posting. But I've spent too much time on this not to post it).

The biggest problem with them is that they simply do not do what many people think they do. This is enough of a problem that FINRA, the financial industry's self-regulating body, has issued a warning about the products, and the SEC and FINRA believe
individual investors may be confused about the performance objectives of leveraged and inverse exchange-traded funds (ETFs).
Leveraged ETFs may be a legitimate tool for sophisticated investors who are doing financial engineering within their personal portfolios.

Test yourself to see whether you know enough to be considering investing in leveraged ETFs.

ULPIX, the Profunds UltraBull Fund, is a 2X leveraged S&P 500 fund, and one of the oldest products of its kind. Thus, it gives us the longest-term view of what has happened in the real world with this kind of product. It's stated goal is to double the daily returns of the S&P 500 and if you examine it closely you will find that it has met that stated goal quite faithfully.

And yet.

If you had invested $10,000 in ULPIX on 11/26/1997 and I had invested $10,000 into a plain, unleveraged S&P 500 index fund on the same day, I would, today, have more money than you. And I would have experienced far less risk. 2008-2009, I was agonizing because my stock fund dropped -50%, losing half its value. But ULPIX dropped -80%, losing all but a fifth of its value. That put it so far behind that a decade later it has still not caught up.

Source

Image

So here are the questions.

1) Are you surprised, or did you already know this?

2) Looking overall at the two curves, which one would you have preferred to experience in your own account, blue or orange? Do you honestly have believed you would have been able to set there and do nothing at all while you lost 4/5ths of your money, and then patiently waited long enough to recoup and then long enough to match the unleveraged fund?

3) Do you understand how and why this happened?

If you were surprised and do not understand, then begin by reading at least these two articles. These are potentially very risky investments, you really need to know what you are doing before you risk your money in them. Do not treat this casually.

Leveraged and inverse ETFs

FINRA Investor Alert--Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors
Strategies that involve leverage should have a worst-case plan that accounts for a margin call and selling when the market drops, but it should not be expected behavior. A strategy with moderate leverage (e.g., 1.5-2x) can easily outperform a high-leverage strategy (e.g., 3-4x) that involves frequent margin calls.
Yeah I’ve seen the charts of daily rebalancing like that. Margin calls will function similarly. It’s certainly not pretty when the market is volatile. But it’s this volatility that is precisely the reason that markets tend to go up. You say, the only reason that letfs work is because markets tend to go up. But it’s precisely this volatility that causes the market to go up- the risk premium. Theoretically volatility decay should not exist. But markets over the last two decades have been slightly more volatile than theory would predict, so there is some volatility decay although that decay is starting to be erased by the nearly vertical rise recently. Spy is up 5x since 2010 while upro is up 30x ( not the 15x you’d expect).

Overall, I agree though. Daily rebalancing and/ or margin calls with high leverage are not great strategies because markets have tended to be more volatile than theory predicts. We could arbitrage this irrational volatility by shorting 10k upro and then buying 30k spy without rebalancing. If upro returns less than 3x spy, we make money. This strategy would have made a lot of money from 2000-2010. But it would have lost most of that money it made from 2010-present.

A better strategy would be to borrow a fixed amount and invest it without rebalancing. If you are confident that the loan won’t come due, in the long run this always pays off, even though the leverage could go beyond 5x or ones net worth could become negative.
skierincolorado
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by skierincolorado »

A shorter way of saying that is that If volatility decay was real it could be arbitraged away. In theory, volatility decay of high leverage ratios should not exist. In practice, there has been some volatility decay. So it’s best to not rebalance if you have that much leverage, and not borrow more than you can confidently continue to borrow. Or to develop machine learning to exploit this arbitrage opportunity.
skierincolorado
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by skierincolorado »

I think an example from the book was that if someone were willing to loan you all of yours future earnings you should take the loan and probably invest it fairly conservatively like 70/30. Of course this would cause very high leverage ratios above 5x or even negative net worth if the market went down. But since it’s a 50 year loan, that’s not really of concern.
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Bentonkb
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by Bentonkb »

skierincolorado wrote: Thu Sep 16, 2021 11:31 am
Bentonkb wrote: Thu Sep 16, 2021 10:58 am As leverage increases it crosses from investing into gambling. I don't know what the cut off is, but it is probably around 3x on an all stock portfolio. Higher than that and you are playing a game with a negative expected return in the long run.
I graduated college with 15k in interest free loans with a 30 year payoff. By your standard I shouldn’t invest in any stocks until it’s all paid off. But the ER is quite positive on investing this money. If I had 5k in cash, should I pay off the loan or invest it, possibly with even further leverage? Id choose the latter. In reality, I didn’t invest the 5k in cash with additional leverage but I did invest it, and I still have the loans.

Most people don’t have 0% student loans, but you can substitute in credit card balance transfers or any other low interest loan and the same principles apply.

I have young family in college invested in sso ( 2x leverage) while also taking out student loans with low interest rates. Technically the leverage ratio is infinite, but the amounts invested are trivial compared to future earnings. It’s risky but they are In a highly employable field so the bet should pay off.

Most people mess this up and are bad with money, so it gets a bad rap. But for a young person with the right discipline, the theory is sound and completely consistent with ayres and nalebuff. The title of one of their papers was “mortgage your retirement” and they talk about how if you could borrow against all your future earnings you should. But most of the time you can’t. But if you can find ways to do it, you should.
I was not considering the scenario where you have a large steady stream of unused income that can service the debt. Anyone who has youth, a large steady stream of unused income, and access to low interest loans shouldn't need a lot of help to become wealthy. Most of us are lucky to have only one or two items from that list.
skierincolorado
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by skierincolorado »

Bentonkb wrote: Thu Sep 16, 2021 1:57 pm
skierincolorado wrote: Thu Sep 16, 2021 11:31 am
Bentonkb wrote: Thu Sep 16, 2021 10:58 am As leverage increases it crosses from investing into gambling. I don't know what the cut off is, but it is probably around 3x on an all stock portfolio. Higher than that and you are playing a game with a negative expected return in the long run.
I graduated college with 15k in interest free loans with a 30 year payoff. By your standard I shouldn’t invest in any stocks until it’s all paid off. But the ER is quite positive on investing this money. If I had 5k in cash, should I pay off the loan or invest it, possibly with even further leverage? Id choose the latter. In reality, I didn’t invest the 5k in cash with additional leverage but I did invest it, and I still have the loans.

Most people don’t have 0% student loans, but you can substitute in credit card balance transfers or any other low interest loan and the same principles apply.

I have young family in college invested in sso ( 2x leverage) while also taking out student loans with low interest rates. Technically the leverage ratio is infinite, but the amounts invested are trivial compared to future earnings. It’s risky but they are In a highly employable field so the bet should pay off.

Most people mess this up and are bad with money, so it gets a bad rap. But for a young person with the right discipline, the theory is sound and completely consistent with ayres and nalebuff. The title of one of their papers was “mortgage your retirement” and they talk about how if you could borrow against all your future earnings you should. But most of the time you can’t. But if you can find ways to do it, you should.
I was not considering the scenario where you have a large steady stream of unused income that can service the debt. Anyone who has youth, a large steady stream of unused income, and access to low interest loans shouldn't need a lot of help to become wealthy. Most of us are lucky to have only one or two items from that list.
Agreed. And I'd add the discipline and attention to detail necessary to come up with a plan and stick to it.

I will say access to credit is more of a possibility for young people than many think. I carried 50-200k of credit card debt for much of my 20s and paid no interest, with almost no income, and could have done much more if I'd wanted to. Because of the low income I didn't risk it in the stock market beyond my net worth, and instead used it for more predictable returns like credit card rewards.
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by Lee_WSP »

Bentonkb wrote: Thu Sep 16, 2021 1:57 pm Anyone who has youth, a large steady stream of unused income, and access to low interest loans shouldn't need a lot of help to become wealthy. Most of us are lucky to have only one or two items from that list.
Youth comes and goes very quickly. It's pretty much a once in a lifetime opportunity. :beer
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by cos »

skierincolorado wrote: Thu Sep 16, 2021 2:27 pm I will say access to credit is more of a possibility for young people than many think. I carried 50-200k of credit card debt for much of my 20s and paid no interest, with almost no income, and could have done much more if I'd wanted to. Because of the low income I didn't risk it in the stock market beyond my net worth, and instead used it for more predictable returns like credit card rewards.
Got any links to resources on this topic? I'd cherish a $200k loan at 0% interest.
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by skierincolorado »

cos wrote: Thu Sep 16, 2021 4:18 pm
skierincolorado wrote: Thu Sep 16, 2021 2:27 pm I will say access to credit is more of a possibility for young people than many think. I carried 50-200k of credit card debt for much of my 20s and paid no interest, with almost no income, and could have done much more if I'd wanted to. Because of the low income I didn't risk it in the stock market beyond my net worth, and instead used it for more predictable returns like credit card rewards.
Got any links to resources on this topic? I'd cherish a $200k loan at 0% interest.
I would buy gift cards at the start of the statement and use them to buy money orders to deposit. The payment isn't due until 3+ weeks after the statement closes so it becomes a 7 week loan. I wasn't doing it for the loan though. I was doing it for the credit card rewards. 5% cash back on grocery. gift cards have fees of 1.2%, money orders less than .1%. Netting 3.75% per 10k. Wash and repeat. Can scale to infinity. Could make $1k in a day no problem. People will say it's money laundering but it's not. Money laundering involves moving money in a circle to conceal an underlying crime. Getting credit card rewards isn't a crime - it's a time honored tradition recognized by the IRS. There was even a lawsuit the IRS lost a year ago about a man who had earned 300k in credit card rewards in one year (tax free).

https://www.wsj.com/articles/he-got-300 ... 1615125601

I believe 0% balance tansfers would extend the duration of the loan to 15+ months

https://www.nerdwallet.com/best/credit- ... e-transfer
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millennialmillions
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by millennialmillions »

skierincolorado wrote: Wed Sep 15, 2021 11:22 pm I'm using the VUSXX T-Bill series from the simba spreadsheet for borrowing cost. Let me know if not finding it and I can post.
The series you're using from the Simba sheet is T-Bill returns, not T-Bill yield, correct? I believe the yield is what we'd really want to ignore price fluctuations, but since the duration is so short it may not make a material difference. On a quick spot check, looks close to me. However, these higher-leverage strategies using ITTs are very sensitive to borrowing costs. When I analyzed 140% VTSAX, 180% ITTs using my pessimistic cost of leverage, it lost to 140% VTSAX, 60% LTTs in both 10th percentile and median.

Image

Is anyone aware of a data source for T-Bill yields going back to 1955?

Also, skierincolorado, could you point me to any reading I can do on the mechanics of using box spreads for leverage? Seems that is the cheapest form of leverage available in taxable accounts, right?
skierincolorado
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Joined: Sat Mar 21, 2020 10:56 am

Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by skierincolorado »

millennialmillions wrote: Thu Sep 16, 2021 9:00 pm
skierincolorado wrote: Wed Sep 15, 2021 11:22 pm I'm using the VUSXX T-Bill series from the simba spreadsheet for borrowing cost. Let me know if not finding it and I can post.
The series you're using from the Simba sheet is T-Bill returns, not T-Bill yield, correct? I believe the yield is what we'd really want to ignore price fluctuations, but since the duration is so short it may not make a material difference. On a quick spot check, looks close to me. However, these higher-leverage strategies using ITTs are very sensitive to borrowing costs. When I analyzed 140% VTSAX, 180% ITTs using my pessimistic cost of leverage, it lost to 140% VTSAX, 60% LTTs in both 10th percentile and median.

Image

Is anyone aware of a data source for T-Bill yields going back to 1955?

Also, skierincolorado, could you point me to any reading I can do on the mechanics of using box spreads for leverage? Seems that is the cheapest form of leverage available in taxable accounts, right?
Yeah I think it's return. There shouldn't be much price movement and what price movment there is should be a wash in the long-run. There could be some theoretical affect from being a hair high on borrowing cost one year when rates drop and a hair low a few years late when rates rise. If these very small deviations are random though, it should wash out over time.

The T-Bill yields going back to 1955 probably comes from a synthetic bond return simulator they developed for the spreadsheet. It's how they generate returns on STT ITT and LTT as well prior to mutual fund data. For T-bills though they might have just used the rate.

For leveraging treasuries, the cheapest by far will be futures contracts. Box spread would be a distant second. Futures contracts should get you very very close to repo rates / 3 month T-bill. Sometimes the borrow cost is actually less than the 3-month T-bill.
See this paper for treasury futures implied borrowing cost: https://www.financialresearch.gov/brief ... Trades.pdf

Box spread thread:
viewtopic.php?t=344667
Rob Bertram
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Re: Lifecycle Investing vs. Hedgefundie's Excellent Adventure

Post by Rob Bertram »

millennialmillions wrote: Thu Sep 16, 2021 9:00 pm Is anyone aware of a data source for T-Bill yields going back to 1955?
If you are looking for Federal Reserve economic data (FRED), you can try this: https://fred.stlouisfed.org/. It looks like T-Bill data goes back to 1954 Q1.

I believe that financing for futures generally follows the 3-month London interbank offered rate (LIBOR) which is also available on FRED. Though, that looks to only go back to 1970 Q1.
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