Lifecycle Investing - Leveraging when young

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Re: Lifecycle Investing - Leveraging when young

Post by LadyGeek »

I removed an off-topic interchange discussing someone who is no longer a forum member. See: Member Rights in a Dispute , 2nd and 3rd paragraphs.

Please stay on-topic.
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Re: Lifecycle Investing - Leveraging when young

Post by TheCleverest »

DMoogle wrote: Mon Apr 26, 2021 3:41 pm
TheCleverest wrote: Mon Apr 26, 2021 2:49 pmGood recommendation about the HFEA. I've read through some of it (not all of it though!) and what I personally appreciate about the Lifecycle Investing is that risk is diversified over time. I believe that HFEA relies more on risk parity. Both are fascinating strategies.
I don't think they're mutually exclusive. You can apply the concept of lifecycle investing to HFEA. Start out at 3x effective leverage, then wind down over time on the leverage by slowly moving your assets to non-leveraged products.
TheCleverest wrote: Mon Apr 26, 2021 2:49 pmWould I be incorrect comparing the margin rate at IB (~1.5%) with the ER of a LETF (let's say 1%)? I feel like I'm missing something and that there are other fees that are not on the ER of the LETF that affect the returns. If anyone has a link I'd be more than happy to learn more.
They're fundamentally different things, but they do both represent the fee that the "manager" of the leverage takes.

LETFs do have other underlying costs that are not explicitly stated. The big one is borrowing costs that are implied in the swaps that they use to obtain leverage. Right now, we're in such a low interest rate environment that they aren't very material, but when/if interest rates rise again, they'll become VERY relevant. The other one would be regular trading/execution costs, slippage, etc. No idea how much that would amount to, but I would assume not very much.
TheCleverest wrote: Mon Apr 26, 2021 2:49 pmWould you consider EFO, EET and SPUU to be 'really large' funds?
EFO and SPUU have under $30M net assets. I would consider those very small. EET has $73M net assets, so a bit better. The performance is... worrisome, but maybe it's just been a bad decade for emerging markets. https://www.portfoliovisualizer.com/bac ... ion2_2=100
Thanks again for your input.

It seems to me, in my evaluation, that I could purchase a fund that tracks the index better, has a lower ER, and has a larger AUM if I stick to the large funds (ie Vanguard Total World VTI) and just margin them to get 2:1 leverage than relying on a niche 2x LTEF.

The downside, of course, would be margin calls and need to balance it and sell/buy to keep around a 2:1 leverage.
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Re: Lifecycle Investing - Leveraging when young

Post by gtwhitegold »

TheCleverest wrote: Mon Apr 26, 2021 8:54 pm
DMoogle wrote: Mon Apr 26, 2021 3:41 pm
TheCleverest wrote: Mon Apr 26, 2021 2:49 pmGood recommendation about the HFEA. I've read through some of it (not all of it though!) and what I personally appreciate about the Lifecycle Investing is that risk is diversified over time. I believe that HFEA relies more on risk parity. Both are fascinating strategies.
I don't think they're mutually exclusive. You can apply the concept of lifecycle investing to HFEA. Start out at 3x effective leverage, then wind down over time on the leverage by slowly moving your assets to non-leveraged products.
TheCleverest wrote: Mon Apr 26, 2021 2:49 pmWould I be incorrect comparing the margin rate at IB (~1.5%) with the ER of a LETF (let's say 1%)? I feel like I'm missing something and that there are other fees that are not on the ER of the LETF that affect the returns. If anyone has a link I'd be more than happy to learn more.
They're fundamentally different things, but they do both represent the fee that the "manager" of the leverage takes.

LETFs do have other underlying costs that are not explicitly stated. The big one is borrowing costs that are implied in the swaps that they use to obtain leverage. Right now, we're in such a low interest rate environment that they aren't very material, but when/if interest rates rise again, they'll become VERY relevant. The other one would be regular trading/execution costs, slippage, etc. No idea how much that would amount to, but I would assume not very much.
TheCleverest wrote: Mon Apr 26, 2021 2:49 pmWould you consider EFO, EET and SPUU to be 'really large' funds?
EFO and SPUU have under $30M net assets. I would consider those very small. EET has $73M net assets, so a bit better. The performance is... worrisome, but maybe it's just been a bad decade for emerging markets. https://www.portfoliovisualizer.com/bac ... ion2_2=100
Thanks again for your input.

It seems to me, in my evaluation, that I could purchase a fund that tracks the index better, has a lower ER, and has a larger AUM if I stick to the large funds (ie Vanguard Total World VTI) and just margin them to get 2:1 leverage than relying on a niche 2x LTEF.

The downside, of course, would be margin calls and need to balance it and sell/buy to keep around a 2:1 leverage.
I would suggest that you start with the 3x ETF such as UPRO and just add VXUS until you reached your desired leverage. As shown in the original HFEA thread, leveraging international equities is very risky and hasn't proven to be worthwhile. If you were shooting for 2x leverage, you would have 150% S&P 500 and 50% Total International, which would have less international exposure, but it would still be more than most US investors. (this would be 50% UPRO and 50% VXUS.

You could also look at a brokerage with fewer margin restrictions like M1 or Robinhood, but having 2x margin doesn't give you much room for error.
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Re: Lifecycle Investing - Leveraging when young

Post by cos »

gtwhitegold wrote: Mon Apr 26, 2021 9:26 pm You could also look at a brokerage with fewer margin restrictions like M1 or Robinhood, but having 2x margin doesn't give you much room for error.
Bahahaha! I wish! M1 limits margin to 35% of the portfolio or the Reg T maintenance, whichever is lower.
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Re: Lifecycle Investing - Leveraging when young

Post by zacharius »

market timer wrote: Fri Mar 01, 2019 11:28 pm
For small accounts (<$100K), the leveraged ETF approach makes sense. I believe HEDGEFUNDIE is doing quarterly rebalancing, though I'd recommend rebalancing based on deviations from target AA and with new contributions, rather than a time-based approach.

For larger accounts, I think futures are best, as Rob Bertram is doing. It gets more complicated if this is done partly inside taxable accounts vs. retirement accounts.
Going through this thread now so apologies if you've already explained this, But why do leveraged ETFs make more sense for smaller accounts?
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Re: Lifecycle Investing - Leveraging when young

Post by market timer »

zacharius wrote: Wed Apr 28, 2021 5:58 pm
market timer wrote: Fri Mar 01, 2019 11:28 pm
For small accounts (<$100K), the leveraged ETF approach makes sense. I believe HEDGEFUNDIE is doing quarterly rebalancing, though I'd recommend rebalancing based on deviations from target AA and with new contributions, rather than a time-based approach.

For larger accounts, I think futures are best, as Rob Bertram is doing. It gets more complicated if this is done partly inside taxable accounts vs. retirement accounts.
Going through this thread now so apologies if you've already explained this, But why do leveraged ETFs make more sense for smaller accounts?
The challenge of using futures is that they come in fairly large denominations. For example, each S&P 500 e-mini has the equity exposure of $210K of SPY. For accounts where this type of exposure is too large, leveraged ETFs offer a practical solution. Another reasonable possibility that Steve Reading mentioned, creating a box spread, is discussed here: viewtopic.php?p=5884649#p5884649
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Re: Lifecycle Investing - Leveraging when young

Post by cos »

market timer wrote: Wed Apr 28, 2021 8:04 pm
zacharius wrote: Wed Apr 28, 2021 5:58 pm
market timer wrote: Fri Mar 01, 2019 11:28 pm
For small accounts (<$100K), the leveraged ETF approach makes sense. I believe HEDGEFUNDIE is doing quarterly rebalancing, though I'd recommend rebalancing based on deviations from target AA and with new contributions, rather than a time-based approach.

For larger accounts, I think futures are best, as Rob Bertram is doing. It gets more complicated if this is done partly inside taxable accounts vs. retirement accounts.
Going through this thread now so apologies if you've already explained this, But why do leveraged ETFs make more sense for smaller accounts?
The challenge of using futures is that they come in fairly large denominations. For example, each S&P 500 e-mini has the equity exposure of $210K of SPY. For accounts where this type of exposure is too large, leveraged ETFs offer a practical solution. Another reasonable possibility that Steve Reading mentioned, creating a box spread, is discussed here: viewtopic.php?p=5884649#p5884649
Note that box spreads require access to portfolio margin to be utilized effectively, and most brokers require net assets exceeding ~$100k before granting said access. Similarly, constructing synthetic futures with options requires the same amount of capital as real futures, again requiring net assets exceeding ~$100k.

As a result, leveraged ETFs are the most efficient means of accessing leverage for people with less than ~$100k invested.
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

market timer wrote: Wed Apr 28, 2021 8:04 pm
zacharius wrote: Wed Apr 28, 2021 5:58 pm
market timer wrote: Fri Mar 01, 2019 11:28 pm
For small accounts (<$100K), the leveraged ETF approach makes sense. I believe HEDGEFUNDIE is doing quarterly rebalancing, though I'd recommend rebalancing based on deviations from target AA and with new contributions, rather than a time-based approach.

For larger accounts, I think futures are best, as Rob Bertram is doing. It gets more complicated if this is done partly inside taxable accounts vs. retirement accounts.
Going through this thread now so apologies if you've already explained this, But why do leveraged ETFs make more sense for smaller accounts?
The challenge of using futures is that they come in fairly large denominations. For example, each S&P 500 e-mini has the equity exposure of $210K of SPY. For accounts where this type of exposure is too large, leveraged ETFs offer a practical solution. Another reasonable possibility that Steve Reading mentioned, creating a box spread, is discussed here: viewtopic.php?p=5884649#p5884649
I have successfully used micro S&P futures to leverage in an account with 25k in it. The denomination is 20k.
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

cos wrote: Thu Apr 29, 2021 12:14 pm
market timer wrote: Wed Apr 28, 2021 8:04 pm
zacharius wrote: Wed Apr 28, 2021 5:58 pm
market timer wrote: Fri Mar 01, 2019 11:28 pm
For small accounts (<$100K), the leveraged ETF approach makes sense. I believe HEDGEFUNDIE is doing quarterly rebalancing, though I'd recommend rebalancing based on deviations from target AA and with new contributions, rather than a time-based approach.

For larger accounts, I think futures are best, as Rob Bertram is doing. It gets more complicated if this is done partly inside taxable accounts vs. retirement accounts.
Going through this thread now so apologies if you've already explained this, But why do leveraged ETFs make more sense for smaller accounts?
The challenge of using futures is that they come in fairly large denominations. For example, each S&P 500 e-mini has the equity exposure of $210K of SPY. For accounts where this type of exposure is too large, leveraged ETFs offer a practical solution. Another reasonable possibility that Steve Reading mentioned, creating a box spread, is discussed here: viewtopic.php?p=5884649#p5884649
Note that box spreads require access to portfolio margin to be utilized effectively, and most brokers require net assets exceeding ~$100k before granting said access. Similarly, constructing synthetic futures with options requires the same amount of capital as real futures, again requiring net assets exceeding ~$100k.

As a result, leveraged ETFs are the most efficient means of accessing leverage for people with less than ~$100k invested.
Why do box spreads require portfolio margin? I have a box spread currently in an account with 25k and Reg T margin. Also, micro S&P futures in denominations of 21k.
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Re: Lifecycle Investing - Leveraging when young

Post by DMoogle »

skierincolorado wrote: Thu Apr 29, 2021 2:49 pmI have successfully used micro S&P futures to leverage in an account with 25k in it. The denomination is 20k.
The issue isn't that it can't be done; it's that even those with very aggressive risk appetites don't want 8:1 exposure on equities.
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

DMoogle wrote: Thu Apr 29, 2021 3:07 pm
skierincolorado wrote: Thu Apr 29, 2021 2:49 pmI have successfully used micro S&P futures to leverage in an account with 25k in it. The denomination is 20k.
The issue isn't that it can't be done; it's that even those with very aggressive risk appetites don't want 8:1 exposure on equities.
But it's not 8:1 exposure. The account has 25k in it and holds 21k in notional S&P micro futures and 15k in VXUS. The overall leverage is 36k/25k which is less than 1.5x.
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Re: Lifecycle Investing - Leveraging when young

Post by Semantics »

skierincolorado wrote: Thu Apr 29, 2021 2:51 pm
cos wrote: Thu Apr 29, 2021 12:14 pm
market timer wrote: Wed Apr 28, 2021 8:04 pm
zacharius wrote: Wed Apr 28, 2021 5:58 pm
market timer wrote: Fri Mar 01, 2019 11:28 pm
For small accounts (<$100K), the leveraged ETF approach makes sense. I believe HEDGEFUNDIE is doing quarterly rebalancing, though I'd recommend rebalancing based on deviations from target AA and with new contributions, rather than a time-based approach.

For larger accounts, I think futures are best, as Rob Bertram is doing. It gets more complicated if this is done partly inside taxable accounts vs. retirement accounts.
Going through this thread now so apologies if you've already explained this, But why do leveraged ETFs make more sense for smaller accounts?
The challenge of using futures is that they come in fairly large denominations. For example, each S&P 500 e-mini has the equity exposure of $210K of SPY. For accounts where this type of exposure is too large, leveraged ETFs offer a practical solution. Another reasonable possibility that Steve Reading mentioned, creating a box spread, is discussed here: viewtopic.php?p=5884649#p5884649
Note that box spreads require access to portfolio margin to be utilized effectively, and most brokers require net assets exceeding ~$100k before granting said access. Similarly, constructing synthetic futures with options requires the same amount of capital as real futures, again requiring net assets exceeding ~$100k.

As a result, leveraged ETFs are the most efficient means of accessing leverage for people with less than ~$100k invested.
Why do box spreads require portfolio margin? I have a box spread currently in an account with 25k and Reg T margin. Also, micro S&P futures in denominations of 21k.
They don't strictly require PM, but the Reg T maintenance margin is the same as the width of the spread (see: https://www.interactivebrokers.co.in/en ... hp?f=26660). So if you're using margin and your equity is still well above the Reg T requirement you could use a short box to decrease your borrowing rate, but you'd increase the risk of a margin call in doing so.
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Re: Lifecycle Investing - Leveraging when young

Post by cos »

skierincolorado wrote: Thu Apr 29, 2021 3:34 pm
DMoogle wrote: Thu Apr 29, 2021 3:07 pm
skierincolorado wrote: Thu Apr 29, 2021 2:49 pmI have successfully used micro S&P futures to leverage in an account with 25k in it. The denomination is 20k.
The issue isn't that it can't be done; it's that even those with very aggressive risk appetites don't want 8:1 exposure on equities.
But it's not 8:1 exposure. The account has 25k in it and holds 21k in notional S&P micro futures and 15k in VXUS. The overall leverage is 36k/25k which is less than 1.5x.
What brokerage do you use?
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

Semantics wrote: Thu Apr 29, 2021 7:55 pm
skierincolorado wrote: Thu Apr 29, 2021 2:51 pm
cos wrote: Thu Apr 29, 2021 12:14 pm
market timer wrote: Wed Apr 28, 2021 8:04 pm
zacharius wrote: Wed Apr 28, 2021 5:58 pm

Going through this thread now so apologies if you've already explained this, But why do leveraged ETFs make more sense for smaller accounts?
The challenge of using futures is that they come in fairly large denominations. For example, each S&P 500 e-mini has the equity exposure of $210K of SPY. For accounts where this type of exposure is too large, leveraged ETFs offer a practical solution. Another reasonable possibility that Steve Reading mentioned, creating a box spread, is discussed here: viewtopic.php?p=5884649#p5884649
Note that box spreads require access to portfolio margin to be utilized effectively, and most brokers require net assets exceeding ~$100k before granting said access. Similarly, constructing synthetic futures with options requires the same amount of capital as real futures, again requiring net assets exceeding ~$100k.

As a result, leveraged ETFs are the most efficient means of accessing leverage for people with less than ~$100k invested.
Why do box spreads require portfolio margin? I have a box spread currently in an account with 25k and Reg T margin. Also, micro S&P futures in denominations of 21k.
They don't strictly require PM, but the Reg T maintenance margin is the same as the width of the spread (see: https://www.interactivebrokers.co.in/en ... hp?f=26660). So if you're using margin and your equity is still well above the Reg T requirement you could use a short box to decrease your borrowing rate, but you'd increase the risk of a margin call in doing so.
Thanks, I had not considered that as I am not that leveraged. Although I am confused because IB seems to add the value of the box spread to both the equity ('equity w/ loan') and the margin requirement, so there is no net change in the excess liquidity.
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Re: Lifecycle Investing - Leveraging when young

Post by kim.gold »

What rates are you guys getting with a SPX box nowadays?
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

DMoogle wrote: Thu Apr 29, 2021 3:07 pm
skierincolorado wrote: Thu Apr 29, 2021 2:49 pmI have successfully used micro S&P futures to leverage in an account with 25k in it. The denomination is 20k.
The issue isn't that it can't be done; it's that even those with very aggressive risk appetites don't want 8:1 exposure on equities.
e-micro S&P 500 is 1/10 size of e-mini S&P 500.

For those who want to use futures to leverage global market, may consider FMWO/FMWN @ EUREX. They track MSCI World index which is a developed market index. The bid/ask spread of FMWN is about 0.1~0.15 x 100 Euro=10~15 Euro if you trade at 12:00 CET(GMT+2) or so. The implied financing rate of FMWN is almost 0 or even mildly negative.
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

daze wrote: Mon May 03, 2021 9:43 pm
DMoogle wrote: Thu Apr 29, 2021 3:07 pm
skierincolorado wrote: Thu Apr 29, 2021 2:49 pmI have successfully used micro S&P futures to leverage in an account with 25k in it. The denomination is 20k.
The issue isn't that it can't be done; it's that even those with very aggressive risk appetites don't want 8:1 exposure on equities.
e-micro S&P 500 is 1/10 size of e-mini S&P 500.

For those who want to use futures to leverage global market, may consider FMWO/FMWN @ EUREX. They track MSCI World index which is a developed market index. The bid/ask spread of FMWN is about 0.1~0.15 x 100 Euro=10~15 Euro if you trade at 12:00 CET(GMT+2) or so. The implied financing rate of FMWN is almost 0 or even mildly negative.
Are you sure the implied financing rate is almost 0? Would be surprising if it is less than the ~.4% on e-minis.
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

skierincolorado wrote: Mon May 03, 2021 9:45 pm
daze wrote: Mon May 03, 2021 9:43 pm
DMoogle wrote: Thu Apr 29, 2021 3:07 pm
skierincolorado wrote: Thu Apr 29, 2021 2:49 pmI have successfully used micro S&P futures to leverage in an account with 25k in it. The denomination is 20k.
The issue isn't that it can't be done; it's that even those with very aggressive risk appetites don't want 8:1 exposure on equities.
e-micro S&P 500 is 1/10 size of e-mini S&P 500.

For those who want to use futures to leverage global market, may consider FMWO/FMWN @ EUREX. They track MSCI World index which is a developed market index. The bid/ask spread of FMWN is about 0.1~0.15 x 100 Euro=10~15 Euro if you trade at 12:00 CET(GMT+2) or so. The implied financing rate of FMWN is almost 0 or even mildly negative.
Are you sure the implied financing rate is almost 0? Would be surprising if it is less than the ~.4% on e-minis.
FMWN borrows in EURO, while e-minis borrows in USD.

On 5/3, the settlement price of FMWN Jun 21 is 374.35 while FMWN Sep 21 is 373.85. If you can roll without slippage, you earn 0.5/374.35=0.13% for 3 months. (FMWN tracks net return index, while e-mini tracks price index. Assuming 2% dividend with 30% tax, net return index would be 0.6% less than gross return index for 1 year, while price index would be 2% less than gross return index.)
If you can invest in gross return index without any cost (probably not), the implied financing rate of FMWN would be about 0.6% - 0.13% x 4 = about 0.08%.
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

daze wrote: Mon May 03, 2021 10:31 pm
skierincolorado wrote: Mon May 03, 2021 9:45 pm
daze wrote: Mon May 03, 2021 9:43 pm
DMoogle wrote: Thu Apr 29, 2021 3:07 pm
skierincolorado wrote: Thu Apr 29, 2021 2:49 pmI have successfully used micro S&P futures to leverage in an account with 25k in it. The denomination is 20k.
The issue isn't that it can't be done; it's that even those with very aggressive risk appetites don't want 8:1 exposure on equities.
e-micro S&P 500 is 1/10 size of e-mini S&P 500.

For those who want to use futures to leverage global market, may consider FMWO/FMWN @ EUREX. They track MSCI World index which is a developed market index. The bid/ask spread of FMWN is about 0.1~0.15 x 100 Euro=10~15 Euro if you trade at 12:00 CET(GMT+2) or so. The implied financing rate of FMWN is almost 0 or even mildly negative.
Are you sure the implied financing rate is almost 0? Would be surprising if it is less than the ~.4% on e-minis.
FMWN borrows in EURO, while e-minis borrows in USD.

On 5/3, the settlement price of FMWN Jun 21 is 374.35 while FMWN Sep 21 is 373.85. If you can roll without slippage, you earn 0.5/374.35=0.13% for 3 months. (FMWN tracks net return index, while e-mini tracks price index. Assuming 2% dividend with 30% tax, net return index would be 0.6% less than gross return index for 1 year, while price index would be 2% less than gross return index.)
If you can invest in gross return index without any cost (probably not), the implied financing rate of FMWN would be about 0.6% - 0.13% x 4 = about 0.08%.
The other thing to consider is that the index is priced in Euros. I think that amounts to being short Euros. Because if the Euro strengthens, the EUR version of the index will rise less than the USD version of the index. So I think you are long the basket of currencies the index holds, and then short the Euro.

Being short Euros is a significant risk given that the Euro is expected to appreciate relative to the USD long-term. The 10 year forward exchange rate is 1.4+ compared to 1.2 today. The expected appreciation of the Euro is the reason for the lower interest rate, otherwise an arbitrage opportunity would exist whereby European investors could invest in USD, earning USD positive interest rates (vs negative Euro interest rates currently). However, this arbitrage opportunity doesn't exist because of the expected depreciation of the USD.

I think futures exist on this index priced in USD, which I think would amount to being long the basket of currencies in the index (without being short the Euro). Of course the interest rate is probably higher because of the aforementioned lack of arbitrage due to interest rate parity (IRP).
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Re: Lifecycle Investing - Leveraging when young

Post by comeinvest »

daze wrote: Mon May 03, 2021 10:31 pm FMWN borrows in EURO, while e-minis borrows in USD.

On 5/3, the settlement price of FMWN Jun 21 is 374.35 while FMWN Sep 21 is 373.85. If you can roll without slippage, you earn 0.5/374.35=0.13% for 3 months. (FMWN tracks net return index, while e-mini tracks price index. Assuming 2% dividend with 30% tax, net return index would be 0.6% less than gross return index for 1 year, while price index would be 2% less than gross return index.)
If you can invest in gross return index without any cost (probably not), the implied financing rate of FMWN would be about 0.6% - 0.13% x 4 = about 0.08%.
I have a question: is the daily settlement price (not the settlement on the final settlement date) calculated from the price of the underlying index on that day, or determined by the price of the actual futures contracts in the market? It must be the latter, correct? Because the actual market determines the implied rates.
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Re: Lifecycle Investing - Leveraging when young

Post by comeinvest »

daze wrote: Mon May 03, 2021 10:31 pm
skierincolorado wrote: Mon May 03, 2021 9:45 pm
daze wrote: Mon May 03, 2021 9:43 pm
DMoogle wrote: Thu Apr 29, 2021 3:07 pm
skierincolorado wrote: Thu Apr 29, 2021 2:49 pmI have successfully used micro S&P futures to leverage in an account with 25k in it. The denomination is 20k.
The issue isn't that it can't be done; it's that even those with very aggressive risk appetites don't want 8:1 exposure on equities.
e-micro S&P 500 is 1/10 size of e-mini S&P 500.

For those who want to use futures to leverage global market, may consider FMWO/FMWN @ EUREX. They track MSCI World index which is a developed market index. The bid/ask spread of FMWN is about 0.1~0.15 x 100 Euro=10~15 Euro if you trade at 12:00 CET(GMT+2) or so. The implied financing rate of FMWN is almost 0 or even mildly negative.
Are you sure the implied financing rate is almost 0? Would be surprising if it is less than the ~.4% on e-minis.
FMWN borrows in EURO, while e-minis borrows in USD.

On 5/3, the settlement price of FMWN Jun 21 is 374.35 while FMWN Sep 21 is 373.85. If you can roll without slippage, you earn 0.5/374.35=0.13% for 3 months. (FMWN tracks net return index, while e-mini tracks price index. Assuming 2% dividend with 30% tax, net return index would be 0.6% less than gross return index for 1 year, while price index would be 2% less than gross return index.)
If you can invest in gross return index without any cost (probably not), the implied financing rate of FMWN would be about 0.6% - 0.13% x 4 = about 0.08%.
... which would then not be a good implied rate. As pointed out by skierincolorado below the post that I'm quoting, it makes only sense to compare financing rates in different currencies in relation to their respective spread vs. a risk-free rate in that currency, e.g. short-term government bonds, Libor or Euribor - preferably of the same maturity as the futures contracts i.e. 3 months. If your number for FMWN is correct, it would have a spread of about 0.6% + 0.08% = ca. 0.7% above the 3-months European risk-free rate. I hear that the ES futures these days have a spread of around 0.4% to 0.5% above U.S. risk-free rates, and I read that the Stoxx Europe 600 futures and similar futures also trade with spreads of around 0.4% above risk-free. All numbers that I'm citing are with respect to gross returns of the index. (Unfortunately I have not done the math myself, but I will once I find some time.)

It is possible that it is more efficient to use regional index futures (S&P500, Stoxx Europe 600, Nikkei) for global leverage than the MSCI world futures. It is also possible that the rolls end up being more efficient for the more popular index futures, as they have markets for quoted calendar spreads which are very efficient.
Last edited by comeinvest on Tue May 04, 2021 12:16 am, edited 1 time in total.
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Re: Lifecycle Investing - Leveraging when young

Post by comeinvest »

skierincolorado wrote: Mon May 03, 2021 11:26 pm Being short Euros is a significant risk given that the Euro is expected to appreciate relative to the USD long-term. The 10 year forward exchange rate is 1.4+ compared to 1.2 today. The expected appreciation of the Euro is the reason for the lower interest rate, otherwise an arbitrage opportunity would exist whereby European investors could invest in USD, earning USD positive interest rates (vs negative Euro interest rates currently). However, this arbitrage opportunity doesn't exist because of the expected depreciation of the USD.
Out of curiosity, what is your data source for 10-year forward exchange rates?
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Re: Lifecycle Investing - Leveraging when young

Post by comeinvest »

daze wrote: Mon May 03, 2021 10:31 pm On 5/3, the settlement price of FMWN Jun 21 is 374.35 while FMWN Sep 21 is 373.85. If you can roll without slippage, you earn 0.5/374.35=0.13% for 3 months. (FMWN tracks net return index, while e-mini tracks price index. Assuming 2% dividend with 30% tax, net return index would be 0.6% less than gross return index for 1 year, while price index would be 2% less than gross return index.)
If you can invest in gross return index without any cost (probably not), the implied financing rate of FMWN would be about 0.6% - 0.13% x 4 = about 0.08%.
Be careful with the dividend assumptions. The dividend rate in some European countries varies greatly from quarter to quarter, as some countries only pay dividends once a year. I don't know about other parts of the world. A wrong estimate may skew your results and lead to wrong conclusions. I think there are data sources for consensus dividend forecasts, but I don't know of any free source. Only ICE and I think CME publish implied financing rates: https://www.theice.com/pace-of-roll/MSC ... 9-20210618
skierincolorado
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

comeinvest wrote: Tue May 04, 2021 12:06 am
skierincolorado wrote: Mon May 03, 2021 11:26 pm Being short Euros is a significant risk given that the Euro is expected to appreciate relative to the USD long-term. The 10 year forward exchange rate is 1.4+ compared to 1.2 today. The expected appreciation of the Euro is the reason for the lower interest rate, otherwise an arbitrage opportunity would exist whereby European investors could invest in USD, earning USD positive interest rates (vs negative Euro interest rates currently). However, this arbitrage opportunity doesn't exist because of the expected depreciation of the USD.
Out of curiosity, what is your data source for 10-year forward exchange rates?
https://www.fxempire.com/currencies/eur ... ward-rates

I vaguely recalled the relationship between forward exchanges rates and interest rates from an international economics course. But it just makes sense.. an obvious arbitrage like that can't exist.

If I'm remembering right, European interest rates have been below U.S. rates for some time, and the Euro has yet to appreciate. But I wouldn't want to bet against the theory being right in the end.
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

comeinvest wrote: Tue May 04, 2021 12:01 am
daze wrote: Mon May 03, 2021 10:31 pm FMWN borrows in EURO, while e-minis borrows in USD.

On 5/3, the settlement price of FMWN Jun 21 is 374.35 while FMWN Sep 21 is 373.85. If you can roll without slippage, you earn 0.5/374.35=0.13% for 3 months. (FMWN tracks net return index, while e-mini tracks price index. Assuming 2% dividend with 30% tax, net return index would be 0.6% less than gross return index for 1 year, while price index would be 2% less than gross return index.)
If you can invest in gross return index without any cost (probably not), the implied financing rate of FMWN would be about 0.6% - 0.13% x 4 = about 0.08%.
... which would then not be a good implied rate. As pointed out by skierincolorado below the post that I'm quoting, it makes only sense to compare financing rates in different currencies in relation to their respective spread vs. a risk-free rate in that currency, e.g. short-term government bonds, Libor or Euribor - preferably of the same maturity as the futures contracts i.e. 3 months. If your number for FMWN is correct, it would have a spread of about 0.6% + 0.08% = ca. 0.7% above the 3-months European risk-free rate. I hear that the ES futures these days have a spread of around 0.4% to 0.5% above U.S. risk-free rates, and I read that the Stoxx Europe 600 futures and similar futures also trade with spreads of around 0.4% above risk-free. All numbers that I'm citing are with respect to gross returns of the index. (Unfortunately I have not done the math myself, but I will once I find some time.)

It is possible that it is more efficient to use regional index futures (S&P500, Stoxx Europe 600, Nikkei) for global leverage than the MSCI world futures. It is also possible that the rolls end up being more efficient for the more popular index futures, as they have markets for quoted calendar spreads which are very efficient.
While Stoxx Europe 600 future is cheaper than MSCI world future for borrowing, I found doing the slicing and dicing with futures is difficult. Using ETFs seems less cost efficient than using futures when foreign tax withholding is considered. (I can only use UCITS ETFs, btw)

If someone can provide a recipe for global exposure slicing and dicing with futures, I would be very grateful.
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Re: Lifecycle Investing - Leveraging when young

Post by comeinvest »

daze wrote: Tue May 04, 2021 6:59 am
comeinvest wrote: Tue May 04, 2021 12:01 am
daze wrote: Mon May 03, 2021 10:31 pm FMWN borrows in EURO, while e-minis borrows in USD.

On 5/3, the settlement price of FMWN Jun 21 is 374.35 while FMWN Sep 21 is 373.85. If you can roll without slippage, you earn 0.5/374.35=0.13% for 3 months. (FMWN tracks net return index, while e-mini tracks price index. Assuming 2% dividend with 30% tax, net return index would be 0.6% less than gross return index for 1 year, while price index would be 2% less than gross return index.)
If you can invest in gross return index without any cost (probably not), the implied financing rate of FMWN would be about 0.6% - 0.13% x 4 = about 0.08%.
... which would then not be a good implied rate. As pointed out by skierincolorado below the post that I'm quoting, it makes only sense to compare financing rates in different currencies in relation to their respective spread vs. a risk-free rate in that currency, e.g. short-term government bonds, Libor or Euribor - preferably of the same maturity as the futures contracts i.e. 3 months. If your number for FMWN is correct, it would have a spread of about 0.6% + 0.08% = ca. 0.7% above the 3-months European risk-free rate. I hear that the ES futures these days have a spread of around 0.4% to 0.5% above U.S. risk-free rates, and I read that the Stoxx Europe 600 futures and similar futures also trade with spreads of around 0.4% above risk-free. All numbers that I'm citing are with respect to gross returns of the index. (Unfortunately I have not done the math myself, but I will once I find some time.)

It is possible that it is more efficient to use regional index futures (S&P500, Stoxx Europe 600, Nikkei) for global leverage than the MSCI world futures. It is also possible that the rolls end up being more efficient for the more popular index futures, as they have markets for quoted calendar spreads which are very efficient.
While Stoxx Europe 600 future is cheaper than MSCI world future for borrowing, I found doing the slicing and dicing with futures is difficult. Using ETFs seems less cost efficient than using futures when foreign tax withholding is considered. (I can only use UCITS ETFs, btw)

If someone can provide a recipe for global exposure slicing and dicing with futures, I would be very grateful.
What sort of slicing and dicing i.e. slice and dice with respect to what, are you thinking of?
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

comeinvest wrote: Tue May 04, 2021 11:54 pm
daze wrote: Tue May 04, 2021 6:59 am If someone can provide a recipe for global exposure slicing and dicing with futures, I would be very grateful.
What sort of slicing and dicing i.e. slice and dice with respect to what, are you thinking of?
Currently, I'm holding 4 contract of FMWN and about 850 shares of EIMI, which results somewhat a global exposure. I think 8 contract of FMWN and 1 contract of FMEM would result a similar exposure percentage with less tax cost, but the total exposure amount is too large for me.

By slicing and dicing, I mean using S&P 500 futures, STOXX Europe 600 futures and other futures instead of FMWN, to create a similar exposure while minimizing the amount of ETFs needed to substitute the part that either without available futures or with too large a contract.

Thanks in advance.
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Re: Lifecycle Investing - Leveraging when young

Post by comeinvest »

daze wrote: Wed May 05, 2021 4:20 am
comeinvest wrote: Tue May 04, 2021 11:54 pm
daze wrote: Tue May 04, 2021 6:59 am If someone can provide a recipe for global exposure slicing and dicing with futures, I would be very grateful.
What sort of slicing and dicing i.e. slice and dice with respect to what, are you thinking of?
Currently, I'm holding 4 contract of FMWN and about 850 shares of EIMI, which results somewhat a global exposure. I think 8 contract of FMWN and 1 contract of FMEM would result a similar exposure percentage with less tax cost, but the total exposure amount is too large for me.

By slicing and dicing, I mean using S&P 500 futures, STOXX Europe 600 futures and other futures instead of FMWN, to create a similar exposure while minimizing the amount of ETFs needed to substitute the part that either without available futures or with too large a contract.

Thanks in advance.
I think the total direct and indirect cost of EM futures as we discussed in this thread (0.6% for implied financing cost, cash drag, and roll cost?), will be slightly higher than a low cost Emerging Markets index ETF with withholding tax drag (0.5% for expense ratio and withholding tax?). Unless you need the leverage or can consistently generate income above the risk-free rate with the cash.

I would look into the MSCI Emerging Market futures of ICE (symbol MME), as I think they are more liquid than FMEM.

I personally use STOXX Europe 600, MME, and Nikkei futures, and supplement with individual stocks of several countries. I personally don't care if some countries or regions are slightly over- or underweighted in my total portfolio with respect to the World index. If there is no systematic behavioral bias or frequent reallocation, and you are consistent or your allocation is rules-based, I believe it doesn't matter in the long run.

On another note, out of curiosity, did you check the implied rate of the FMWN or FMEM roll in March and June 2020? I think MME (MSCI EM futures) had some spike in financing cost due to the liquidity crisis. Unfortunately I'm unable to find suitable dividend data to compute implied financing cost for Eurex futures.
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Re: Lifecycle Investing - Leveraging when young

Post by comeinvest »

daze wrote: Mon May 03, 2021 9:43 pm
DMoogle wrote: Thu Apr 29, 2021 3:07 pm
skierincolorado wrote: Thu Apr 29, 2021 2:49 pmI have successfully used micro S&P futures to leverage in an account with 25k in it. The denomination is 20k.
The issue isn't that it can't be done; it's that even those with very aggressive risk appetites don't want 8:1 exposure on equities.
e-micro S&P 500 is 1/10 size of e-mini S&P 500.

For those who want to use futures to leverage global market, may consider FMWO/FMWN @ EUREX. They track MSCI World index which is a developed market index. The bid/ask spread of FMWN is about 0.1~0.15 x 100 Euro=10~15 Euro if you trade at 12:00 CET(GMT+2) or so. The implied financing rate of FMWN is almost 0 or even mildly negative.
I see bid/ask spreads of 374.20:374:40 now at European business hours. That would be 0.214% p.a. drag from roll. However, I think what matters more for the long-term investor, is the minimum tick size of the roll, which is 0.02. However, I don't know if the roll is actually quoted at the minimum tick size. In case of doubt, I prefer more liquid futures, to be safe.
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

comeinvest wrote: Wed May 05, 2021 6:15 am
I think the total direct and indirect cost of EM futures as we discussed in this thread (0.6% for implied financing cost, cash drag, and roll cost?), will be slightly higher than a low cost Emerging Markets index ETF with withholding tax drag (0.5% for expense ratio and withholding tax?). Unless you need the leverage or can consistently generate income above the risk-free rate with the cash.
Excuse me if I'm totally mistaken, but it seems one can beat the risk-free rate by merely holding EUR cash and earning 0% interest. If one held FMWN with 100% EUR cash as collateral, it beat the MSCI net return index by about 0.5%, while IWDA beat the MSCI net return index by about 0.1% after ER. The leverage part is also a bonus if needed.

Now that I rethink about it, FMEM probably would not beat EIMI since FMEM is priced in USD. And the benefit of holding EUR priced futures over ETFs would disappear if the negative interest rate of EUR disappear.
comeinvest wrote: Wed May 05, 2021 6:15 am On another note, out of curiosity, did you check the implied rate of the FMWN or FMEM roll in March and June 2020? I think MME (MSCI EM futures) had some spike in financing cost due to the liquidity crisis. Unfortunately I'm unable to find suitable dividend data to compute implied financing cost for Eurex futures.
Unfortunately I don't have the data of March and June 2020.
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Re: Lifecycle Investing - Leveraging when young

Post by Donkey Hote »

Steve Reading (or others), I would appreciate your input on two aspects of selling boxes to finance margin debt, in particular at IB:
1. I have seen some people say you must first buy stocks on margin, then effectively refinance that margin debt by selling boxes. I have also seen people say that you must in fact reverse this order - acquire cash through selling boxes, then using the cash to purchase stocks. More common than either of those is neglecting to mention a required sequence, suggesting it's irrelevant. Can you clarify this aspect of execution?
2. Have you encountered any problems with IB not understanding the hedged nature of the position, and dramatically decreasing your margin based on wide spreads (i.e. they price your long positions at bid and your shorts at ask, which can lead to a very bad mark on illiquid positions)? It seems to be a very common complaint of IB in particular.

Appreciate any insight you can provide!
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Re: Lifecycle Investing - Leveraging when young

Post by comeinvest »

Donkey Hote wrote: Thu May 06, 2021 5:54 pm Steve Reading (or others), I would appreciate your input on two aspects of selling boxes to finance margin debt, in particular at IB:
1. I have seen some people say you must first buy stocks on margin, then effectively refinance that margin debt by selling boxes. I have also seen people say that you must in fact reverse this order - acquire cash through selling boxes, then using the cash to purchase stocks. More common than either of those is neglecting to mention a required sequence, suggesting it's irrelevant. Can you clarify this aspect of execution?
2. Have you encountered any problems with IB not understanding the hedged nature of the position, and dramatically decreasing your margin based on wide spreads (i.e. they price your long positions at bid and your shorts at ask, which can lead to a very bad mark on illiquid positions)? It seems to be a very common complaint of IB in particular.

Appreciate any insight you can provide!
I can comment on your questions.
1. The order doesn't matter.
2. In my account, wider boxes (which usually also have wider quoted spreads) have slightly lower margin, but in either case the margin is close to nil. I also don't think the margin requirement is based on bid or ask, not even on mark, but on the low-risk nature of the combined position. Further, I don't think the mark price is based on bid or ask of a particular option, but derived from a proprietary pricing model. It's usually not the midpoint.
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Re: Lifecycle Investing - Leveraging when young

Post by comeinvest »

Ok, so I have a taxable account at IB with box spreads and tax-exempt municipal bond ETFs and closed-end funds, among others. NO broker margin loan, i.e. only positive cash balances.
Upon reviewing my account statements, I noticed that I have been receiving dividends-in-lieu taxable at ordinary income tax rates from my municipal bond funds instead of about 50% of the dividends I would normally receive from those funds. OUCH! That kind of negates the point of owning muni funds, doesn't it?
I thought the broker can only lend securities up to 140% of the loan balance from the broker. But it looks like I was mistaken.
What is the value of the securities based on that the broker can lend in an account with options?
My box spreads have very low margin requirement, i.e. the margin of the options cannot be the limit. Is it the value of the short options positions? I'm confused.

The SEC says: "Fully paid securities” are, generally, securities carried for a customer in a cash account as well as securities carried for the account of a customer in a margin account or any special account under Regulation T (12 C.F.R. Part 220) that have no loan value for margin purposes, and all margin equity securities in such accounts if they are fully paid. “Excess margin securities” generally means securities carried in a customer’s margin account that are supporting a margin debit balance and have a market value in excess of 140% of the customer’s adjusted margin debit balance."
Donkey Hote
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Re: Lifecycle Investing - Leveraging when young

Post by Donkey Hote »

comeinvest wrote: Fri May 07, 2021 1:50 am
Donkey Hote wrote: Thu May 06, 2021 5:54 pm Steve Reading (or others), I would appreciate your input on two aspects of selling boxes to finance margin debt, in particular at IB:
1. I have seen some people say you must first buy stocks on margin, then effectively refinance that margin debt by selling boxes. I have also seen people say that you must in fact reverse this order - acquire cash through selling boxes, then using the cash to purchase stocks. More common than either of those is neglecting to mention a required sequence, suggesting it's irrelevant. Can you clarify this aspect of execution?
2. Have you encountered any problems with IB not understanding the hedged nature of the position, and dramatically decreasing your margin based on wide spreads (i.e. they price your long positions at bid and your shorts at ask, which can lead to a very bad mark on illiquid positions)? It seems to be a very common complaint of IB in particular.

Appreciate any insight you can provide!
I can comment on your questions.
1. The order doesn't matter.
2. In my account, wider boxes (which usually also have wider quoted spreads) have slightly lower margin, but in either case the margin is close to nil. I also don't think the margin requirement is based on bid or ask, not even on mark, but on the low-risk nature of the combined position. Further, I don't think the mark price is based on bid or ask of a particular option, but derived from a proprietary pricing model. It's usually not the midpoint.
Thank you for the response, it is really helpful. Common sense would say order should be irrelevant, but people seem to put a lot of effort into working around (perceived) bugs at IB. On a similar note, it was a little disconcerting to hear IB has trouble with the core brokerage function of pricing client positions, but your post gives me hope that that concern is overblown (or has been remedied).
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Re: Lifecycle Investing - Leveraging when young

Post by Donkey Hote »

comeinvest wrote: Fri May 07, 2021 4:42 am Ok, so I have a taxable account at IB with box spreads and tax-exempt municipal bond ETFs and closed-end funds, among others. NO broker margin loan, i.e. only positive cash balances.
Upon reviewing my account statements, I noticed that I have been receiving dividends-in-lieu taxable at ordinary income tax rates from my municipal bond funds instead of about 50% of the dividends I would normally receive from those funds. OUCH! That kind of negates the point of owning muni funds, doesn't it?
I thought the broker can only lend securities up to 140% of the loan balance from the broker. But it looks like I was mistaken.
What is the value of the securities based on that the broker can lend in an account with options?
My box spreads have very low margin requirement, i.e. the margin of the options cannot be the limit. Is it the value of the short options positions? I'm confused.

The SEC says: "Fully paid securities” are, generally, securities carried for a customer in a cash account as well as securities carried for the account of a customer in a margin account or any special account under Regulation T (12 C.F.R. Part 220) that have no loan value for margin purposes, and all margin equity securities in such accounts if they are fully paid. “Excess margin securities” generally means securities carried in a customer’s margin account that are supporting a margin debit balance and have a market value in excess of 140% of the customer’s adjusted margin debit balance."
My understanding is that IB will only lend securities with values in excess of 140% of your margin balance, not up to 140%. If you have no margin loan, only your box spreads could potentially limit which securities are eligible. Not sure how they factor into it, but my guess is their margin requirement * 140% is the cutoff, and anything with a value greater than that can be loaned out. Based on your reply to my post above, I would guess you know more about that than I do. :D
stay_the_course
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Re: Lifecycle Investing - Leveraging when young

Post by stay_the_course »

UberGrub wrote: Sun Mar 28, 2021 9:45 am
skierincolorado wrote: Sun Mar 28, 2021 3:41 am One other question if someone doesn't mind. What's the cheapest way to leverage if not at IB? Sounds like box spreads to me. And can that be done in an IRA? Two questions I guess, sorry. Just read the whole thread and I don't remember if box spread in IRA was mentioned.
I believe Steve Reading was permanently banned. I'm not fully privy to the circumstances, nor I know if it can be discussed in the forum. I hope others can answer you, just letting you know it will not be OP.
I spent my weekend reading pretty much every post in these 27 pages and I found Steve's posts very insightful and interesting, if nothing else I know so much more about a variety of financial instruments regardless of whether I would actually use them. Disappointed to find this post about him being banned towards the end lol.
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Re: Lifecycle Investing - Leveraging when young

Post by AllomancerJack »

Aside from tax implications, is there any drawbacks on leveraging using warrants on S&P500 index?
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

AllomancerJack wrote: Sun Aug 15, 2021 5:52 pm Aside from tax implications, is there any drawbacks on leveraging using warrants on S&P500 index?
Do you mean options? Who issues warrants on S&P500? Not sure that's even possible.

The downside of options is you are essentially paying for downside protection, and possibly overpaying. They are less liquid than futures, so you eat some of the bid-ask spread. In my experience a S&P500 call option with a strike price around half the current price (2:1 leverage) will have implied interest of 2.5-3%. Of course part of the implied interest is downside protection in that you stop losing money after the S&P500 drops 50% at expiration. All that said, I own a call option in my 401k. I don't think they are a bad option, but if the market never experiences a large drop, you'll be paying a 2.5% premium for nothing. If it's a taxable account, synthetic stock fixes this problem, but if it's a taxable account there are better options than naked calls or synthetic stock.

In a taxable account, the ranking would be 1) box spreads 2) futures 3) synthetic stock 4) naked calls. In high tax brackets, broker margin from IB at 1.5% interest would be #2 after box spreads and before futures. You might as well write the box though for amounts over 25k to get it down to ~0.7% interest. In tax-advantaged it would be 1) futures (possible in IRA, not 401k as far as I know) 2) naked calls. For smaller amounts under 10 or 20k, my #1 choice would be LETFs. The OP lays it out with the same ordering I believe.
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Re: Lifecycle Investing - Leveraging when young

Post by dr_roboto »

I only recently stumbled upon this concept of lifecycle investing. I have read the book by Ayres and Nalebuff and I'm working my way through this thread. Can someone provide more information about Phase 3, namely how the ramping down process should proceed?
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

dr_roboto wrote: Tue Aug 17, 2021 1:08 pm I only recently stumbled upon this concept of lifecycle investing. I have read the book by Ayres and Nalebuff and I'm working my way through this thread. Can someone provide more information about Phase 3, namely how the ramping down process should proceed?
It's the same procedure as the earlier phases. The only difference is that the target stock allocation is less than what is in your savings portfolio, so there is no need to leverage. All other aspects, including calculating the present value of future savings, is the same as before.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Lifecycle Investing - Leveraging when young

Post by dr_roboto »

Ben Mathew wrote: Tue Aug 17, 2021 3:30 pm
dr_roboto wrote: Tue Aug 17, 2021 1:08 pm I only recently stumbled upon this concept of lifecycle investing. I have read the book by Ayres and Nalebuff and I'm working my way through this thread. Can someone provide more information about Phase 3, namely how the ramping down process should proceed?
It's the same procedure as the earlier phases. The only difference is that the target stock allocation is less than what is in your savings portfolio, so there is no need to leverage. All other aspects, including calculating the present value of future savings, is the same as before.
Thanks for taking the time to reply, Ben. I appreciate your time and expertise.

If I understand correctly, Phase 3 starts when I hit my number, which I believe is Samuelson share x total savings (current + future). At that point, I no longer need leverage.

But once I enter Phase 3, am I investing in 100% bonds until I hit my predetermined ratio of stocks to bonds (ie my Samuelson share/ratio), assuming my net wealth from stocks does not decrease thereby requiring me to start investing in stocks again?
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Re: Lifecycle Investing - Leveraging when young

Post by gougou »

If you like leverage, why don't you just buy the S&P futures? You get more than 10x leverage on that. The ticker is ES or MES on Interactive Brokers.

I hope you don't blow your account though.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

dr_roboto wrote: Wed Aug 18, 2021 1:37 pm
Ben Mathew wrote: Tue Aug 17, 2021 3:30 pm
dr_roboto wrote: Tue Aug 17, 2021 1:08 pm I only recently stumbled upon this concept of lifecycle investing. I have read the book by Ayres and Nalebuff and I'm working my way through this thread. Can someone provide more information about Phase 3, namely how the ramping down process should proceed?
It's the same procedure as the earlier phases. The only difference is that the target stock allocation is less than what is in your savings portfolio, so there is no need to leverage. All other aspects, including calculating the present value of future savings, is the same as before.
Thanks for taking the time to reply, Ben. I appreciate your time and expertise.

If I understand correctly, Phase 3 starts when I hit my number, which I believe is Samuelson share x total savings (current + future). At that point, I no longer need leverage.

But once I enter Phase 3, am I investing in 100% bonds until I hit my predetermined ratio of stocks to bonds (ie my Samuelson share/ratio), assuming my net wealth from stocks does not decrease thereby requiring me to start investing in stocks again?
By investing I assume you mean new money right? You would still have SS * (current + future savings) in stock.

If that's what you mean, then yes I think all new money into bonds would be approximately correct, but should be checked quarterly with market fluctuations to make sure that one still has SS * current + futures savings in stock.
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

dr_roboto wrote: Wed Aug 18, 2021 1:37 pm
Ben Mathew wrote: Tue Aug 17, 2021 3:30 pm
dr_roboto wrote: Tue Aug 17, 2021 1:08 pm I only recently stumbled upon this concept of lifecycle investing. I have read the book by Ayres and Nalebuff and I'm working my way through this thread. Can someone provide more information about Phase 3, namely how the ramping down process should proceed?
It's the same procedure as the earlier phases. The only difference is that the target stock allocation is less than what is in your savings portfolio, so there is no need to leverage. All other aspects, including calculating the present value of future savings, is the same as before.
Thanks for taking the time to reply, Ben. I appreciate your time and expertise.

If I understand correctly, Phase 3 starts when I hit my number, which I believe is Samuelson share x total savings (current + future). At that point, I no longer need leverage.

But once I enter Phase 3, am I investing in 100% bonds until I hit my predetermined ratio of stocks to bonds (ie my Samuelson share/ratio), assuming my net wealth from stocks does not decrease thereby requiring me to start investing in stocks again?
Yes, in phase 3, if stocks don't drop, 100% of new savings can go into bonds. On top of that, you will typically have to sell stocks and buy bonds to achieve your target AA because stocks usually grow faster than bonds. But a dip in stocks can require you to rebalance from bonds to stocks. If the dip is deep enough, you can be back in phase 2, requiring leverage to get to target stock allocation. As skierincolorado said, keep recalculating regularly and rebalance as needed to maintain target.
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Re: Lifecycle Investing - Leveraging when young

Post by gougou »

I got a better idea. I could just invest in MLPs that pay very high distributions. Say I buy MPLX (which pays 10% distribution) with 1.5x leverage and as long as I don't blow up my account, I'll be able to repay the margin loan on it in 3 to 4 years since margin loans cost me < 1%. I could diversify among multiple MLPs to slightly reduce my risk.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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LadyGeek
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Re: Lifecycle Investing - Leveraging when young

Post by LadyGeek »

gougou wrote: Wed Aug 18, 2021 4:28 pm I got a better idea. I could just invest in MLPs that pay very high distributions. Say I buy MPLX (which pays 10% distribution) with 1.5x leverage and as long as I don't blow up my account, I'll be able to repay the margin loan on it in 3 to 4 years since margin loans cost me < 1%. I could diversify among multiple MLPs to slightly reduce my risk.
MLP - The wiki has some background info: Master limited partnership

Note the big orange box at the top of the article.
Master limited partnerships are intended for very experienced investors who understand both the risks involved and the incredibly complex taxation rules. Please ask in the Bogleheads forum for advice, as these securities are intended for high net worth individuals with the resources to manage these securities.
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gougou
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Re: Lifecycle Investing - Leveraging when young

Post by gougou »

LadyGeek wrote: Wed Aug 18, 2021 4:29 pm
gougou wrote: Wed Aug 18, 2021 4:28 pm I got a better idea. I could just invest in MLPs that pay very high distributions. Say I buy MPLX (which pays 10% distribution) with 1.5x leverage and as long as I don't blow up my account, I'll be able to repay the margin loan on it in 3 to 4 years since margin loans cost me < 1%. I could diversify among multiple MLPs to slightly reduce my risk.
MLP - The wiki has some background info: Master limited partnership

Note the big orange box at the top of the article.
Master limited partnerships are intended for very experienced investors who understand both the risks involved and the incredibly complex taxation rules. Please ask in the Bogleheads forum for advice, as these securities are intended for high net worth individuals with the resources to manage these securities.
OK I guess it doesn't need to be MLPs. Any stocks that pay high dividends would work.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

gougou wrote: Wed Aug 18, 2021 4:34 pm
LadyGeek wrote: Wed Aug 18, 2021 4:29 pm
gougou wrote: Wed Aug 18, 2021 4:28 pm I got a better idea. I could just invest in MLPs that pay very high distributions. Say I buy MPLX (which pays 10% distribution) with 1.5x leverage and as long as I don't blow up my account, I'll be able to repay the margin loan on it in 3 to 4 years since margin loans cost me < 1%. I could diversify among multiple MLPs to slightly reduce my risk.
MLP - The wiki has some background info: Master limited partnership

Note the big orange box at the top of the article.
Master limited partnerships are intended for very experienced investors who understand both the risks involved and the incredibly complex taxation rules. Please ask in the Bogleheads forum for advice, as these securities are intended for high net worth individuals with the resources to manage these securities.
OK I guess it doesn't need to be MLPs. Any stocks that pay high dividends would work.
? Dividend stocks are no better, and possibly worse than, TSM.
Last edited by skierincolorado on Wed Aug 18, 2021 8:55 pm, edited 1 time in total.
dr_roboto
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Re: Lifecycle Investing - Leveraging when young

Post by dr_roboto »

skierincolorado wrote: Wed Aug 18, 2021 2:04 pm
dr_roboto wrote: Wed Aug 18, 2021 1:37 pm
Ben Mathew wrote: Tue Aug 17, 2021 3:30 pm
dr_roboto wrote: Tue Aug 17, 2021 1:08 pm I only recently stumbled upon this concept of lifecycle investing. I have read the book by Ayres and Nalebuff and I'm working my way through this thread. Can someone provide more information about Phase 3, namely how the ramping down process should proceed?
It's the same procedure as the earlier phases. The only difference is that the target stock allocation is less than what is in your savings portfolio, so there is no need to leverage. All other aspects, including calculating the present value of future savings, is the same as before.
Thanks for taking the time to reply, Ben. I appreciate your time and expertise.

If I understand correctly, Phase 3 starts when I hit my number, which I believe is Samuelson share x total savings (current + future). At that point, I no longer need leverage.

But once I enter Phase 3, am I investing in 100% bonds until I hit my predetermined ratio of stocks to bonds (ie my Samuelson share/ratio), assuming my net wealth from stocks does not decrease thereby requiring me to start investing in stocks again?
By investing I assume you mean new money right? You would still have SS * (current + future savings) in stock.

If that's what you mean, then yes I think all new money into bonds would be approximately correct, but should be checked quarterly with market fluctuations to make sure that one still has SS * current + futures savings in stock.

Ben Mathew wrote: Wed Aug 18, 2021 4:21 pm
dr_roboto wrote: Wed Aug 18, 2021 1:37 pm
Ben Mathew wrote: Tue Aug 17, 2021 3:30 pm
dr_roboto wrote: Tue Aug 17, 2021 1:08 pm I only recently stumbled upon this concept of lifecycle investing. I have read the book by Ayres and Nalebuff and I'm working my way through this thread. Can someone provide more information about Phase 3, namely how the ramping down process should proceed?
It's the same procedure as the earlier phases. The only difference is that the target stock allocation is less than what is in your savings portfolio, so there is no need to leverage. All other aspects, including calculating the present value of future savings, is the same as before.
Thanks for taking the time to reply, Ben. I appreciate your time and expertise.

If I understand correctly, Phase 3 starts when I hit my number, which I believe is Samuelson share x total savings (current + future). At that point, I no longer need leverage.

But once I enter Phase 3, am I investing in 100% bonds until I hit my predetermined ratio of stocks to bonds (ie my Samuelson share/ratio), assuming my net wealth from stocks does not decrease thereby requiring me to start investing in stocks again?
Yes, in phase 3, if stocks don't drop, 100% of new savings can go into bonds. On top of that, you will typically have to sell stocks and buy bonds to achieve your target AA because stocks usually grow faster than bonds. But a dip in stocks can require you to rebalance from bonds to stocks. If the dip is deep enough, you can be back in phase 2, requiring leverage to get to target stock allocation. As skierincolorado said, keep recalculating regularly and rebalance as needed to maintain target.
Thank you!
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

skierincolorado wrote: Wed Aug 18, 2021 5:37 pm .
Not sure if it's a dumb idea.

Considering the idea of liabilities matching with lifecycle investing, would it be better to get a debt with duration similar to your income flow?
If you are going to retire in 30 years, and the income of later years would be greater than young ages, the duration of your income flow would be 15 or 20 years?
Mortgage would have a duration of years, but futures/margin loan/LETFs has a duration essentially zero. If using futures/margin loan/LETFs to get leverage, should we short treasuries to adjust the duration?
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