Lifecycle Investing - Leveraging when young

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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

verythankful wrote: Fri Feb 26, 2021 10:09 am
Steve Reading wrote: Thu Feb 25, 2021 11:13 pm
verythankful wrote: Thu Feb 25, 2021 9:57 pm As US market is overvalued. Was looking at EFA (developed-market securities based in Europe, Australia and the Far East) high expenses ratio (0.35) but offer leaps and pe ratio less than 20. Leveraging in roth using Deep in the money option for Jan 2023, looks reasonable, any thoughts here?
What was the implied interest rate on the LEAP?
Worked out to be 3.25% yearly, if counting foregone dividend only on amount invested (option price) 2%.
Sounds reasonable to me.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Ben Mathew
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

Gufomel wrote: Fri Feb 26, 2021 9:20 am I’m guessing that the approach of putting the debt in cell M47 is more aggressive than putting nominal future payments in each future year and having the spreadsheet discount it at the safe bond rate (assuming your mortgage/debt is at a higher rate than the safe bond rate you have in the spreadsheet)?
You're on the right track. The concept applies to mortgages as well as any other debt like student loans. The following two methods:

(A) Reduce savings portfolio by the debt owed, vs

(B) Reduce future cash flow by the amount of the debt payments (i.e. reduced future savings and/or increasing future expenses)

will result in the same net present values used in the spreadsheet calculations if the interest rate of the debt equals the safe bond rate assumed in the spreadsheet. But since the interest rate on your debt will usually be different than the safe bonds rate, you will get a more accurate model if you reduce future cash flow by your debt payments (B) rather than reduce the savings portfolio (A).

But don't use nominal future payments. Convert to real dollars using the inflation rate (step 2 in the TPAW calculator) before entering them in the table in step 3.
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Ben Mathew
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

Gufomel wrote: Fri Feb 26, 2021 9:44 am And kudos again to Ben for this spreadsheet. As hard as some of these things are for me to conceptualize, the spreadsheet makes it so much easier to step through and get a visual on. Ever since I came across Steve’s post, it’s something I’ve been trying to do in my head or with a spreadsheet as best as I knew how.
Thanks. Glad to hear that you are finding it useful.
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Re: Lifecycle Investing - Leveraging when young

Post by Gufomel »

Ben Mathew wrote: Fri Feb 26, 2021 11:14 am
Gufomel wrote: Fri Feb 26, 2021 9:20 am I’m guessing that the approach of putting the debt in cell M47 is more aggressive than putting nominal future payments in each future year and having the spreadsheet discount it at the safe bond rate (assuming your mortgage/debt is at a higher rate than the safe bond rate you have in the spreadsheet)?
You're on the right track. The concept applies to mortgages as well as any other debt like student loans. The following two methods:

(A) Reduce savings portfolio by the debt owed, vs

(B) Reduce future cash flow by the amount of the debt payments (i.e. reduced future savings and/or increasing future expenses)

will result in the same net present values used in the spreadsheet calculations if the interest rate of the debt equals the safe bond rate assumed in the spreadsheet. But since the interest rate on your debt will usually be different than the safe bonds rate, you will get a more accurate model if you reduce future cash flow by your debt payments (B) rather than reduce the savings portfolio (A).

But don't use nominal future payments. Convert to real dollars using the inflation rate (step 2 in the TPAW calculator) before entering them in the table in step 3.
Ok let me digest this a little. I understand the basic concepts of nominal vs real but got to think through some of the complexities.

In terms of future savings (e.g. from income during accumulation or SS in retirement), if you assume the amount you’re going to save will increase at the rate of inflation, then you can just bypass doing a calculation to convert to real. You’re essentially assuming that your savings increases at the rate of inflation, and then discounting it at the rate of inflation, without bothering to do the math. So you can put 10k into the spreadsheet every year as savings (as an example).

But when it comes to debt payments that you either subtract from savings or add to essential expenses on the spreadsheet, you have to first discount it at the rate of inflation. This would also apply to any final mortgage payoff (e.g. at retirement if desired).

I wasn’t initially connecting the nuance there of how the base assumption for savings from income would be that it would increase with inflation so you don’t need to bother with discounting by inflation rate, but nominal debt is different. Talking it out helped it make sense. Let me know if I’m off anywhere there. I think this explains why I was getting some results that I didn’t expect when I was playing around with the spreadsheet to see the impact of paying off a mortgage early. It was showing a larger benefit than I was expecting. That’s because my mortgage payments out into the future weren’t in real dollars but everything else, including expected return on portfolio, was.
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

Gufomel wrote: Fri Feb 26, 2021 12:04 pm
Ben Mathew wrote: Fri Feb 26, 2021 11:14 am
Gufomel wrote: Fri Feb 26, 2021 9:20 am I’m guessing that the approach of putting the debt in cell M47 is more aggressive than putting nominal future payments in each future year and having the spreadsheet discount it at the safe bond rate (assuming your mortgage/debt is at a higher rate than the safe bond rate you have in the spreadsheet)?
You're on the right track. The concept applies to mortgages as well as any other debt like student loans. The following two methods:

(A) Reduce savings portfolio by the debt owed, vs

(B) Reduce future cash flow by the amount of the debt payments (i.e. reduced future savings and/or increasing future expenses)

will result in the same net present values used in the spreadsheet calculations if the interest rate of the debt equals the safe bond rate assumed in the spreadsheet. But since the interest rate on your debt will usually be different than the safe bonds rate, you will get a more accurate model if you reduce future cash flow by your debt payments (B) rather than reduce the savings portfolio (A).

But don't use nominal future payments. Convert to real dollars using the inflation rate (step 2 in the TPAW calculator) before entering them in the table in step 3.
Ok let me digest this a little. I understand the basic concepts of nominal vs real but got to think through some of the complexities.

In terms of future savings (e.g. from income during accumulation or SS in retirement), if you assume the amount you’re going to save will increase at the rate of inflation, then you can just bypass doing a calculation to convert to real. You’re essentially assuming that your savings increases at the rate of inflation, and then discounting it at the rate of inflation, without bothering to do the math. So you can put 10k into the spreadsheet every year as savings (as an example).

But when it comes to debt payments that you either subtract from savings or add to essential expenses on the spreadsheet, you have to first discount it at the rate of inflation. This would also apply to any final mortgage payoff (e.g. at retirement if desired).

I wasn’t initially connecting the nuance there of how the base assumption for savings from income would be that it would increase with inflation so you don’t need to bother with discounting by inflation rate, but nominal debt is different. Talking it out helped it make sense. Let me know if I’m off anywhere there. I think this explains why I was getting some results that I didn’t expect when I was playing around with the spreadsheet to see the impact of paying off a mortgage early. It was showing a larger benefit than I was expecting. That’s because my mortgage payments out into the future weren’t in real dollars but everything else, including expected return on portfolio, was.
That's right. If you think your future savings will stay constant in real dollars, you don't have to convert to nominal using the inflation rate and then convert back to real. Just enter it directly as a constant real $. But for things that are explicitly in nominal dollars and so won't adjust with inflation, you'll need to convert to real. This includes mortgage payments and other debt payments that are fixed in advance in nominal dollars. Mortgage payments in real dollars will be declining over time. You will likewise need to convert nominal pensions and annuities to real dollars. But since social security is indexed to inflation, it stays constant in real dollars -- no conversion needed.
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Re: Lifecycle Investing - Leveraging when young

Post by Gufomel »

Ben Mathew wrote: Fri Feb 26, 2021 12:20 pm
Gufomel wrote: Fri Feb 26, 2021 12:04 pm
Ben Mathew wrote: Fri Feb 26, 2021 11:14 am
Gufomel wrote: Fri Feb 26, 2021 9:20 am I’m guessing that the approach of putting the debt in cell M47 is more aggressive than putting nominal future payments in each future year and having the spreadsheet discount it at the safe bond rate (assuming your mortgage/debt is at a higher rate than the safe bond rate you have in the spreadsheet)?
You're on the right track. The concept applies to mortgages as well as any other debt like student loans. The following two methods:

(A) Reduce savings portfolio by the debt owed, vs

(B) Reduce future cash flow by the amount of the debt payments (i.e. reduced future savings and/or increasing future expenses)

will result in the same net present values used in the spreadsheet calculations if the interest rate of the debt equals the safe bond rate assumed in the spreadsheet. But since the interest rate on your debt will usually be different than the safe bonds rate, you will get a more accurate model if you reduce future cash flow by your debt payments (B) rather than reduce the savings portfolio (A).

But don't use nominal future payments. Convert to real dollars using the inflation rate (step 2 in the TPAW calculator) before entering them in the table in step 3.
Ok let me digest this a little. I understand the basic concepts of nominal vs real but got to think through some of the complexities.

In terms of future savings (e.g. from income during accumulation or SS in retirement), if you assume the amount you’re going to save will increase at the rate of inflation, then you can just bypass doing a calculation to convert to real. You’re essentially assuming that your savings increases at the rate of inflation, and then discounting it at the rate of inflation, without bothering to do the math. So you can put 10k into the spreadsheet every year as savings (as an example).

But when it comes to debt payments that you either subtract from savings or add to essential expenses on the spreadsheet, you have to first discount it at the rate of inflation. This would also apply to any final mortgage payoff (e.g. at retirement if desired).

I wasn’t initially connecting the nuance there of how the base assumption for savings from income would be that it would increase with inflation so you don’t need to bother with discounting by inflation rate, but nominal debt is different. Talking it out helped it make sense. Let me know if I’m off anywhere there. I think this explains why I was getting some results that I didn’t expect when I was playing around with the spreadsheet to see the impact of paying off a mortgage early. It was showing a larger benefit than I was expecting. That’s because my mortgage payments out into the future weren’t in real dollars but everything else, including expected return on portfolio, was.
That's right. If you think your future savings will stay constant in real dollars, you don't have to convert to nominal using the inflation rate and then convert back to real. Just enter it directly as a constant real $. But for things that are explicitly in nominal dollars and so won't adjust with inflation, you'll need to convert to real. This includes mortgage payments and other debt payments that are fixed in advance in nominal dollars. Mortgage payments in real dollars will be declining over time. You will likewise need to convert nominal pensions and annuities to real dollars. But since social security is indexed to inflation, it stays constant in real dollars -- no conversion needed.
Makes sense, appreciate it.
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Re: Lifecycle Investing - Leveraging when young

Post by Gufomel »

Ben Mathew wrote: Thu Feb 25, 2021 10:53 pm
Gufomel wrote: Thu Feb 25, 2021 3:46 pm 1) Where’s the best place to put a mortgage? Just subtract it from the value you put for Savings Portfolio?
There's no place to directly enter the mortgage. It shows up indirectly as reduced future savings for the portfolio while you have the mortgage. A few examples:

Example 1: 30 year old with 13 years left on the mortgage: This shows up as lower savings for the next 13 years (ages 30-42), higher savings afterwards till retirement (ages 42-64), and no scheduled mortgage expense during retirement.

Example 2: 60 year old with 13 years left on the mortgage, planning to retire at age 65. Keeping mortgage for full term. So mortgage payments continue into into early part of retirement. This manifests as lower savings for ages 60-64, higher mortgage expense during early retirement (ages 65-72), and no mortgage expense after. You could enter the mortgage payments under "essential expenses" for ages 65-72.

Example 3: 60 year old with 13 years left on the mortgage, planning to retire at age 65. Will pay off mortgage at start of retirement. This manifests as lower savings for ages 60-64, and a onetime mortgage payoff expense scheduled under "essential expenses" at age 65.
Gufomel wrote: Thu Feb 25, 2021 3:46 pm 2) I’m getting a #REF error when I try to delete rows. I see the comment about not deleting the first two rows, last row, or retirement age row, but deleting anything seems to throw an error for me.
I expect a #REF error till the formulas are copied over. Let me look at the spreadsheet more closely tomorrow and see if I can improve this process.
Gufomel wrote: Thu Feb 25, 2021 3:46 pm 3) Related to above, I guess the number of rows would need to be manually adjusted every year going forward that someone uses this spreadsheet?
Yes. Eventually I hope to create an automated spreadsheet where you enter current age, withdrawal start age, and withdrawal end age, and the table is automatically created, so no manual row deleting required every year. The problem with this is that the formulas become complicated and hard to understand. So it ends up being easy to use as-is, but hard to modify. So I'll probably put up both versions--a manual spreadsheet (for understanding and customizing) and an automated spreadsheet (for ease of use) and let people decide which one they want to use.
Another quick question as far as retirement age and adding/deleting rows just to make sure I’m not missing something obvious. The retirement age (I12) doesn’t actually impact anything (other than the ending age), correct? It’s really what row you put the PMT formula on in column Q that drives the calculations?

No push on making a change, just want to make sure I’m using it correctly.
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

Gufomel wrote: Fri Feb 26, 2021 2:12 pm
Ben Mathew wrote: Thu Feb 25, 2021 10:53 pm
Gufomel wrote: Thu Feb 25, 2021 3:46 pm 1) Where’s the best place to put a mortgage? Just subtract it from the value you put for Savings Portfolio?
There's no place to directly enter the mortgage. It shows up indirectly as reduced future savings for the portfolio while you have the mortgage. A few examples:

Example 1: 30 year old with 13 years left on the mortgage: This shows up as lower savings for the next 13 years (ages 30-42), higher savings afterwards till retirement (ages 42-64), and no scheduled mortgage expense during retirement.

Example 2: 60 year old with 13 years left on the mortgage, planning to retire at age 65. Keeping mortgage for full term. So mortgage payments continue into into early part of retirement. This manifests as lower savings for ages 60-64, higher mortgage expense during early retirement (ages 65-72), and no mortgage expense after. You could enter the mortgage payments under "essential expenses" for ages 65-72.

Example 3: 60 year old with 13 years left on the mortgage, planning to retire at age 65. Will pay off mortgage at start of retirement. This manifests as lower savings for ages 60-64, and a onetime mortgage payoff expense scheduled under "essential expenses" at age 65.
Gufomel wrote: Thu Feb 25, 2021 3:46 pm 2) I’m getting a #REF error when I try to delete rows. I see the comment about not deleting the first two rows, last row, or retirement age row, but deleting anything seems to throw an error for me.
I expect a #REF error till the formulas are copied over. Let me look at the spreadsheet more closely tomorrow and see if I can improve this process.
Gufomel wrote: Thu Feb 25, 2021 3:46 pm 3) Related to above, I guess the number of rows would need to be manually adjusted every year going forward that someone uses this spreadsheet?
Yes. Eventually I hope to create an automated spreadsheet where you enter current age, withdrawal start age, and withdrawal end age, and the table is automatically created, so no manual row deleting required every year. The problem with this is that the formulas become complicated and hard to understand. So it ends up being easy to use as-is, but hard to modify. So I'll probably put up both versions--a manual spreadsheet (for understanding and customizing) and an automated spreadsheet (for ease of use) and let people decide which one they want to use.
Another quick question as far as retirement age and adding/deleting rows just to make sure I’m not missing something obvious. The retirement age (I12) doesn’t actually impact anything (other than the ending age), correct? It’s really what row you put the PMT formula on in column Q that drives the calculations?

No push on making a change, just want to make sure I’m using it correctly.
That's right. It's just used to display the ending age and nothing else. You have to manually place the PMT formula is in the retirement row of the table.
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Re: Lifecycle Investing - Leveraging when young

Post by daze »

Steve Reading wrote: Sun Jan 31, 2021 9:08 am
daze wrote: Sun Jan 31, 2021 2:13 am
Steve Reading wrote: Sat Jan 30, 2021 10:31 pm
daze wrote: Sat Jan 30, 2021 9:22 pm
Steve Reading wrote: Sat Jan 30, 2021 8:43 pm .
If I'm not mistaken, leverage with SPX options or E-micro S&P 500 are essentially borrowing USD.

For those who earns USD, borrowing USD against their future income is straightforward.
But for those who earns other currencies, I suppose it expose them to currency risk.

IB provides several currencies for margin borrowing, so those earning EUR or JPY would probably be fine.
However, my salary is in Taiwan dollar, which IB does not provide.

How should one using leverage while taking account of currency risk?
I don’t really know. If it were me, I probably would just use margin or futures in USD and take on the currency risk. This is the same currency risk you’d take if you invested in the SPX denominated in USD. It’s not like futures are literally a debt in USD that you must pay. They just expose you to more stock than you could with your savings.
Imaging I'm provided a noncallable loan as large as I want, either in USD or in TWD.
Let's say the PV of my future income is 28M TWD or 1M USD and the targeted stock exposure is 50%.
(TWD:USD is about 28:1 currently. It was 33:1 in 2015. A volatility of 20% or more is not too impossible on a lifecycle viewpoint.)

1. I can take a loan of 14M TWD and invest all of them into VT. If USD appreciated by 20%, I could still service the debt with 50% of my future income.
2. I can take a loan of 0.5M USD and invest all of them into VT. If USD appreciated by 20%, I would need to service the debt with 60% of my future income. I could also sell some VT, but the currency exposure of VT is not totally in USD and the volatility of VT is involved.

If I use e-micro futures to get leverage, and I paired futures with ex-US ETF to reach a global market exposure, it would be similar to borrow USD to buy VT and there's real currency risk in it.
Right, I understand it’s ideal to borrow in your own currency, even if it’s to buy the same ETF. So it’s better to be, say, 200% VT/ -100% TWD than 200% VTI/-100% USD.

Like I said, I don’t have a good answer for you. I probably would just use futures to get leverage and just take the currency risk. Could also go long a USD/TWD futures or a forward (in a way that the contract appreciates if the USD appreciates vs the TWD). This would hedge your currency risk entirely but makes things a little more complicated.
I don't know if this idea robust:
With the assumption of CRRA utility and log normal distribution of return, solution of Merton's portfolio is (1/RRA)*(ERP)/Var.

Assuming currency risk is neutral, normal distributed and independent to equity risk premium, and it's a big if, the currency risk increases the Var but does not change the ERP. For RRA = 3, ERP=0.05, SD of ERP 0.16 and SD of USDTWD 0.05, borrowing in USD instead of TWD will increase the Var from 0.16^2 to (0.16^2+0.05^2) and targeted stock exposure decreases to 59% from 65%.


If currency risk is neutral and normal distributed but not independent to equity risk premium, For RRA = 3, ERP=0.05, SD of ERP 0.16 and SD of USDTWD 0.05, the Var at most increases to (0.16+0.05)^2, and the targeted stock exposure decreases to 38% in the worst case.

Therefore, having currency risk does suggest to borrow less if you've already saved a substantial amount.

Edit:
The strikethrough part is mathematically wrong. The 38% as lower bound part is not mathematically wrong, but it might be possible to get a higher lower bound if I were better at math.
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Re: Lifecycle Investing - Leveraging when young

Post by LTCM »

I would like to explore adding some leverage to my retirement accounts. I've read this entire thread and its very interesting (I'm sure I forgot parts since it was over a period of several weeks). It seems this thread mostly pertains to taxable accounts but there are some retirement account based parts. Could the resident experts expand on those a bit?

I'm currently 100% stocks. 12.5% Developed Markets. 12.5% Emerging Markets. 75% US (25% large cap, 25% large growth, 25% mid cap growth, 25% small cap growth). I have this tilt because I want to push as much earning into the future as possible since I should get paid a small premium for that. I don't need money now. I need it in 30+ years (I might not even need it then tbh and have inheritance as a major objective). I have no debt and own my own house. I feel like I need a bigger house since the kids are under my feet. I also live in a HCOL tech-based city so my housing costs are more correlated to growth stocks than value stocks.

I feel I can afford/stomach losses now in return for greater long term growth. To me that means I can afford to take on more risk than 100% stocks. So that means leverage. How do I get leverage into my retirement accounts? I'm fully maxed out contribution wise (IRA, i401k, 529). I'm in the process of adding the max EE/I Bonds for their above market rates, balance total, diversification and tax advantages.

I'm very keen to retain as much money for myself as possible by minimizing both costs (ER & IR) and taxes. How do I best add leverage with those provisos? The (edited) first post suggests S&P Micros futures and Deep ITM LEAP calls as the main tools for the tax advantaged account. I don't have options enabled on my Vanguard account at the moment. Vanguard holds by my Roth IRA, my Roth i401k and my standard i401k. Can I add S&P micros there? Can I add LEAPs there? Do I need a different broker?

It seams LEAPs have a wide spread. I'm reading 10% as typical (wow!) so to me that means I lose on average 5% going in and 5% coming out. That's very discouraging to my philosophy. If they look like losing I could let them expire and therefore only pay going in to get the cost down to 5%. Does this mean I should be aiming for Deep OTM LEAP calls instead? It seems like that increases my chances of allowing them to expire and reducing average costs? If I only pay exit costs on the occasional big winner I'd be better off. Could I actually exercise the option? What percentage of my account would I need to leave unleveraged to do that?

If LEAPs are off the table for those reasons can you expand more on the Micro futures? They are not long dated so does that defeat my aim of pushing as much benefit into the future as possible? What is the tax drag mentioned in the linked post (presumably avoided by using tax advantaged accounts)? Should they be placed in Roth or Standard accounts? Is this another rolling strategy rather than exercise the option strategy? With their shorter nature I assume that means rolling more often than every 2 years which causes total spread costs to increase.

So much to think about and I'm sure not all of it is relevant but if y'all could expand on it a bit so I can think about the points raised for myself I'd appreciate it. I'm not sure this is 100% the right thread since its not specifically Lifestyle Investing but it seems a lot of the points I'm raising have been discussed here. If you think I need to make a new topic I will do.

Thanks for all the reading, it's very interesting.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Market returns for the past 12 months have been truly remarkable. I've gone from barely getting to within the rebalancing bands of my target using 2:1 leverage, to now having too much in stocks (past my rebalancing band) and delevered to ~1.8:1. My large value tilt especially has been fantastic.

After some deliberation and a little bit of math, I decided it does make sense to sell some VTV, realize some gains, and delever somewhat. If my positions keep increasing, I will likely do some more soon.

It is psychologically difficult to sell positions that I still feel very bullish about though.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by zhuyz05 »

Steve Reading wrote: Wed Mar 10, 2021 11:24 am Market returns for the past 12 months have been truly remarkable. I've gone from barely getting to within the rebalancing bands of my target using 2:1 leverage, to now having too much in stocks (past my rebalancing band) and delevered to ~1.8:1. My large value tilt especially has been fantastic.

After some deliberation and a little bit of math, I decided it does make sense to sell some VTV, realize some gains, and delever somewhat. If my positions keep increasing, I will likely do some more soon.

It is psychologically difficult to sell positions that I still feel very bullish about though.
Value definitely had some nice run recently, especially small cap value. I saw that you borrow on margin from IBKR. Would their margin rate increase rapidly if inflation ticks up quickly?
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Re: Lifecycle Investing - Leveraging when young

Post by bumbojumbo »

I finally got around to trying to reproduce some of the lifecycle investing results, which has raised a few questions.

For me, a big takeaway from Trinity-Study-type research is that historically the safest portfolios often have significantly higher stock allocations than most would assume. When assessing the lifecycle investing results, I am assuming a baseline 100% constant stock allocation. Under that assumption I am finding that the lifecycle investing strategy results in a mean-improvement, but not a significant reduction in risk, or that it even increases risk (in say the 1st and 10th percentile outcomes).

Has anyone tried to download and modify the core simulation file from the lifecycle investing website? I would like to modify it and set the "constant %" strategy to 100% for comparison, but I'm confused about how the parameters work in that excel file. Normally the constant % strategy is 75/25.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

zhuyz05 wrote: Fri Mar 12, 2021 11:00 pm
Steve Reading wrote: Wed Mar 10, 2021 11:24 am Market returns for the past 12 months have been truly remarkable. I've gone from barely getting to within the rebalancing bands of my target using 2:1 leverage, to now having too much in stocks (past my rebalancing band) and delevered to ~1.8:1. My large value tilt especially has been fantastic.

After some deliberation and a little bit of math, I decided it does make sense to sell some VTV, realize some gains, and delever somewhat. If my positions keep increasing, I will likely do some more soon.

It is psychologically difficult to sell positions that I still feel very bullish about though.
Value definitely had some nice run recently, especially small cap value. I saw that you borrow on margin from IBKR. Would their margin rate increase rapidly if inflation ticks up quickly?
IBKR margin rate is not based on inflation, it is based on the benchmark short-term borrowing rate (either LIBOR or Fed Fund, not super sure). Fed has given guidance that short-term rates will stay at zero until at least 2022 so this is not a concern for me at the moment.
bumbojumbo wrote: Sat Mar 13, 2021 2:38 am When assessing the lifecycle investing results, I am assuming a baseline 100% constant stock allocation. Under that assumption I am finding that the lifecycle investing strategy results in a mean-improvement, but not a significant reduction in risk, or that it even increases risk (in say the 1st and 10th percentile outcomes).
You're comparing a constant 100% stock strategy vs a 200/100 lifecycle strategy? The latter is more temporally diversified but it also takes on more stock risk in general, so you won't see much of a reduction in risk.
bumbojumbo wrote: Sat Mar 13, 2021 2:38 am Has anyone tried to download and modify the core simulation file from the lifecycle investing website? I would like to modify it and set the "constant %" strategy to 100% for comparison, but I'm confused about how the parameters work in that excel file. Normally the constant % strategy is 75/25.
Tab "Parameters" gives you a summary of what each parameter does. Then you go to "Summary" to change things. Ex: Making F3 100% makes the Samuelson share of the leveraged strategy end at 100%. Making F6 100% will make the constant strategy 100%.

I see below that the 200/100 beats the constant 100 on every metric (even down to the 10th perc and min. accumulation). But it has a larger coeff. of variance and st dev, as we predicted above. But switch F3 to 83% and now you see how the 200/83 beats constant 100 on every metric (column G), including accumulations, median and lower variance. That tells you it must be taking on more stock risk (since median accumulation was higher) but somehow more efficiently/more diversified because the coeff of variance is lower.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by bumbojumbo »

Steve Reading wrote: Sat Mar 13, 2021 8:46 am Tab "Parameters" gives you a summary of what each parameter does. Then you go to "Summary" to change things. Ex: Making F3 100% makes the Samuelson share of the leveraged strategy end at 100%. Making F6 100% will make the constant strategy 100%.

I see below that the 200/100 beats the constant 100 on every metric (even down to the 10th perc and min. accumulation). But it has a larger coeff. of variance and st dev, as we predicted above. But switch F3 to 83% and now you see how the 200/83 beats constant 100 on every metric (column G), including accumulations, median and lower variance. That tells you it must be taking on more stock risk (since median accumulation was higher) but somehow more efficiently/more diversified because the coeff of variance is lower.
Thank you. I am seeing those results now.
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Re: Lifecycle Investing - Leveraging when young

Post by Anon9001 »

Steve Reading wrote: Fri Feb 26, 2021 10:14 am Sounds reasonable to me.
Why are you leveraging only US then if it is cheap to leverage EAFE? Considering how expensive US is in relation to Ex-US I would be more afraid of leveraging US than Ex-US.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Anon9001 wrote: Sun Mar 14, 2021 1:49 am
Steve Reading wrote: Fri Feb 26, 2021 10:14 am Sounds reasonable to me.
Why are you leveraging only US then if it is cheap to leverage EAFE? Considering how expensive US is in relation to Ex-US I would be more afraid of leveraging US than Ex-US.
I invest in Ex-US and Emerging Markets, not just USA.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by Anon9001 »

Steve Reading wrote: Sun Mar 14, 2021 9:49 am I invest in Ex-US and Emerging Markets, not just USA.
Yes but you said you leveraging only US. I am wondering why? The EAFE in the money options seem to not be expensive so I don't see good reason to leverage US which is very expensive relative to Ex-US instead of leveraging Ex-US.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Anon9001 wrote: Sun Mar 14, 2021 9:51 am
Steve Reading wrote: Sun Mar 14, 2021 9:49 am I invest in Ex-US and Emerging Markets, not just USA.
Yes but you said you leveraging only US. I am wondering why? The EAFE in the money options seem to not be expensive so I don't see good reason to leverage US which is very expensive relative to Ex-US instead of leveraging Ex-US.
I leverage a global portfolio. I don’t think I’ve ever said otherwise.
I have said that if you’re leveraging with LEAPs (a method I don’t use), that Ex-USA exposure might be a lot more expensive and hence not worth it. But if it isn’t more expensive, then it’s a good idea to add EAFE LEAP exposure too.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by Anon9001 »

Steve Reading wrote: Sun Mar 14, 2021 9:59 am I leverage a global portfolio. I don’t think I’ve ever said otherwise.
I have said that if you’re leveraging with LEAPs (a method I don’t use), that Ex-USA exposure might be a lot more expensive and hence not worth it. But if it isn’t more expensive, then it’s a good idea to add EAFE LEAP exposure too.
Here you go for source regarding this. So now you are using IBKR margin?
The synthetic long I set up is essentially identical to financing at that box spread to get stock exposure. My portfolio is globally diversified; I get all my leverage on the US side while most of my stock ETFs are international equity.

I don’t know about doing this from Europe. Uncorrolated is there so he might know
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Anon9001 wrote: Sun Mar 14, 2021 10:09 am
Steve Reading wrote: Sun Mar 14, 2021 9:59 am I leverage a global portfolio. I don’t think I’ve ever said otherwise.
I have said that if you’re leveraging with LEAPs (a method I don’t use), that Ex-USA exposure might be a lot more expensive and hence not worth it. But if it isn’t more expensive, then it’s a good idea to add EAFE LEAP exposure too.
Here you go for source regarding this. So now you are using IBKR margin?
The synthetic long I set up is essentially identical to financing at that box spread to get stock exposure. My portfolio is globally diversified; I get all my leverage on the US side while most of my stock ETFs are international equity.

I don’t know about doing this from Europe. Uncorrolated is there so he might know
When I leveraged using synthetic longs with options, I used the options for USA exposure and invested in Ex-USA ETFs. This is identical to leveraging an overall global portfolio because debt is fungible; the exposures are the same but the costs are lower and the holdings simpler.

Nowadays, I use margin so I'm just long various USA, Ex-US, and EM ETFs and hold a negative cash balance that I pay down over time.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by DMoogle »

Steve, what does your taxable portfolio look like now? I'm doing ~20% VXUS + 80% NTSX, leveraged at around 1.4x using IB margin.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

DMoogle wrote: Sun Mar 14, 2021 5:14 pm Steve, what does your taxable portfolio look like now? I'm doing ~20% VXUS + 80% NTSX, leveraged at around 1.4x using IB margin.
Approximate weights (holdings might look a little weird, there's been TLHing in the past)
21% VFMF
10% SCHB (TSM)
13% VOE
15% VIOV
15% FNDF
11% ISCF
7% FNDE
8% EMGF

I have a cash balance of about -5K. And a few 100K's worth of short box spreads. This is a way to leverage on margin, but paying cheaper margin costs than IBKR's actual margin. It's also tax-deductible since the options produce capital losses.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by market timer »

Steve Reading wrote: Sun Mar 14, 2021 6:13 pmAnd a few 100K's worth of short box spreads. This is a way to leverage on margin, but paying cheaper margin costs than IBKR's actual margin. It's also tax-deductible since the options produce capital losses.
For the short box spread, it seems the choice of underlying security (S&P 500, gold, euros) is irrelevant. The main concern would be liquidity and transaction costs. What security do you use and what (effectively tax-deductible) interest rate do you pay?
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

market timer wrote: Tue Mar 16, 2021 12:22 am
Steve Reading wrote: Sun Mar 14, 2021 6:13 pmAnd a few 100K's worth of short box spreads. This is a way to leverage on margin, but paying cheaper margin costs than IBKR's actual margin. It's also tax-deductible since the options produce capital losses.
For the short box spread, it seems the choice of underlying security (S&P 500, gold, euros) is irrelevant. The main concern would be liquidity and transaction costs. What security do you use and what (effectively tax-deductible) interest rate do you pay?
SPX and approximately 0.55% borrowing rate based on the actual fill I got, if held to expiration.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

Steve Reading wrote: Tue Jan 26, 2021 4:53 pm
freyj6 wrote: Tue Jan 26, 2021 1:58 pm
Steve Reading wrote: Fri Jan 22, 2021 11:26 am
freyj6 wrote: Fri Jan 22, 2021 11:20 am
Steve Reading wrote: Fri Jan 22, 2021 7:43 am

I still stand by 1.5x leverage. Historically, it was about as good as 2x leverage any ways. And even after a 33% market decline, you still end up at 2x leverage, which was the recommendation from the paper. So it gives a large cushion in case you want to be opportunistic and not rebalance your leverage back to 1.5x in the midst of a bear market.

The only reason I went to 2x this year is because doing so got me right within reach of my equity goal rebalancing bands so I decided to just go for it already.

If the market dropped 30 or 40%, I would just sell positions. I don’t think it’s as big of a deal as I made it out earlier in the thread.

What you suggest (using 1.25x leverage) seems reasonable to me. I would just be wary that if you’re set on not selling for a loss and your leverage goes past 2x in a Bear market, that you do rebalance (at least back to 2x) as per the book.
Good to know.

I'm not sure if this was clear from the last post, but I like the idea of the fixed dollar amount version because I'd be buying unleveraged stocks all the way down. This would make it really difficult to actually end up more than 2x leveraged.

For example, take a 1.33x leveraged portfolio of 150k regular stock and 50k borrowed (200k stock total).

If the market drops 50%, you'd still have 75k regular stock and 50k borrowed (125k total). The market would need to drop 66.6% to move beyond 2x.

Furthermore, I'd be buying into the unlevered position only. Even with contribution as low as 1k per month, it would take roughly a 75% drop in 12 months to exceed a 2x position.

Anyway, even if I'm not jumping into leverage yet, this topic has been super helpful both in terms of education and perspective. Sometimes I get a little nervous being 100% stock with these high valuations and rampant speculation, but when I view it through the perspective of stock exposure vs lifetime human capital it's much easier. Realistically, I'm about 10% stock and 90% human-capital bond :)
Right but if the market doubled from then and you ended up at 400k in stock (350k yours, 50k borrowed), would you not re-lever back up to 1.33x? Assuming you haven’t hit your target yet (still in Phase 1).
Honestly, I understand that it would statistically be the right thing to do, but I probably would not. What feels the most intuitive and safest (among risky, leveraged strategies) is to follow a strategy where the fixed dollar amount allocation becomes the glide path. At 150k saved, 200k invested, I'd be 1.33% invested, at 350k/50k, I'd be roughly 1.14% leveraged, and so on. Once I hit my Samuelson share, I'd begin to lever down.

Again the main reason this appeals to me is that it's very aggressive but has little to no chance of ever getting out of hand. 50k is roughly 1 year of savings for me; perhaps if my income increases significantly I'll feel differently. But then again, that means my Samuelson share would also increase significantly.

Really happy you're doing this and putting so much time into describing it.

PS - what's your AA roughly? Do you tilt at all, even though it's difficult to do so with large amount of leverage?
But if you're starting out (say, with 5K), you'd just borrow 2.5K and no more ever again? That's basically as good as not borrowing at all. I think you do want to borrow more as you save and your collateral grows. But maybe you have a limit once it's bigger than, say X years of salary?

My AA is 80% stocks. I tilt to value and quality and don't find it hard to do since I just buy whatever ETFs I want on margin. I'm not limited to the products offered by derivatives.
Reading through this thread today, gonna buy the book, think I've got the idea though. One question I've got is about AA. I saw some of you mention AA including 10-20% fixed income. What is the purpose of this? If you are borrowing at IB paying ~1.5% interest, aren't you just borrowing at 1.5% to invest at roughly 1.5% fixed income, maybe a little more. BND is yielding like 1.5-1.6% now.

One other question, has anybody done a box spread at Fidelity? I entered one while the market was closed just to see if they would approve it and they did. Does Fidelity allow you to use the credit from a box spread to refinance margin? Can I withdraw cash, increase my margin, then refi the margin with a box spread? Any broker specific issues?

I'm 32 spouse 29, and we've saved/invested a decent chunk of our human capital already, so we are a little late to this. But I think it still has a role to play. First I will make sure I am 100% invested. Usually I'm more like 90%. Then over the course of the next year I'm going to try to bump to ~1.2x leverage. I'm thinking I will maintain a fixed amount borrowed, so if the market goes down my leverage will rise but never drop below 1.2. Maybe some Shiller PE adjustment too - haven't got to that part yet, although I think functionally it will be the same thing as leveraging more when the market drops. Shiller PE goes down when the market goes down since the denominator is slow to change.

Finally, has anybody considered an even more aggressive strategy of ~1.2x leverage but then maintaining a fixed, or even growing, $$ amount invested. I saw somebody was doing a fixed $$ amount borrowed, which makes the leverage rise a bit in downturns. But maintaining a fixed $$ invested (up to a 2x limit) would cause major increases in leverage during downturns. So for example 400k equity 480k invested today, market drops 50% tomorrow I would end up at 160k equity so invested would be 360k (not to exceed 2x). Then I'd stay at 2x leverage until investment got back to 480 at which point I would begin deleveraging back to 1.2x.

Or some kind of middle ground between maintaining constant $$ borrowed(+contributions) and constant $$ invested(+contributions). This would allow leverage to go up steadily as the market goes down, but not immediately spike from 1.2 to 2.0 when the market drops 30%. Larger drops of 50%+ would still lead to 2x leverage.

Basically the goal would be to maintain a fixed, or growing, portion of one's human capital invested. This would necessitate large increases in leverage (up to the 2x limit) if the market went down.
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

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.
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Re: Lifecycle Investing - Leveraging when young

Post by UberGrub »

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.
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Re: Lifecycle Investing - Leveraging when young

Post by Jacotus »

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.
Really? The last post from him was only 6 days ago.
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Re: Lifecycle Investing - Leveraging when young

Post by UberGrub »

Jacotus wrote: Sun Mar 28, 2021 9:58 am
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.
Really? The last post from him was only 6 days ago.
We occasionally communicate via email (we actually met up Providence area once, long story). He told me it happened, must been this past week from what you point out.

I passed a message to the mods from him explaining the situation and asking to reconsider but I don't know if anything came out of it.
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Re: Lifecycle Investing - Leveraging when young

Post by Jacotus »

UberGrub wrote: Sun Mar 28, 2021 10:20 am
Jacotus wrote: Sun Mar 28, 2021 9:58 am
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.
Really? The last post from him was only 6 days ago.
We occasionally communicate via email (we actually met up Providence area once, long story). He told me it happened, must been this past week from what you point out.

I passed a message to the mods from him explaining the situation and asking to reconsider but I don't know if anything came out of it.
That's too bad. Discussing moderation on the forum is verboten so let's drop it.
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Re: Lifecycle Investing - Leveraging when young

Post by Semantics »

UberGrub wrote: Sun Mar 28, 2021 10:20 am
Jacotus wrote: Sun Mar 28, 2021 9:58 am
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.
Really? The last post from him was only 6 days ago.
We occasionally communicate via email (we actually met up Providence area once, long story). He told me it happened, must been this past week from what you point out.

I passed a message to the mods from him explaining the situation and asking to reconsider but I don't know if anything came out of it.
Do you know if he's active on any other forums? His contributions were one of the main reasons I came here, along with with Uncorrelated, and Hedgefundie. It seems all of them are now gone. What a shame.
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Re: Lifecycle Investing - Leveraging when young

Post by UberGrub »

Semantics wrote: Sun Mar 28, 2021 10:38 am
UberGrub wrote: Sun Mar 28, 2021 10:20 am
Jacotus wrote: Sun Mar 28, 2021 9:58 am
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.
Really? The last post from him was only 6 days ago.
We occasionally communicate via email (we actually met up Providence area once, long story). He told me it happened, must been this past week from what you point out.

I passed a message to the mods from him explaining the situation and asking to reconsider but I don't know if anything came out of it.
Do you know if he's active on any other forums? His contributions were one of the main reasons I came here, along with with Uncorrelated, and Hedgefundie. It seems all of them are now gone. What a shame.
I don't know, sorry :/
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

UberGrub wrote: Sun Mar 28, 2021 10:20 am
Jacotus wrote: Sun Mar 28, 2021 9:58 am
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.
Really? The last post from him was only 6 days ago.
We occasionally communicate via email (we actually met up Providence area once, long story). He told me it happened, must been this past week from what you point out.

I passed a message to the mods from him explaining the situation and asking to reconsider but I don't know if anything came out of it.
I'm new here (frequent reader, infrequent poster) so I don't want to overstep my bounds, but I agree their posts are one of the greatest assets of this forum. The amount of effort that went into their posts and the modeling they have done is priceless. I do hope that it's possible to reconsider at some time in the future.
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

What is a good interest rate on a LEAP right now? Should I be comparing to STT?

I calculated on SPY and IWM Dec '23 (family member might use IWM for the lower price), and I'm getting 1.1-1.4% at the midpoint (div on the amount paid). Higher for the ask. I'd be happy to pay these rates since this is in an IRA account at Fidelity.

Family member will use IWM and EFA for the lower prices. A little concerned about the lack of diversification but better than nothing I figure.
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew »

I asked a mod to confirm if Steve was permanently banned. They were not able to discuss details of the situation due to privacy. But given the details shared by UberGrub, the time that has elapsed since his last post (Mar 22), the fact that he cannot be PM'd, and the fact that appeals are decided within 48 hours, I think we can conclude that Steve Reading's appeal was denied and that he is indeed permanently banned.

I am sad that Steve will no longer part of the Bogleheads forum. His posts contributed greatly to improving this forum's understanding of the powerful but frequently misunderstood ideas behind lifecycle investing. He was convinced by the theoretical model and empirical evidence behind lifecycle investing and practiced it seriously. And he took the time to answer anyone's questions about it--in this thread as well as other threads. His practical experience with leveraging made him an invaluable resource for those seeking to use leverage in their lifecycle investing strategy. The OP of this thread, which he recently put together, is a testament to how much work he put into this.

Given my background in economics, he would sometimes ask me when he was confused about a topic he thought I might know something about. Trying to answer his question would usually help me understand the topic better than I did before. He actually tried to figure stuff out, and was willing to change his mind about things. I will miss him on this forum.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Lifecycle Investing - Leveraging when young

Post by jarjarM »

It's quite sad that Steve is no longer allowed on the forum. I hope one day we'll know why.
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Re: Lifecycle Investing - Leveraging when young

Post by JamesDean44 »

Ben Mathew wrote: Thu Apr 01, 2021 9:31 pm I asked a mod to confirm if Steve was permanently banned. They were not able to discuss details of the situation due to privacy. But given the details shared by UberGrub, the time that has elapsed since his last post (Mar 22), the fact that he cannot be PM'd, and the fact that appeals are decided within 48 hours, I think we can conclude that Steve Reading's appeal was denied and that he is indeed permanently banned.

I am sad that Steve will no longer part of the Bogleheads forum. His posts contributed greatly to improving this forum's understanding of the powerful but frequently misunderstood ideas behind lifecycle investing. He was convinced by the theoretical model and empirical evidence behind lifecycle investing and practiced it seriously. And he took the time to answer anyone's questions about it--in this thread as well as other threads. His practical experience with leveraging made him an invaluable resource for those seeking to use leverage in their lifecycle investing strategy. The OP of this thread, which he recently put together, is a testament to how much work he put into this.

Given my background in economics, he would sometimes ask me when he was confused about a topic he thought I might know something about. Trying to answer his question would usually help me understand the topic better than I did before. He actually tried to figure stuff out, and was willing to change his mind about things. I will miss him on this forum.
Very well put.
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Re: Lifecycle Investing - Leveraging when young

Post by imak »

Ben Mathew wrote: Thu Apr 01, 2021 9:31 pm I asked a mod to confirm if Steve was permanently banned. They were not able to discuss details of the situation due to privacy. But given the details shared by UberGrub, the time that has elapsed since his last post (Mar 22), the fact that he cannot be PM'd, and the fact that appeals are decided within 48 hours, I think we can conclude that Steve Reading's appeal was denied and that he is indeed permanently banned.

I am sad that Steve will no longer part of the Bogleheads forum. His posts contributed greatly to improving this forum's understanding of the powerful but frequently misunderstood ideas behind lifecycle investing. He was convinced by the theoretical model and empirical evidence behind lifecycle investing and practiced it seriously. And he took the time to answer anyone's questions about it--in this thread as well as other threads. His practical experience with leveraging made him an invaluable resource for those seeking to use leverage in their lifecycle investing strategy. The OP of this thread, which he recently put together, is a testament to how much work he put into this.

Given my background in economics, he would sometimes ask me when he was confused about a topic he thought I might know something about. Trying to answer his question would usually help me understand the topic better than I did before. He actually tried to figure stuff out, and was willing to change his mind about things. I will miss him on this forum.
Very well said. Indeed, a loss for the forum.
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Re: Lifecycle Investing - Leveraging when young

Post by langlands »

jarjarM wrote: Thu Apr 01, 2021 9:38 pm It's quite sad that Steve is no longer allowed on the forum. I hope one day we'll know why.
Yes. This was one of the threads that dramatically changed my view on leveraged investing and his contributions will be sorely missed.
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Re: Lifecycle Investing - Leveraging when young

Post by Marseille07 »

Ben Mathew wrote: Thu Apr 01, 2021 9:31 pm I asked a mod to confirm if Steve was permanently banned. They were not able to discuss details of the situation due to privacy. But given the details shared by UberGrub, the time that has elapsed since his last post (Mar 22), the fact that he cannot be PM'd, and the fact that appeals are decided within 48 hours, I think we can conclude that Steve Reading's appeal was denied and that he is indeed permanently banned.

I am sad that Steve will no longer part of the Bogleheads forum. His posts contributed greatly to improving this forum's understanding of the powerful but frequently misunderstood ideas behind lifecycle investing. He was convinced by the theoretical model and empirical evidence behind lifecycle investing and practiced it seriously. And he took the time to answer anyone's questions about it--in this thread as well as other threads. His practical experience with leveraging made him an invaluable resource for those seeking to use leverage in their lifecycle investing strategy. The OP of this thread, which he recently put together, is a testament to how much work he put into this.

Given my background in economics, he would sometimes ask me when he was confused about a topic he thought I might know something about. Trying to answer his question would usually help me understand the topic better than I did before. He actually tried to figure stuff out, and was willing to change his mind about things. I will miss him on this forum.
Steve will be missed. I liked reading his posts, always insightful yet witty.
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Re: Lifecycle Investing - Leveraging when young

Post by skierincolorado »

Ben Mathew wrote: Thu Apr 01, 2021 9:31 pm I asked a mod to confirm if Steve was permanently banned. They were not able to discuss details of the situation due to privacy. But given the details shared by UberGrub, the time that has elapsed since his last post (Mar 22), the fact that he cannot be PM'd, and the fact that appeals are decided within 48 hours, I think we can conclude that Steve Reading's appeal was denied and that he is indeed permanently banned.

I am sad that Steve will no longer part of the Bogleheads forum. His posts contributed greatly to improving this forum's understanding of the powerful but frequently misunderstood ideas behind lifecycle investing. He was convinced by the theoretical model and empirical evidence behind lifecycle investing and practiced it seriously. And he took the time to answer anyone's questions about it--in this thread as well as other threads. His practical experience with leveraging made him an invaluable resource for those seeking to use leverage in their lifecycle investing strategy. The OP of this thread, which he recently put together, is a testament to how much work he put into this.

Given my background in economics, he would sometimes ask me when he was confused about a topic he thought I might know something about. Trying to answer his question would usually help me understand the topic better than I did before. He actually tried to figure stuff out, and was willing to change his mind about things. I will miss him on this forum.
Well said. Couldn't agree more.
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cos
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Re: Lifecycle Investing - Leveraging when young

Post by cos »

Ben Mathew wrote: Thu Apr 01, 2021 9:31 pm I asked a mod to confirm if Steve was permanently banned. They were not able to discuss details of the situation due to privacy. But given the details shared by UberGrub, the time that has elapsed since his last post (Mar 22), the fact that he cannot be PM'd, and the fact that appeals are decided within 48 hours, I think we can conclude that Steve Reading's appeal was denied and that he is indeed permanently banned.

I am sad that Steve will no longer part of the Bogleheads forum. His posts contributed greatly to improving this forum's understanding of the powerful but frequently misunderstood ideas behind lifecycle investing. He was convinced by the theoretical model and empirical evidence behind lifecycle investing and practiced it seriously. And he took the time to answer anyone's questions about it--in this thread as well as other threads. His practical experience with leveraging made him an invaluable resource for those seeking to use leverage in their lifecycle investing strategy. The OP of this thread, which he recently put together, is a testament to how much work he put into this.

Given my background in economics, he would sometimes ask me when he was confused about a topic he thought I might know something about. Trying to answer his question would usually help me understand the topic better than I did before. He actually tried to figure stuff out, and was willing to change his mind about things. I will miss him on this forum.
I miss him already. I wonder where he'll go next.
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wassabi
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Re: Lifecycle Investing - Leveraging when young

Post by wassabi »

cos wrote: Fri Apr 02, 2021 3:55 pm
Ben Mathew wrote: Thu Apr 01, 2021 9:31 pm I asked a mod to confirm if Steve was permanently banned. They were not able to discuss details of the situation due to privacy. But given the details shared by UberGrub, the time that has elapsed since his last post (Mar 22), the fact that he cannot be PM'd, and the fact that appeals are decided within 48 hours, I think we can conclude that Steve Reading's appeal was denied and that he is indeed permanently banned.

I am sad that Steve will no longer part of the Bogleheads forum. His posts contributed greatly to improving this forum's understanding of the powerful but frequently misunderstood ideas behind lifecycle investing. He was convinced by the theoretical model and empirical evidence behind lifecycle investing and practiced it seriously. And he took the time to answer anyone's questions about it--in this thread as well as other threads. His practical experience with leveraging made him an invaluable resource for those seeking to use leverage in their lifecycle investing strategy. The OP of this thread, which he recently put together, is a testament to how much work he put into this.

Given my background in economics, he would sometimes ask me when he was confused about a topic he thought I might know something about. Trying to answer his question would usually help me understand the topic better than I did before. He actually tried to figure stuff out, and was willing to change his mind about things. I will miss him on this forum.
I miss him already. I wonder where he'll go next.
I agree. This thread was one of the most useful for me. If Steve is reading this message, I hope he will consider going to the r/Bogleheads thread in reddit to at least touch base with the community. I found out about this thread from a posting over there.
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Re: Lifecycle Investing - Leveraging when young

Post by RovenSkyfall »

UberGrub wrote: Sun Mar 28, 2021 10:20 am
Jacotus wrote: Sun Mar 28, 2021 9:58 am
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.
Really? The last post from him was only 6 days ago.
We occasionally communicate via email (we actually met up Providence area once, long story). He told me it happened, must been this past week from what you point out.

I passed a message to the mods from him explaining the situation and asking to reconsider but I don't know if anything came out of it.
Did Uncorrelated get banned as well?
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Marseille07
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Re: Lifecycle Investing - Leveraging when young

Post by Marseille07 »

RovenSkyfall wrote: Tue Apr 20, 2021 8:34 am
UberGrub wrote: Sun Mar 28, 2021 10:20 am
Jacotus wrote: Sun Mar 28, 2021 9:58 am
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.
Really? The last post from him was only 6 days ago.
We occasionally communicate via email (we actually met up Providence area once, long story). He told me it happened, must been this past week from what you point out.

I passed a message to the mods from him explaining the situation and asking to reconsider but I don't know if anything came out of it.
Did Uncorrelated get banned as well?
See if you can PM that person. My guess is Uncorrelated is uncorrelated.
TheCleverest
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Re: Lifecycle Investing - Leveraging when young

Post by TheCleverest »

Thank you to Steve Reading and the many others who have contributed. I’ve learned quite a bit with this thread. I’ve also had the pleasure of reading the Lifecycle book.

I want to hear what the forum thinks about the following. I welcome any pointers or opportunities to learn more or clarify a misunderstanding :D

I’d like to leverage up some equity holdings in a taxable account around 2:1. I’m in Phase 1.

My own individual circumstances and personal desires are
-minimize tax burden
-get lowest interest rates
-try to achieve a ‘non-callable’ type loan
-be hands off
-use broad based US and international indexes

I get the sense there are four common ways to do this.

FUTURES:
-not interested because I cannot be that hands on due to my profession and personal interests
-they do not offer international and emerging markets like I desire
-the 60/40 LTCG and STCG would soak me in a high taxed state and my federal income bracket

OPTIONS
-bid/ask prices are wide for the 2:1 leverage for international and EM
-opportunity to have all LTCG is nice
-to me this is a ‘callable’ loan since there is an end date
-the implied interest rates, after doing some calculations, isn’t as low as I thought it would be.

LETF
-great especially if not a lot of capital at hand
-downside is even though the ER is around 1% the actual interest rate is closer to 4-5%
-great since it keeps leverage constant (ie don’t have to sell anything when the market is down)
-offers what I am interested in (SP500, EM, International)
-great tax treatment
-would be very easy to manage on a platform like M1 in terms of rebalancing

MARGIN
-super low interest rates
-down side is I could get a margin call….but with the 2:1 leverage I’d like to employ + additional monies I could easily deposit I’m not too worried about this
-great tax treatment
-down side is that I’d have to buy/sell in order to keep around ideal leverage (but I’m ok with it floating a bit between 1.5 and 2.5 to be honest)
-would avoid the volatility decay

So, I’m between using LTEF and using margin.

It appears to me there is an additional interest rate cost for LETF that would provide the following:
1) hands off approach
2) constant leverage compared to using a margin account.
3) cannot lose more than I put in (vs margin)


QUESTIONS
1. How do I actually calculate the interest rate from the LETF and compare that vs margin?
2. If I used margin would adding new money every quarter be a reasonable rebalancing strategy?
3. What am I overlooking in deciding between margin and LETF?
4. How important is the volatility drag of LTEF if held for 10-15 as per the book and my estimation?
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Re: Lifecycle Investing - Leveraging when young

Post by DMoogle »

TheCleverest wrote: Sun Apr 25, 2021 6:49 pmQUESTIONS
1. How do I actually calculate the interest rate from the LETF and compare that vs margin?
2. If I used margin would adding new money every quarter be a reasonable rebalancing strategy?
3. What am I overlooking in deciding between margin and LETF?
4. How important is the volatility drag of LTEF if held for 10-15 as per the book and my estimation?
1. There's a "simulating LETF returns" thread floating somewhere around here that has very in-depth research on the true expenses of LETF. I don't know enough to truly answer your question, but I can say with certainty that the implicit interest rate in LETFs will be substantially lower than the margin rates that are available. But the expense ratio partially makes up for that (compare ~1% ER vs. 1.5% margin spread at Interactive Brokers).
2. Yes, I think so. However, as your account balance gets very large, you may have difficulty adequately rebalancing solely from contributions. Also, every "winning" quarter means that your leverage ratio will have fallen, so you can just use more margin to rebalance and get to the desired ratio you want.
3. There seems to be a lot of skepticism regarding international LETFs. I don't know a ton about it, but it seems to boil down to (1) high ER and (2) inadequacy in actually tracking the underlying index. My impression is that the most well-informed guys here stick to the REALLY big LETFs.
4. I assume you meant 10-15 years. Very important. If you're expecting 2x annual return from a 2x S&P500 LETF, you're likely to be very disappointed.

You might be interested in Hedgefundie's Excellent Adventure. That thread is also floating around here somewhere. Personally, I'm doing that in my tax-advantaged account, and using a combination of margin, NTSX (a "lightly" leveraged ETF), and VXUS in my taxable account.
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Re: Lifecycle Investing - Leveraging when young

Post by TheCleverest »

Thanks DMoogle.

Good 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.

Would 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.

Good point w/r/t contributions may being insufficient once the account gets large.

Would you consider EFO, EET and SPUU to be 'really large' funds?
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DMoogle
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Re: Lifecycle Investing - Leveraging when young

Post by DMoogle »

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
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