When talking about bonds I usually use the framework of percent net worth specified by asset type, for example 150%/300% stocks/bonds. To me, that’s the most clear. A few people still seem to get confused but the information is there if they want to try to understand what it means.DMoogle wrote: ↑Thu Sep 16, 2021 10:09 amI think we need a new framework for talking about leverage ratios in a non-LETF context. 4x against net worth sounds sky-high and very scary to most, but if a portfolio was actually 0.5x SPY and 3.5x STTs, then it's actually a reasonably safe portfolio. Even 1x SPY and 8x STTs looks to be less risky than HFEA. Using a flat number to discuss leverage ratios really doesn't hold up well at all when not considering the context of the underlying assets.skierincolorado wrote: ↑Thu Sep 16, 2021 8:05 amIn order of risk:
-leveraging 2x against net worth (SSO), or 3x (UPRO)
-leveraging 4x against net worth
-taking fixed loans using your future income as collateral via credit cards, mortgages, personal loans. This allows for leverage higher than 4x, and can very easily turn into infinite leverage if one's net worth becomes negative
-taking more fixed loans than you'd be able to sustain in a market down turn or loss of job
I'm not really sure what this framework should look like, but I think the more we can point to long-term results (i.e. at least 3 decades) and discuss volatility and drawdowns, the better off we'll be.
In the above examples though I really am talking about being 3x or 4x in only stocks. Or even having stock exposure on a negative net worth such as student loans if the interest rate is low. Which is technically infinite leverage. I think that much leverage is acceptable for a recent college grad in a highly employable field. But personally I didn’t have the know how or discipline to execute such a plan after college. Very few do. Which is probably why Ayres and nalebuff avoid going there.