I'm the guy from the
Lifecycle Investing vs. HFEA thread. After reading through this thread, I think we're largely working toward the same goal, so it would be useful to combine threads. Thanks to skier, DMoogle, LTCM, and all for your insightful posts!
Here is a recap of that thread and my current thinking:
I have been looking to find the best total portfolio strategy for my situation, testing various aspects of Lifecycle Investing, HFEA, and Modern Portfolio Theory. The HFEA analysis done in the past has focused on results for a single lump sump contribution over time. The Lifecycle Investing analysis did not consider holding bonds while leveraged. I wanted to consider both of these aspects looking at a 35-year accumulation period. So I built
my own spreadsheet to do this analysis, using data back to 1955. The spreadsheet uses macros and is a bit messy - I might make it more user friendly if there's demand for it.
The spreadsheet includes both leveraged ETFs and leverage using margin, where any method can be simulated with a given cost of borrowing. Here is a recap of the results using margin. The first table uses T-Bill returns as the historical cost of borrowing, so this can be considered an optimistic cost of borrowing. The second table uses the 10-year treasury yield as the historical cost of borrowing. In recent times, this has been close to the cost of margin on Interactive Brokers, so it can be considered a pessimistic cost of borrowing.
Optimistic cost of borrowing
Pessimistic cost of borrowing
I did some additional analysis not included in that summary. I used leveraged ETFs for the S&P 500 and LTTs to see how those compared. Long story short, slightly worse than the pessimistic cost of borrowing. Since they're so easy to use, I don't think they should be completely written off. I also ran bootstrap-sampled simulations assuming every year is independent, whereas the above result uses historical 35-year periods. The bootstrap results unsurprisingly show a significantly worse 10th percentile but not much difference between strategies ($25M - $31M 10th percentile). So I am primarily looking at the results for historical 35-year periods.
I have been surprised that using a lifecycle strategy to decrease leverage has not resulted in a better 10th percentile result. The lifecycle with levered bonds shown above is simply the 140% VTSAX, 60% VLGSX portfolio with a gradual glide down in leverage approaching retirement. At the 10th percentile, it has performed worse than its constant counterpart and worse than a lifecycle strategy using no bonds while levered. I plan to dig into this more, but for now it doesn't really matter to me since the starting point is the same.
Looking at my results so far, I am leaning toward a 140% stock, 120% ITTs portfolio. It has performed well with a pessimistic cost of borrowing and exceptionally well with an optimistic cost of borrowing. There are some final things to think through (such as including international in the 140%), and I would appreciate any feedback from this group. As of now, I'm pretty close to making the decision on a 140% stock, 120% ITTs portfolio and turning my focus to implementation details. I am an options/futures/margin noob and have a lot to learn to minimize borrowing costs.