millennialmillions wrote: ↑Fri Oct 15, 2021 11:26 am
Based on the posts from skier and the backtest results (assuming the above discussion on ZF gets resolved), I’m now convinced that I should hold ITT instead of LTT. I’ve also decided to go with an allocation of 140% equity (98% domestic, 42% international) and 140% ITT. I transferred my Roth IRA to IBKR so I can now hold futures. Here are my planned holdings:
A few remaining questions I would appreciate any input on:
- Thoughts on my allocation across accounts? I don’t have any treasuries in my “Other Rtmt” accounts because they can’t trade futures, and it seems any other mechanism of treasury exposure is subpar.
- The participants of this thread have still not reached consensus on the correct amount to use when determining treasury allocation. Based on the CME resource Bentonkb provided, I believe it should be the Principal Invoice Price (quoted futures price * the conversion factor), so that’s what I’m using. MES seems more straightforward – just 5 * the index value, right?
- How does everyone decide the buffer on your futures margin requirement you’re comfortable with? E.g. if I have 14 MES contracts in a Roth IRA and I want to be able to withstand a 30% drop, I need 14 * 4,400 * 5 * 0.3 = $93,000 extra cash beyond the initial margin requirement. But what about the possibility of changing margin requirements, since they increase with market volatility?
- How does everyone hold their “buffer” cash that is not currently used to meet margin requirements in retirement accounts? Do you put it in a fund like ICSH, JPST, or MINT? Is there a way to ensure that would be liquidated first in case extra cash is needed to meet margin requirements?
EDIT: also I agree with comeinvest that there is some benefit to diversifying across the yield curve slightly. personally for me that means owning ZF and a little ZN. Not a lot of diversification, not a lot of added complexity, still in the belly of the curve.
Also keep in mind when you decided on the 140% ITT allocation, that was for the duration of VFITX I think, which is a little over 5 years I think. ZF is under 5 years. So adding in some ZN could get you back to that 5.5 year average you were targeting.
Also I am curious how you decided on 140% ITT? Is it because it maximizes the 10th percentile of returns historically?
I calculate the margin requirement in the IRA to be 57k at IB (14*1679*2+6*828*2). That leaves you with 146k in cash. If the equity portion lost 30%, and you did not rebalance during the drop, you would lose 93k, and still have 53k in cash remaining. If you rebalanced back to your target leverage ratio at some point during the decline, you would lose less. So you could hold a substantial portion of the 146k in STT, like ICSH. But it would be more efficient to hold less MES, and more VTI. Holding ICSH does not compensate you fully for the .3-.4% (above LIBOR) financing cost implicit in MES. Furthermore, the broker does not consider ICSH collateral in an IRA, only cash, so only some of the cash could be held in ICSH.
I would reccomend in that IRA:
9 MES (198k)
112k VTI
6 ZF (587k)
98k cash
total equities and ZF stays the same at 310k/587k
you would have 98k cash to cover the 40k margin requirement (9*1679*2+6*828*2). You could endure an 18.7% market drop before margin call. If more buffer is desired, do one more MES and 22k less VTI. You would have the same problem with ICSH - the broker will not consider this as collateral - only cash is collateral. Thus we want to strike a reasonable balance between how much cash we hold and how often we need to monitor the market for drops that would bring us close to a margin call.
One consideration, that might allow for holding less cash than in my example, is if you determined and felt confident that the broker would liquidate the minimum amount of MES/ZF/or VTI necessary. Preferably VTI. If the market dropped this much, you would want to sell some stock anyways to maintain your target leverage ratio.
While I am not a small/value tilter, I don't believe this is a good time to underweight small/value. So a second modification I would make to the IRA holdings would be to substitute some VB/VBR and/or VO for VTI to counteract the large-cap bias of MES. Thus:
9 MES (198k)
72k VTI
40k VBR
6 ZF (587k)
98k cash
Some VB/VBR/VO could be held in retirement accounts to compensate for the UPRO. I personally don't think the amount of VB/VBR/VO needs to be rebalanced regularly, so there is no added complexity. I just think we need to hold some to compensate for the MES and UPRO. The exact amount isn't important IMO. Just hold some and forget about it. Since it's highly correlated with large caps, it probably wouldn't need to be rebalanced more than once a decade.
Otherwise, what you've outlined is very similar to what I hold. Only remaining difference is that I'm 130/200 insteada of 140/140. And within equity I'm 35/65 vs 30/70. So very similar... also in tems of how it's spread across accounts is nearly identical. Like you I have 2 401ks, one of which allows LETFs and options, the other does not. I chose LEAPs instead of LETF. I think LEAPs are a little better, but LETF are easier.
How do you plan to rebalance? One of the reasons I hold a little less stock leverage than you currently, is that I do not plan to rebalance my leverage ratio other than to keep at at 1.3x or higher. In a market decline I would let the leverage increase up to close to 2x before capping it. This is a subtle bet on the market being in a bubble currently, but it's pretty subtle given I'm still leveraged in equities!