Should I use margin to buy a balanced fund?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
long_gamma
Posts: 420
Joined: Mon Sep 14, 2015 4:13 pm

Re: Should I use margin to buy a balanced fund?

Post by long_gamma »

Some what relevant article to this thread.

https://blog.thinknewfound.com/2017/12/ ... y-getting/
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson
Topic Author
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: Should I use margin to buy a balanced fund?

Post by Rob Bertram »

Awesome read! It is very much in line with this thread.

I really do hope that leveraged portfolios becomes more popular. If one of the robo-advisers would offer leveraged portfolios as an investment option, I would definitely stop my manual stuff and move it over to their service. Rolling futures isn't time consuming, but it does require access to your account. That means I have to plan vacations around my portfolio which is mildly inconvenient.
Swelfie
Posts: 200
Joined: Mon Mar 14, 2016 12:54 am

Re: Should I use margin to buy a balanced fund?

Post by Swelfie »

Having been running a similar risk-parity portfolio for over a year now, one thing I was a bit caught off guard by was that, as Rob had discussed earlier in this thread, rising interest rates aren't really all that troublesome to the short term bonds. But what I am seeing in this current market is that combined with a flattening yield curve they are. The last few months interest rates have risen at the 2 year point, but they have risen faster at the 3 month point. This has pushed the implied repo rate up at a rate that my 2 year treasuries have the same expected return as they did 4 months ago, but they have lost a lot of value. My original assessment was that if interest rates rise I would expect to increase future returns, but I hadn't really accounted for the effect curve slope could have as a risk unto itself.

Not that I'm dissatisfied. My portfolio is behaving well overall. I am wondering if there is a diversification path here though. Here is my thought:

VIX doesn't really have any expected future growth, rather it spikes and returns to a baseline. The "insurance" aspect of holding VIX directly against an equity crash causes prices on future volatility to be higher than expected. This puts VIX futures in contago almost always (except during market crashes) and conversely, puts short VIX in near permanent backwardation, making a sliver of ZIV, for instance an attractive investment.

Yield curves have a similar story to VIX in that normally the curve is somewhat steep. At times it shallows or inverts but it later returns to normal (I can't see an economy that persisted in a state where long term investments always pay more than short term.) Since straight-forward investment in a positively sloped yield curve, such as this thread illustrates, is the norm, then insurance against curve flattening is likely at a premium. What is the combination of derivatives then that is shorts a flattening yield curve, as this should also in my mind be in a state of near permanent backwardation?
Topic Author
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: Should I use margin to buy a balanced fund?

Post by Rob Bertram »

Yeah, the 2-year note futures have been fairly stagnant. I can check my history, but I believe that they are flat or at a slight loss year to date. Note that they are doing exactly what I want: providing an uncorrelated asset to the portfolio with a positive expected return. And, I agree, the portfolio is doing well which is what should be the ultimate focus.

An inverted yield curve is definitely a concern for a leveraged portfolio. It has happened, but it is a relatively rare event. Outside of keeping leverage within reason, I don't have a portfolio mitigation strategy. I don't want to abandon my total-market framework in order to add assets that are only relevant for a specific black swan event and create drag on the portfolio the rest of the time. I understand your original goal for including VIX futures in your portfolio, but it's not an approach that I would do. As you point out, VIX futures almost always in contango which makes it a losing choice for a buy-and-hold portfolio.

For anyone interested, there is a nice animated graph of the treasury yield curve here: http://stockcharts.com/freecharts/yieldcurve.php
kassad
Posts: 1
Joined: Fri Feb 02, 2018 3:22 am

Re: Should I use margin to buy a balanced fund?

Post by kassad »

First of all: Kudos to you, Rob for doing this, and opening a thread about it!

Lately I have been thinking about doing the same thing (okay not exactly the same, but something similar), using futures to lever up a balanced portfolio. I haven't yet read through the entire 19 pages of this thread, but I have seen you are also using QUANDL as data source for your futures backtesting. Me too, and I have a problem with it. I am curious how you might have addressed this?

I have noticed that when I compare the buy and hold performance of the SP500 index (an ETF or US Large Cap in portfoliovisualizer) to the continious SP500 future of the CHRIS database on quandl, they follow each other nicely. However when comparing the same for US long term treasuries (the etf TLT or the cash bond index Long Term Treasuries in portfoliovisualizer) and the continious 30 year bond futures on Quandl, the continious futures vastly underperform (this is true for all the cash bond indexes vs their continious bond futures counterparts that I have tried). To the point that holding the bond futures in the portfolio aren't doing their 'job' well enough. I and up with a few percent more drawdown, and nearly half the CAGR when I put in the 40/60 stock/treasuries futures portfolio on a 1× leverage in amibroker (1982-2017) then what portfolivisualizer works out for the 40/60 index/ETF counterparts. This is a rather dissapointing simulation result.

I have to notice that the continious futures aren't rolled over based on volume or open interest, but are based on spot month calculations (held until expiry) which obviously results in a drag on the performance of futures contracts that are in contango. There is also a huge gap in all the continious bond futures on quandl I have checked from the 21st of Dec 1999 to the 22nd of Dec 1999 (110.84 -> 91.09 in the case of the 30 year treasuries !!!!!).

Did you notice the same problem? How have you gotten round it in your backtesting? Or you don't use the free continious futures at all, and have constructed your own from the individual historical futures using your own rollover rules (I have found various scripts in R and Python that do this, but I myself am not experienced in either programming languages) ?
cavemank
Posts: 1
Joined: Fri Aug 04, 2017 2:09 pm

Re: Should I use margin to buy a balanced fund?

Post by cavemank »

Rob,

I'm really curious as to how your portfolio is doing right now, with bonds and stocks both down a bit.
Finance Doc
Posts: 13
Joined: Thu Jan 30, 2014 7:23 pm

Re: Should I use margin to buy a balanced fund?

Post by Finance Doc »

Rob Bertram wrote: Fri Dec 02, 2016 5:46 pm That is a very good question, frejd. Here are my observations:
  • Don't let the pursuit of perfect be the enemy of good: At the core, the model is a 40% total-stock / 60% intermediate-treasury portfolio leveraged to taste. Transforming the bonds from intermediate to short-term was an exercise of keeping the same Sharpe ration and improving the Sortino ratio so as to reduce margin call. There are less complex portfolios with very similar risk/return profiles that you can achieve with a lower starting dollar amount. For example, a 10% stock / 90% short-term treasury portfolio has virtually the same risk profile as 10% stock/ 5% long-term / 85% short-term treasuries (Portfolio Visualizer link). With about $40k, one could get an e-mini S&P contract and 4x 2-year treasury contract. That would be close enough. For lower amounts, you could use leveraged ETFs for stocks (UPRO is 3x S&P 500) and 2-year treasury futures.
  • You don't need to do the insane leverage ratios that I've chosen: I would encourage people just starting out to begin with something much lower as they haven't truly experienced a bear market to understand their risk tolerance.
  • Remember the fundamentals: The top three factors for building wealth are savings rate, time, and keeping costs low. Master those first, then come back to asset allocation and risk/leverage.
I am contemplating doing something similar to what you've done and came across this discussion. A few questions for you:

1) From my cursory reading, you seem to have settled on a 10/90 futures split between s and p 500 / 2 year treasuries? Any other takeaway points to your method? I'm not a market timer at all but starting out with this approach in a market with high stock valuation and low interest rates makes me think twice.

2) Regarding your answer above, 1 e-mini and 4 treasury futures is 530,000 notional value. I don't know the exact details, is maintenance margin for that around 10 to 15 thousand? Leaving a loss of only 25 to 30 thousand to wipe out the position? Max loss maybe as low as 4.7%? I know backtesting predicts that won't happen, but they say, "Past results are no guarantee of future performance" for a reason.

Any and all advice regarding your approach would be appreciated.
long_gamma
Posts: 420
Joined: Mon Sep 14, 2015 4:13 pm

Re: Should I use margin to buy a balanced fund?

Post by long_gamma »

Finance Doc wrote: Sun Feb 11, 2018 11:17 pm 2) Regarding your answer above, 1 e-mini and 4 treasury futures is 530,000 notional value. I don't know the exact details, is maintenance margin for that around 10 to 15 thousand? Leaving a loss of only 25 to 30 thousand to wipe out the position? Max loss maybe as low as 4.7%? I know backtesting predicts that won't happen, but they say, "Past results are no guarantee of future performance" for a reason.
Your notional value calculation looks wrong. 2 year treasury note face amount is $200,000. At current values of 2 year note and ES emini, notional value is close to $1 million.

I am all for leverage, but the leverage applied here is crazy for my taste.
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson
jw50
Posts: 67
Joined: Thu Jul 27, 2017 2:00 pm

Re: Should I use margin to buy a balanced fund?

Post by jw50 »

Too many posts to read through.

For simpleton like me, the two main considerations are:
-the differential between the expected return and the margin interest rate
-the potential of margin call, been a forced seller

Therefore I will have only stocks in the portion of my portfolio bought with margin; and use maximum of 20% margin.
Finance Doc
Posts: 13
Joined: Thu Jan 30, 2014 7:23 pm

Re: Should I use margin to buy a balanced fund?

Post by Finance Doc »

long_gamma wrote: Mon Feb 12, 2018 12:18 pm
Finance Doc wrote: Sun Feb 11, 2018 11:17 pm 2) Regarding your answer above, 1 e-mini and 4 treasury futures is 530,000 notional value. I don't know the exact details, is maintenance margin for that around 10 to 15 thousand? Leaving a loss of only 25 to 30 thousand to wipe out the position? Max loss maybe as low as 4.7%? I know backtesting predicts that won't happen, but they say, "Past results are no guarantee of future performance" for a reason.
Your notional value calculation looks wrong. 2 year treasury note face amount is $200,000. At current values of 2 year note and ES emini, notional value is close to $1 million.

I am all for leverage, but the leverage applied here is crazy for my taste.
Okay, I must have had the specs wrong. Even worse.
bmritz
Posts: 44
Joined: Sun Nov 29, 2015 1:59 am

Re: Should I use margin to buy a balanced fund?

Post by bmritz »

jw50 wrote: Mon Feb 12, 2018 2:18 pm Too many posts to read through.

For simpleton like me, the two main considerations are:
-the differential between the expected return and the margin interest rate
-the potential of margin call, been a forced seller

Therefore I will have only stocks in the portion of my portfolio bought with margin; and use maximum of 20% margin.
Isn't the buying power of the margin fungible though? So if you use any margin on anything on a portfolio you are effectively levering the entire portfolio? That's how I always thought of it. So the relevant measure of your first consideration would be the expected return of your entire portfolio vs the margin rate.
bmritz
Posts: 44
Joined: Sun Nov 29, 2015 1:59 am

Re: Should I use margin to buy a balanced fund?

Post by bmritz »

cavemank wrote: Thu Feb 08, 2018 10:47 am Rob,

I'm really curious as to how your portfolio is doing right now, with bonds and stocks both down a bit.
I was also curious how this portfolio performed during the recent “correction.”

Last I could follow, the portfolio was: 10% S&P 500, 5% Long Term Treasuries, 85% Short Term Treasuries Leveraged 26x via futures.

Returns between close of Jan. 26 and close of Feb. 8:

Code: Select all

VOO (Vanguard S&P 500 ETF):                  -10.09%  (Jan 26: 263.36 Feb 8: 236.79)
VGLT (Vanguard Long-Term Treasury ETF):      -3.77%   (Jan 26: 75.88  Feb 8: 73.02)
VGSH (Vanguard Short-Term Treasury ETF):     +0.00%   (Jan 26: 60.09  Feb 8: 60.09)
By naively multiplying the portfolio weights by the returns, the total unlevered portfolio decreased by 1.20%.
Levered 26x, the account funds decreased by 31.13%.

Wild ride indeed.

For a little context, excluding dividends, YTD the unlevered portfolio is down 0.59%, while the levered portfolio is down 15.42%.

95% of that 15.42% loss came from decreased NAV in the bond portion of the portfolio. This thing is sensitive to interest rates.
jw50
Posts: 67
Joined: Thu Jul 27, 2017 2:00 pm

Re: Should I use margin to buy a balanced fund?

Post by jw50 »

An interesting article on leverage:
http://www.morningstar.com/articles/849 ... erage.html
long_gamma
Posts: 420
Joined: Mon Sep 14, 2015 4:13 pm

Re: Should I use margin to buy a balanced fund?

Post by long_gamma »

I have problem with his initial assumptions.
Real-World Costs
Of course …money is never free. I then raided the Federal Reserve Bank of St. Louis’s database (FRED), downloaded the monthly federal-funds interest rate, and simulated three borrowing costs. I permitted institutions to borrow at the fed-funds rate plus 2 percentage points; larger retail investors ($1 million), at fed-funds plus 4 points; and small retail buyers at fed-funds plus 6 points. (I couldn’t find a database that listed historical margin-account interest rates, but based on current quotes, those assumptions seem roughly correct.)
He has two links (FRED & IB) which doesn't justify the rates he is quoting.

FRED rate 1.42%
IB rates varies from 2.04% to 2.92%

So for very small retail buyer he is assuming 1.42%+6% = 7.42% which is nowhere near 2.92%.

There is other option, retail investors can borrow using futures and options at much lower rate. Implicit cost of borrowing using futures and options is less than 2.5%.

It doesn't take genius to figure out, when expected returns are around 6 to 7% and if one is borrowing at 7.42% then leverage doesn't work.
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson
n00b590
Posts: 35
Joined: Mon Dec 04, 2017 2:35 pm

Re: Should I use margin to buy a balanced fund?

Post by n00b590 »

long_gamma wrote: Thu Feb 15, 2018 6:14 am I have problem with his initial assumptions.
Real-World Costs
Of course …money is never free. I then raided the Federal Reserve Bank of St. Louis’s database (FRED), downloaded the monthly federal-funds interest rate, and simulated three borrowing costs. I permitted institutions to borrow at the fed-funds rate plus 2 percentage points; larger retail investors ($1 million), at fed-funds plus 4 points; and small retail buyers at fed-funds plus 6 points. (I couldn’t find a database that listed historical margin-account interest rates, but based on current quotes, those assumptions seem roughly correct.)
He has two links (FRED & IB) which doesn't justify the rates he is quoting.

FRED rate 1.42%
IB rates varies from 2.04% to 2.92%

So for very small retail buyer he is assuming 1.42%+6% = 7.42% which is nowhere near 2.92%.

There is other option, retail investors can borrow using futures and options at much lower rate. Implicit cost of borrowing using futures and options is less than 2.5%.

It doesn't take genius to figure out, when expected returns are around 6 to 7% and if one is borrowing at 7.42% then leverage doesn't work.
+1
redstar
Posts: 125
Joined: Thu Jul 13, 2017 11:15 pm

Re: Should I use margin to buy a balanced fund?

Post by redstar »

Rob Bertram wrote: Tue Apr 14, 2015 12:03 pm I was thinking about how to start a leveraged portfolio with about $10k (which is the minimum to open a margin account). Do you plan on keeping the 10/90 asset allocation as you continue to contribute cash, or is it only a transitional point due to the size of the futures contract? If you do plan on transitioning, would you be willing to share your plan?
Rob, thanks for this thread. It’s fascinating. Do you have estimates on the portfolio that would make sense to start using low amounts of leverage with a small amount of capital? I’m not sure I would do it, but I’m curious what it looks like.
Topic Author
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: Should I use margin to buy a balanced fund?

Post by Rob Bertram »

redstar wrote: Mon Apr 23, 2018 11:31 pm Rob, thanks for this thread. It’s fascinating. Do you have estimates on the portfolio that would make sense to start using low amounts of leverage with a small amount of capital? I’m not sure I would do it, but I’m curious what it looks like.
My apologies for a slow response. I have been busy with life and did not have free time to spend on the forums. For people starting to invest and are in the accumulation phase, the easiest thing to do is get the UPRO ETF. It is designed to represent 3x the daily value of the S&P500 and is re-leveraged daily. Due to volatility, this gives around 2x the returns of the S&P500 but you get 3x the volatility. That is what I have in my Roth IRA at Vanguard since 2014, and it has about tripled since then.
WhiteMaxima
Posts: 3338
Joined: Thu May 19, 2016 5:04 pm

Re: Should I use margin to buy a balanced fund?

Post by WhiteMaxima »

don't use margin loan. basically it is kind of leveraged investment at a high interest.
garlandwhizzer
Posts: 3565
Joined: Fri Aug 06, 2010 3:42 pm

Re: Should I use margin to buy a balanced fund?

Post by garlandwhizzer »

WhiteMaxima wrote:

don't use margin loan. basically it is kind of leveraged investment at a high interest.
1+

Taking out a loan and leveraging up to buy a volatile asset is a high risk strategy that may work if the market is kind to you or may be a complete disaster if it is not. If the market collapses balanced funds will also suffer big time and the need to make loan payments plus margin calls can hit you at precisely the time of greatest pain. This strategy has the potential to destroy your investing future not to mention the emotional agony it can create.

Garland Whizzer
EfficientInvestor
Posts: 580
Joined: Thu Nov 01, 2018 7:02 pm
Location: Alabama

Re: Should I use margin to buy a balanced fund?

Post by EfficientInvestor »

Rob Bertram wrote: Mon Oct 01, 2018 8:32 am For people starting to invest and are in the accumulation phase, the easiest thing to do is get the UPRO ETF. It is designed to represent 3x the daily value of the S&P500 and is re-leveraged daily. Due to volatility, this gives around 2x the returns of the S&P500 but you get 3x the volatility. That is what I have in my Roth IRA at Vanguard since 2014, and it has about tripled since then.
Rob - Thanks for starting the thread. I have not taken the time to read through all 19 pages, so my apologies if my question has already been covered. Have you considered using a blend of UPRO or TQQQ for 3X stock exposure and then combining with a 3X bond fund (TMF) and perhaps a 3X gold fund (UGLD)? My research shows that using a 35/55/10 split of TQQQ/TMF/UGLD and rebalancing at the end of each year would have resulted in a ~24% annualized return with a max drawdown of -58% since the beginning of 1987. Over that same time period, the S&P 500 had an annualized return of 10.4% with a max drawdown of -51%. So you get over 2 times the annualized return with similar downside risk.
Last edited by EfficientInvestor on Thu Feb 21, 2019 8:20 pm, edited 1 time in total.
desafinado
Posts: 181
Joined: Wed Dec 28, 2016 2:14 am

Re: Should I use margin to buy a balanced fund?

Post by desafinado »

Rob, any update given rising rates and recent stock market volatility?
Benjamin Buffett
Posts: 129
Joined: Sun Nov 25, 2018 1:20 pm
Location: Indiana

Re: Should I use margin to buy a balanced fund?

Post by Benjamin Buffett »

I think of buying on margin as taking a time bomb into an investment account. If the margin is called, the debt can cause a loss, in some cases a substantial loss. Mortgage investors thought it would be a good idea to buy while being heavily leveraged......it was not a good move: https://youtu.be/bx_LWm6_6tA I would not recommend buying on margin, and personally avoid potential debt loss like the plague. The Great Depression was in part caused by margin trading.

Short selling I would only do if I covered my call with a long position at the same time, but even then I would expect to take a commission loss if I cant time the market well enough to make more than my commission costs. I don't expect that I can do this reliably enough to mess with covered calls and other forms of speculation.
HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: Should I use margin to buy a balanced fund?

Post by HEDGEFUNDIE »

desafinado wrote: Sun Dec 30, 2018 4:35 pm Rob, any update given rising rates and recent stock market volatility?
Looks like UPRO had a 50% drawdown from top to bottom compared to 20% for VOO. Sometimes the volatility decay can work in your favor!
sawvp
Posts: 6
Joined: Sat Mar 09, 2019 1:53 pm

Re: Should I use margin to buy a balanced fund?

Post by sawvp »

kassad wrote: Fri Feb 02, 2018 7:48 am First of all: Kudos to you, Rob for doing this, and opening a thread about it!

Lately I have been thinking about doing the same thing (okay not exactly the same, but something similar), using futures to lever up a balanced portfolio. I haven't yet read through the entire 19 pages of this thread, but I have seen you are also using QUANDL as data source for your futures backtesting. Me too, and I have a problem with it. I am curious how you might have addressed this?

I have noticed that when I compare the buy and hold performance of the SP500 index (an ETF or US Large Cap in portfoliovisualizer) to the continious SP500 future of the CHRIS database on quandl, they follow each other nicely. However when comparing the same for US long term treasuries (the etf TLT or the cash bond index Long Term Treasuries in portfoliovisualizer) and the continious 30 year bond futures on Quandl, the continious futures vastly underperform (this is true for all the cash bond indexes vs their continious bond futures counterparts that I have tried). To the point that holding the bond futures in the portfolio aren't doing their 'job' well enough. I and up with a few percent more drawdown, and nearly half the CAGR when I put in the 40/60 stock/treasuries futures portfolio on a 1× leverage in amibroker (1982-2017) then what portfolivisualizer works out for the 40/60 index/ETF counterparts. This is a rather dissapointing simulation result.

I have to notice that the continious futures aren't rolled over based on volume or open interest, but are based on spot month calculations (held until expiry) which obviously results in a drag on the performance of futures contracts that are in contango. There is also a huge gap in all the continious bond futures on quandl I have checked from the 21st of Dec 1999 to the 22nd of Dec 1999 (110.84 -> 91.09 in the case of the 30 year treasuries !!!!!).

Did you notice the same problem? How have you gotten round it in your backtesting? Or you don't use the free continious futures at all, and have constructed your own from the individual historical futures using your own rollover rules (I have found various scripts in R and Python that do this, but I myself am not experienced in either programming languages) ?
I've been doing a fair bit of research as well and have found the same problem. I haven't been able to find answers as to why, but the return for treasury futures is very different than when I look at regular treasury returns in PortfolioVisualizer. For a simple look, you can go to MacroTrends and see that since 1991, the average return for the 2 year is .5% a year, with many, many down years. After you factor in the cost of slippage and contango, which has been estimated to be .4-.5%, there's nothing left. If you've found a way around this, or even an explanation, it would be great to hear about it.

Initially, the math appears to work wonderfully well for this 10/90 stock/treasury split Rob has set up, but leveraging a treasury etf with a margin loan is too expensive right now (IB rates have gone up). Leveraging with futures is nearly free, but the lack of real return paints a very different picture for the portfolio. It would be great to hear from Rob about how this is panning out in reality. My research tells me that 2 year treasury futures have lost money every single calendar year since he started this thing--while the SHY ETF has made money every year. Clearly, I still have a lot to learn about treasuries...
Beliavsky
Posts: 1233
Joined: Sun Jun 29, 2014 10:21 am

Re: Should I use margin to buy a balanced fund?

Post by Beliavsky »

sawvp wrote: Sat Mar 09, 2019 2:16 pm I've been doing a fair bit of research as well and have found the same problem. I haven't been able to find answers as to why, but the return for treasury futures is very different than when I look at regular treasury returns in PortfolioVisualizer. For a simple look, you can go to MacroTrends and see that since 1991, the average return for the 2 year is .5% a year, with many, many down years. After you factor in the cost of slippage and contango, which has been estimated to be .4-.5%, there's nothing left. If you've found a way around this, or even an explanation, it would be great to hear about it.

Initially, the math appears to work wonderfully well for this 10/90 stock/treasury split Rob has set up, but leveraging a treasury etf with a margin loan is too expensive right now (IB rates have gone up). Leveraging with futures is nearly free, but the lack of real return paints a very different picture for the portfolio. It would be great to hear from Rob about how this is panning out in reality. My research tells me that 2 year treasury futures have lost money every single calendar year since he started this thing--while the SHY ETF has made money every year. Clearly, I still have a lot to learn about treasuries...
You are probably making the same mistakes discussed in the thread Understanding using treasury futures for leverage to implement risk parity.
Topic Author
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: Should I use margin to buy a balanced fund?

Post by Rob Bertram »

sawvp wrote: Sat Mar 09, 2019 2:16 pm 've been doing a fair bit of research as well and have found the same problem. I haven't been able to find answers as to why, but the return for treasury futures is very different than when I look at regular treasury returns in PortfolioVisualizer. For a simple look, you can go to MacroTrends and see that since 1991, the average return for the 2 year is .5% a year, with many, many down years. After you factor in the cost of slippage and contango, which has been estimated to be .4-.5%, there's nothing left. If you've found a way around this, or even an explanation, it would be great to hear about it.

Initially, the math appears to work wonderfully well for this 10/90 stock/treasury split Rob has set up, but leveraging a treasury etf with a margin loan is too expensive right now (IB rates have gone up). Leveraging with futures is nearly free, but the lack of real return paints a very different picture for the portfolio. It would be great to hear from Rob about how this is panning out in reality. My research tells me that 2 year treasury futures have lost money every single calendar year since he started this thing--while the SHY ETF has made money every year. Clearly, I still have a lot to learn about treasuries...
You are correct. Leveraging a short-term treasury on average nets zero real return or possibly some loss due to market movements. Long-term treasuries do have a positive return after financing costs, but they are a relatively small percentage of the portfolio.

The purpose of the short-term treasuries is not for return but to be an uncorrelated asset to compliment my equity allocation. It allows me to effectively leverage stocks by 2.6x and not go bust when speculators panic and the market tanks.

I have recently been assessing the need for short-term treasuries in my portfolio mainly for purposes of reducing complexity. I do not have an automatic way to auto-balance, so I mainly log in to roll contracts. Since enjoying life is way more fun than manually entering trades, I am thinking about reducing the portfolio to 2x stocks and no bonds. The risk profile is about the same (slightly worse), the return is slightly worse, but my monthly contributions would prevent a margin call. This change means I only have to log in 4 times a year to roll contracts instead of 8 times.
Topic Author
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: Should I use margin to buy a balanced fund?

Post by Rob Bertram »

If anyone has any pressing questions, please send me a private message as I do not check the forum regularly. Happy investing!
EfficientInvestor
Posts: 580
Joined: Thu Nov 01, 2018 7:02 pm
Location: Alabama

Re: Should I use margin to buy a balanced fund?

Post by EfficientInvestor »

sawvp wrote: Sat Mar 09, 2019 2:16 pm
kassad wrote: Fri Feb 02, 2018 7:48 am First of all: Kudos to you, Rob for doing this, and opening a thread about it!

Lately I have been thinking about doing the same thing (okay not exactly the same, but something similar), using futures to lever up a balanced portfolio. I haven't yet read through the entire 19 pages of this thread, but I have seen you are also using QUANDL as data source for your futures backtesting. Me too, and I have a problem with it. I am curious how you might have addressed this?

I have noticed that when I compare the buy and hold performance of the SP500 index (an ETF or US Large Cap in portfoliovisualizer) to the continious SP500 future of the CHRIS database on quandl, they follow each other nicely. However when comparing the same for US long term treasuries (the etf TLT or the cash bond index Long Term Treasuries in portfoliovisualizer) and the continious 30 year bond futures on Quandl, the continious futures vastly underperform (this is true for all the cash bond indexes vs their continious bond futures counterparts that I have tried). To the point that holding the bond futures in the portfolio aren't doing their 'job' well enough. I and up with a few percent more drawdown, and nearly half the CAGR when I put in the 40/60 stock/treasuries futures portfolio on a 1× leverage in amibroker (1982-2017) then what portfolivisualizer works out for the 40/60 index/ETF counterparts. This is a rather dissapointing simulation result.

I have to notice that the continious futures aren't rolled over based on volume or open interest, but are based on spot month calculations (held until expiry) which obviously results in a drag on the performance of futures contracts that are in contango. There is also a huge gap in all the continious bond futures on quandl I have checked from the 21st of Dec 1999 to the 22nd of Dec 1999 (110.84 -> 91.09 in the case of the 30 year treasuries !!!!!).

Did you notice the same problem? How have you gotten round it in your backtesting? Or you don't use the free continious futures at all, and have constructed your own from the individual historical futures using your own rollover rules (I have found various scripts in R and Python that do this, but I myself am not experienced in either programming languages) ?
I've been doing a fair bit of research as well and have found the same problem. I haven't been able to find answers as to why, but the return for treasury futures is very different than when I look at regular treasury returns in PortfolioVisualizer. For a simple look, you can go to MacroTrends and see that since 1991, the average return for the 2 year is .5% a year, with many, many down years. After you factor in the cost of slippage and contango, which has been estimated to be .4-.5%, there's nothing left. If you've found a way around this, or even an explanation, it would be great to hear about it.

Initially, the math appears to work wonderfully well for this 10/90 stock/treasury split Rob has set up, but leveraging a treasury etf with a margin loan is too expensive right now (IB rates have gone up). Leveraging with futures is nearly free, but the lack of real return paints a very different picture for the portfolio. It would be great to hear from Rob about how this is panning out in reality. My research tells me that 2 year treasury futures have lost money every single calendar year since he started this thing--while the SHY ETF has made money every year. Clearly, I still have a lot to learn about treasuries...
I'm thinking that this MacroTrends data is not a total return index. To accurately reflect what you are doing in PortfolioVisualizer, I believe you want to look at a Total Return Index. Take a look at the difference between the 2-year indexes that ICE offers at the links below. The non total return index is similar to the MacroTrends chart you referenced. The total return index chart looks more like the returns of SHY.

ICE 2-year treasury futures index - https://www.nyse.com/quote/index/USTTWO
ICE 2-year treasury futures total return index - https://www.nyse.com/quote/index/USTTWOT

When using futures to replicate SHY, you would put a small amount of capital in the futures contract and then invest the rest in T-bills that receive the risk-free rate. This is essentially what the Total Return index assumes.

Let me know if you agree with this analysis.
sawvp
Posts: 6
Joined: Sat Mar 09, 2019 1:53 pm

Re: Should I use margin to buy a balanced fund?

Post by sawvp »

Thanks for the links. I've always understood total return to include dividends, which you don't receive on a futures contract. I could very well be wrong though--let me know if I'm mistaken. As you point out, the interest earned in cash is definitely a bonus, though I'm thinking that number could be dropping hard and fast in the coming weeks/months.

Since originally posting the question I bought SHY as well as 1 futures contract (ZT) to see how similar they perform. I've come to realize the futures contract is a different product and can't be expected to mirror SHY. It's betting on a future price. Some days I make money in SHY and lose it in ZT and vice versa. Or some days, SHY is flat and ZT does great. I have to agree with Rob's last statement, that it's more of an insurance policy against a major draw down in risk assets--though it's been profitable as of late and I wished I bought more than one contract. I'm underweight in stocks right now, but even once I ramp back up, I'll probably always hold some treasury contracts as cheap insurance. You do have to roll them every three months, but this takes about 5 minutes. If there's anything I've gained from this thread--it's been the proper introduction to ZT. I am a big fan. THANK YOU ROB.
rhe
Posts: 138
Joined: Sun Feb 26, 2017 1:10 am

Re: Should I use margin to buy a balanced fund?

Post by rhe »

Rob Bertram wrote: Thu Aug 08, 2019 5:24 pm I have recently been assessing the need for short-term treasuries in my portfolio mainly for purposes of reducing complexity. I do not have an automatic way to auto-balance, so I mainly log in to roll contracts. Since enjoying life is way more fun than manually entering trades, I am thinking about reducing the portfolio to 2x stocks and no bonds. The risk profile is about the same (slightly worse), the return is slightly worse, but my monthly contributions would prevent a margin call. This change means I only have to log in 4 times a year to roll contracts instead of 8 times.
I've basically changed over to using eurodollar futures (and equivalents in other currencies) for this reason. These are cash settled, and if you have a two year strip of eurodollars and forget to do anything for a quarter, all that happens is that you end up with a 1.75 year strip of eurodollars. Now I can just log in whenever the thought occurs to me, rather than worrying about rolling on certain specific days. Roll costs overall are also lower, once you take into account that you're only trading 1/8 of your contracts each quarter.
RandomWord
Posts: 119
Joined: Tue Jun 18, 2019 1:12 pm

Re: Should I use margin to buy a balanced fund?

Post by RandomWord »

sawvp wrote: Tue Aug 13, 2019 7:24 pm Since originally posting the question I bought SHY as well as 1 futures contract (ZT) to see how similar they perform. I've come to realize the futures contract is a different product and can't be expected to mirror SHY. It's betting on a future price. Some days I make money in SHY and lose it in ZT and vice versa. Or some days, SHY is flat and ZT does great. I have to agree with Rob's last statement, that it's more of an insurance policy against a major draw down in risk assets--though it's been profitable as of late and I wished I bought more than one contract. I'm underweight in stocks right now, but even once I ramp back up, I'll probably always hold some treasury contracts as cheap insurance. You do have to roll them every three months, but this takes about 5 minutes. If there's anything I've gained from this thread--it's been the proper introduction to ZT. I am a big fan. THANK YOU ROB.
You're accounting for the implied cost of leverage in ZT, right? 100k of notional value in ZT is going to do much worse than 100k in SHY, because the ZT is effectively borrowing money and paying interest. Also SHY is a wider range of duration in its treasuries.

My understanding is that the "normal" state of affairs, with a normal yield curve, is that ZT earns the difference between the very short term rates and the 2-year rate. You borrow short and lend long, like a bank. The interest rate movements are just noise on top of that. It's weird now because the yield curve is inverted, so in theory it's paying more to borrow than what it earns from lending, but "everyone" expects the short term rates to drop, so the price movements are dominated by news that affects when/how fast the short term rates will drop.
Diego_Quant
Posts: 38
Joined: Fri Jul 27, 2018 11:27 pm

Re: Should I use margin to buy a balanced fund?

Post by Diego_Quant »

Hi Rob, are you still with that way of investing?
Blue456
Posts: 2152
Joined: Tue Jun 04, 2019 5:46 am

Re: Should I use margin to buy a balanced fund?

Post by Blue456 »

Rob Bertram wrote: Wed Jul 16, 2014 6:42 pm
1) Sure, I agree that margin rates are adjustable. Aren't there adjustable rate mortgages also? People seem fairly comfortable using those.
I guess that depends who you ask. I would never get adjustable mortgage. But I’m also in a camp that will never get any mortgage and follows Dave Ramsey philosophy on debt.
User avatar
physixfan
Posts: 243
Joined: Wed Apr 03, 2019 4:09 pm

Re: Should I use margin to buy a balanced fund?

Post by physixfan »

I realized that IB offers only 1.05% margin loan interest rate if the balance is >$100k. This seems very attractive. Is it a good idea to borrow money now (this sounds like market timing)?
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: Should I use margin to buy a balanced fund?

Post by Nathan Drake »

Rob Bertram,

I am curious. Let's say I've been an investor for 10 years. I have $1M++ in investible assets. Roughly $500K is in retirement accounts, the other $500k is in taxable. I contribute roughly $3K / Month to taxable accounts. My portfolio is structured as 100% equities, 40% US, 60% International. Of those equities, 50% is in small cap value.

I have an M1 Finance account with 2% margin.

How would you structure your use of leverage for this scenario? Avoidance of margin calls is of utmost importance, as is minimizing taxable events (short term cap gains).
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Topic Author
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: Should I use margin to buy a balanced fund?

Post by Rob Bertram »

It looks like M1 only supports Reg-T margin accounts and has a 25% maintenance margin for stocks and ETFs. Maintenance margin determines when a broker will do a margin call. For example, if you deposited $10k and borrowed an additional $10k for a portfolio value of $20k, your maintenance margin would be $2500 (which is 25% of $10k). This means that they will start selling assets once your portfolio drops by $7500 ($7.5k/$20k = 37.5%) to $12500.

You would have to use futures in order to get the better maintenance margin (4% last I checked). Unfortunately, they are not tax efficient which means that they would only work in a tax-advantaged account. Interactive Brokers has a Portfolio Margin account available to people with $110k or more. They use a risk-based assessment of your entire portfolio to determine the maintenance margin. For total-market stock index funds, it is around 10%. In that same example, your $20k portfolio would need to drop by $9k (9/20 = 45%) before a margin call would happen on a 10% maintenance margin.

You have to ask yourself why you are tilting heavily towards small-cap stocks. Are you reaching for more returns by using a more volatile asset? If you want to use leverage, volatility is your enemy. You want to start with a portfolio that has the best risk-adjusted return. And for that, the market portfolio is mathematically the best choice.

I am indifferent on international stock. Multiple funds in your asset means that you've got to worry about rebalancing on top of re-leveraging. For me, simplicity beats any tiny return that might result from manual rebalancing. Either go with a total-world index fund or stick with a single stock ETF. From what I remember, total-world has a higher historical volatility than a Total-US stock index. You'll need to determine the max drawdown of your portfolio, calculate the duration of that drawdown, and add the appropriate margin costs. That will then give you a feeling for the worst-case. Add an additional 10% to the drawdown and use that in combination with your margin requirement to determine your maximum leverage.

If you stick with M1, you are likely looking at a maximum of 1.4x leverage during accumulation until your account crosses $1m net and 1.2x leverage after that.
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: Should I use margin to buy a balanced fund?

Post by Nathan Drake »

Rob Bertram wrote: Mon Aug 09, 2021 8:31 am It looks like M1 only supports Reg-T margin accounts and has a 25% maintenance margin for stocks and ETFs. Maintenance margin determines when a broker will do a margin call. For example, if you deposited $10k and borrowed an additional $10k for a portfolio value of $20k, your maintenance margin would be $2500 (which is 25% of $10k). This means that they will start selling assets once your portfolio drops by $7500 ($7.5k/$20k = 37.5%) to $12500.

You would have to use futures in order to get the better maintenance margin (4% last I checked). Unfortunately, they are not tax efficient which means that they would only work in a tax-advantaged account. Interactive Brokers has a Portfolio Margin account available to people with $110k or more. They use a risk-based assessment of your entire portfolio to determine the maintenance margin. For total-market stock index funds, it is around 10%. In that same example, your $20k portfolio would need to drop by $9k (9/20 = 45%) before a margin call would happen on a 10% maintenance margin.

You have to ask yourself why you are tilting heavily towards small-cap stocks. Are you reaching for more returns by using a more volatile asset? If you want to use leverage, volatility is your enemy. You want to start with a portfolio that has the best risk-adjusted return. And for that, the market portfolio is mathematically the best choice.

I am indifferent on international stock. Multiple funds in your asset means that you've got to worry about rebalancing on top of re-leveraging. For me, simplicity beats any tiny return that might result from manual rebalancing. Either go with a total-world index fund or stick with a single stock ETF. From what I remember, total-world has a higher historical volatility than a Total-US stock index. You'll need to determine the max drawdown of your portfolio, calculate the duration of that drawdown, and add the appropriate margin costs. That will then give you a feeling for the worst-case. Add an additional 10% to the drawdown and use that in combination with your margin requirement to determine your maximum leverage.

If you stick with M1, you are likely looking at a maximum of 1.4x leverage during accumulation until your account crosses $1m net and 1.2x leverage after that.
Small cap value stocks have a similar risk adjusted return to the market.

I am tilting to SCV due to the diversification benefits in addition to a possible premium. US TSM is prone to prolonged periods of poor performance. Adding international and SCV smoothes the returns and might command a slight premium for additional risk, leading to more regular positive outcomes.

Not sure if using leverage will be all that worthwhile if the margin calls could start coming with just a 35-50% drop. At least, not sure if the risk would be worth it.

My goal is to have a highly diversified portfolio first, and was hoping to achieve some time diversification with leverage
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Derek Detour
Posts: 3
Joined: Fri Oct 08, 2021 10:20 am

Re: Should I use margin to buy a balanced fund?

Post by Derek Detour »

Great post Rob, I've read the whole thing.

Someone remind me why leverage is a bad thing? It looks pretty good on Portfolio Visualizer :D Of course, that's with "free money" at 2% instead of tracking actual interest rates.

More seriously, what's the best way to invest with a small / value tilt on leverage? Use portfolio margin at IB? Futures sound appealing, but it sounds like they're pretty well limited to the eMinis like S&P 500 -- and even then they start at what, $100k? I read Lifecycle Investing twice, but my eyes crossed at all the discussion of LEAPs and futures, and the posters in this thread landed on futures being cheapest in terms of interest rate (but margin being best in taxable accounts).

And could someone please explain to me how the Kelly Criteria lands on 1.14 as ideal leverage? If I understand correctly it has to do with volatility drag from the standard deviation combined with the risk of ruin. But with reasonable leverage (say 1.5x with portfolio margin maintenance requirements and contributing $3000 monthly), risk of ruin in the sense of a margin call would seem quite low on 100% stocks. And when I looked up the Kelly Criterion, I found discussion that it's less applicable to bets that aren't "100% loss" on the downside without some adjustments. Cheers!
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Should I use margin to buy a balanced fund?

Post by skierincolorado »

Derek Detour wrote: Fri Oct 08, 2021 10:32 am Great post Rob, I've read the whole thing.

Someone remind me why leverage is a bad thing? It looks pretty good on Portfolio Visualizer :D Of course, that's with "free money" at 2% instead of tracking actual interest rates.

More seriously, what's the best way to invest with a small / value tilt on leverage? Use portfolio margin at IB? Futures sound appealing, but it sounds like they're pretty well limited to the eMinis like S&P 500 -- and even then they start at what, $100k? I read Lifecycle Investing twice, but my eyes crossed at all the discussion of LEAPs and futures, and the posters in this thread landed on futures being cheapest in terms of interest rate (but margin being best in taxable accounts).

And could someone please explain to me how the Kelly Criteria lands on 1.14 as ideal leverage? If I understand correctly it has to do with volatility drag from the standard deviation combined with the risk of ruin. But with reasonable leverage (say 1.5x with portfolio margin maintenance requirements and contributing $3000 monthly), risk of ruin in the sense of a margin call would seem quite low on 100% stocks. And when I looked up the Kelly Criterion, I found discussion that it's less applicable to bets that aren't "100% loss" on the downside without some adjustments. Cheers!
You can simulate actual borrowing costs in Portfolio Visualizer by shorting CASHX.

I would not small/value tilt with leverage. As Rob pointed out, small-cap has high volatility. You want to leverage assets with the highest risk-adjusted returns. Small cap has much worse risk adjusted returns since 2005. Since 1955, small-cap has the same risk adjusted return as total market. That doesn't give us any reason to tilt small-cap, if anything it suggests we should tilt away.

Rob and I seem to have similar ideas. Leveraging a balance portfolio with the highest sharpe ratio. I have a 45/55 portfolio leveraged 3x. The bond portion is intermediate term treasuries.

This thread has a lot of similarities to a thread I started recently:
viewtopic.php?f=10&t=357281

If you are intersested in factor investing, the beta and momentum factors actually substantially increase risk-adjusted return, unlike the size and value factors which increase both risk and return roughly proportionally. I tilt slightly to low-beta, but mostly just for fun.

In terms of how to tilt with leverage, it's pretty easy. The best way in an IRA would be futures. A small/value tilt in a 100k IRA could look like:

4 MES contracts (90k exposure to S&P500)
25k cash collateral for futures
25k VTI
50k VBR

total equity exposure = 165k (1.65x leverage).

If you wanted more leverage, you could do 6 MES (135k exposure), 35k cash collateral, 65k VBR. That's 200k in equity exposure, or 2x leverage.

Of course, I wouldn't tilt to small/value. I would either not tilt and only own enough VB/VBR to make me market weight, or I would tilt to something with high risk-adjusted returns, like low-beta funds.

In a taxable account you would likely be best served by borrowing on margin. You could refinance the margin to a lower interest rate using a box-spread. Current IBKR margin rates are 1.1-1.6% and box spreads are .7%.
Derek Detour
Posts: 3
Joined: Fri Oct 08, 2021 10:20 am

Re: Should I use margin to buy a balanced fund?

Post by Derek Detour »

skierincolorado wrote: Fri Oct 08, 2021 6:01 pm

You can simulate actual borrowing costs in Portfolio Visualizer by shorting CASHX.

I would not small/value tilt with leverage. As Rob pointed out, small-cap has high volatility. You want to leverage assets with the highest risk-adjusted returns. Small cap has much worse risk adjusted returns since 2005. Since 1955, small-cap has the same risk adjusted return as total market. That doesn't give us any reason to tilt small-cap, if anything it suggests we should tilt away.

Rob and I seem to have similar ideas. Leveraging a balance portfolio with the highest sharpe ratio. I have a 45/55 portfolio leveraged 3x. The bond portion is intermediate term treasuries.

This thread has a lot of similarities to a thread I started recently:
viewtopic.php?f=10&t=357281

If you are intersested in factor investing, the beta and momentum factors actually substantially increase risk-adjusted return, unlike the size and value factors which increase both risk and return roughly proportionally. I tilt slightly to low-beta, but mostly just for fun.
Cheers and thanks for the link! I got interested in leverage from reading about the low volatility factor (betting against beta or BAB), and that research is always leveraged on a risk parity basis to generate excess returns when looking at historical data. From studying the topic further, though, it seems like the high turnover and issues like bid-ask spread would make BAB not as valuable in real life, even with leverage.

And I see your point that the volatility drag gets multiplied meaning you really want to focus on Sharpe ratio over, say, CAGR or Sortino ratio. It makes me wonder if effectively leverage multiples the "free lunch" of diversification (i.e. higher risk-adjusted returns per the Sharpe ratio). I have difficulty wrapping my brain around the idea that a leveraged asset with higher CAGR + higher volatility would return less than a leveraged asset with lower CAGR + lower volatility, but I see the logic in it.
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Should I use margin to buy a balanced fund?

Post by skierincolorado »

Derek Detour wrote: Fri Oct 08, 2021 6:37 pm
skierincolorado wrote: Fri Oct 08, 2021 6:01 pm

You can simulate actual borrowing costs in Portfolio Visualizer by shorting CASHX.

I would not small/value tilt with leverage. As Rob pointed out, small-cap has high volatility. You want to leverage assets with the highest risk-adjusted returns. Small cap has much worse risk adjusted returns since 2005. Since 1955, small-cap has the same risk adjusted return as total market. That doesn't give us any reason to tilt small-cap, if anything it suggests we should tilt away.

Rob and I seem to have similar ideas. Leveraging a balance portfolio with the highest sharpe ratio. I have a 45/55 portfolio leveraged 3x. The bond portion is intermediate term treasuries.

This thread has a lot of similarities to a thread I started recently:
viewtopic.php?f=10&t=357281

If you are intersested in factor investing, the beta and momentum factors actually substantially increase risk-adjusted return, unlike the size and value factors which increase both risk and return roughly proportionally. I tilt slightly to low-beta, but mostly just for fun.
Cheers and thanks for the link! I got interested in leverage from reading about the low volatility factor (betting against beta or BAB), and that research is always leveraged on a risk parity basis to generate excess returns when looking at historical data. From studying the topic further, though, it seems like the high turnover and issues like bid-ask spread would make BAB not as valuable in real life, even with leverage.

And I see your point that the volatility drag gets multiplied meaning you really want to focus on Sharpe ratio over, say, CAGR or Sortino ratio. It makes me wonder if effectively leverage multiples the "free lunch" of diversification (i.e. higher risk-adjusted returns per the Sharpe ratio). I have difficulty wrapping my brain around the idea that a leveraged asset with higher CAGR + higher volatility would return less than a leveraged asset with lower CAGR + lower volatility, but I see the logic in it.
To the bolded: higher CAGR + higher volatility isn't the problem. It's when volatility increases more than CAGR. Since 2005 small/value has had the same CAGR but higher volatility. Over a longer-horizon, it's closer, but why take the risk? Even if the sharpe ratio (risk-adjusted return) is the same as total market it's still less diversified for no benefit to risk-adjusted return. If we're going to deviate from the market portfolio, it should be seeking substantially higher risk-adjusted returns. The only examples I know of are the low-beta and momenum factors. Deviating from the market portfolio is still a risk, so I only tilt slightly.
LazyOverthinker
Posts: 133
Joined: Wed Jun 08, 2022 5:03 am

Re: Should I use margin to buy a balanced fund?

Post by LazyOverthinker »

Rob, did you end up switching from ZT leverage to pure stock leverage? At one point you said you were 20x levered in 10% TSM/5% LTT /85% STT. It seems that would have just survived recent events. But elsewhere I read you were 26x levered, which would recently be game over unless you managed it on the way down.

Image
https://imgur.com/i8VnKjE

(not sure what image website actually work with the "img" command)
Topic Author
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: Should I use margin to buy a balanced fund?

Post by Rob Bertram »

LazyOverthinker wrote: Sat Jun 25, 2022 4:41 am Rob, did you end up switching from ZT leverage to pure stock leverage? At one point you said you were 20x levered in 10% TSM/5% LTT /85% STT. It seems that would have just survived recent events. But elsewhere I read you were 26x levered, which would recently be game over unless you managed it on the way down.
You are correct. I switched to 2x total stock ETFs a few years ago. The main reason is that I have a life (job, family, vacations, etc.) and might be too busy to roll futures at the optimal time. It is also much more tax efficient.

You are also correct. I had a leverage glide path where the ratio varies. Early in the journey when my contributions to the account were large relative to the portfolio basis, I could take on more risk. Keeping things simple and sitting on a larger portfolio has me in the middle of the glide path. Though, I should repeat that this is my "play" account. I take significantly more risk here than I do with my retirement accounts. Everyone needs to understand their risk tolerance.
LazyOverthinker wrote: Sat Jun 25, 2022 4:41 am Image
https://imgur.com/i8VnKjE

(not sure what image website actually work with the "img" command)
I believe that I fixed the link. The forum BBCode logic is looking for an image and not a web page. I added ".png" to your url, and it seems to work.
Beliavsky
Posts: 1233
Joined: Sun Jun 29, 2014 10:21 am

Re: Should I use margin to buy a balanced fund?

Post by Beliavsky »

If you want only modest leverage you can use futures to own bonds synthetically. Since Treasury bond interest is taxable as ordinary income, it's advantageous to convert some of this interest to capital gains via futures. For example, for a $1mil portfolio you could invest $950K in an S&P 500 index fund and use $50K in T-bills as margin for $2mil in Treasury note futures. According to the CME, the margin requirement for $120K (one contract) of Treasury notes is only $1800.
Count of Notre Dame
Posts: 448
Joined: Fri Oct 11, 2013 1:08 pm

Re: Should I use margin to buy a balanced fund?

Post by Count of Notre Dame »

From what I've read about investing on margin, the main risk is avoiding a margin call in which you'd be forced to sell your securities at a market bottom. The use of bonds would lower the potential volatility of the portfolio, so to the extent you didn't have liquid funds to inject into your brokerage as the market was tanking, I'd expect you to eventually be forced to start allocating to bonds as your account grows in size, or to delever the use of margin altogether. I think modern portfolio theory and the thousands of posts regarding asset allocation would be up to each person to decide in which camp they fall, but I personally plan on floating to a 60/40 asset allocation as my margin account grows too large to avoid a margin call with my availabile liquidity.
Post Reply