[arcticbull]

Bear in mind Personal Finance is pretty conservative. Depending on how much time you have in the market you can take some more aggressive bets. I'm not suggesting r/WallStreetBets style investing but something like a risk parity adjusted pairing of 3X leveraged S&P with 3X leveraged treasuries can yield dramatically better returns over time [1]. I'm not recommending it per se, to each their own risk tolerance and research, but suggesting that if you have time in the market, consider being more aggressive.

I'd suggest something like this.

(1) Have 6 months of expenses set aside.

(2) Max out your tax-advantaged retirement accounts.

(3) Allocate some amount of capital to traditional or conservative investments, and some amount to more aggressive plays. The more time you have in the market, the more aggressive you can afford to be. Having both types of investments will give you the comfort you need during rough times that your riskier plays come through eventually.

(4) If you're looking at property, consider setting aside a down-payment. Keep in mind that if you're employed, buying a house in cash may not be the optimal strategy as you can deduct large quantities of your mortgage payments, giving you, with 20% down, a 5X leveraged investment in real-estate with deductible expenses and historically-low interest rates. Mortgage interest rates are just a hair over inflation, and when you deduct the interest from your taxes, you're actually saving money with a mortgage.

(5) Now that you have a large chunk of capital, you can consider financing some purchases yourself at extremely low rates by taking advantage of margin borrowing. InteractiveBrokers offer 1.5% interest margin loans, and you could, if within your risk tolerance, borrow some amount of money collateralized by your (safe) equity positions. This 1.5% interest is also tax-deductible. Obviously be careful, a margin call is something to avoid, but against a $450K portfolio, I personally wouldn't sweat borrowing $45K.

One thing I was able to do personally is borrow enough on margin to make a down-payment on a property. This allowed me to deduct the entire balance of my mortgage, beyond the $750K cap, and at 1.5% the margin interest is much lower than if I'd financed the whole thing.

[1] https://www.bogleheads.org/forum/viewtopic.php?t=272007

[jannotti]

Please stay away from leverage equity index funds.

https://capitalallocatorspodcast.com/wp-content/uploads/2017...

Edit: For more clarity - risk parity can make sense, but I don't think you ever need to use leverage on your equities to get risk parity. The fundamental insight of risk parity investing is that at commonly recommended ratios (50/50, 60/40) the risk (variance) from equities totally dominates the risk from bonds. So the risk parity advice is usually something with a much higher bond mix, but the entire portfolio is leveraged. But DO NOT use levered ETFs that recognize, say, 3x the DAILY movement of the S&P to do this. They don't do what you think. Read that link, or compute the following two scenarios:

1) Market goes up 1.1% on odd days, down 1% on even days. That yields about 9% (200 trading days). But a 3x daily etf product would only get you about 22%, not 27%.

2) Market foes up 1% on odd days, down 1.1% on even. That, sadly, means you lose about 11% on the year. If you use a 3x DAILY etf product, you lose around 75%.

[arcticbull]

Please read the write-up before replying with blanket statements that aren't relevant in this case :)

That issue is addressed in the bogleheads post explicitly ("How much does the leverage cost?" and "Don't you know that leveraged ETFs are only intended to be held for one day?"), basically the ETFs are risk parity adjusted, and the volatility in the ETFs actually what generates the returns. The strategy makes money from volatility, and the 3X leverage is used to add volatility in, exaggerating the returns.

I think you might find the post interesting because it seems like you are interested in investing. What you're saying is again explicitly addressed there, and factored into the calculation. They work an example of that kind of decay, and how it's mitigated. Specifically, it doesn't matter that you have volatility decay in one of the ETFs because they're uncorrelated, and when one goes up the other goes down, canceling out the effect.

Your blanket statement does not apply to this specific strategy. It's not wrong in general, but it's not relevant here.

If you don't want to read the bogleheads write-up it's also addressed on Seeking Alpha [1].

> "That, sadly, means you lose about 11% on the year."

Not if, as you see in the write-up, you pair it with an uncorrelated 3X leveraged asset and rebalance periodically.

The post includes a backtest to 1987.

[1] https://seekingalpha.com/article/4308489-why-leveraged-etfs-...

[blacksqr]

I've been using 3x ETFs for the past few years to pursue a Permanent Portfolio style strategy in one account, and an All Weather strategy in another, rebalance annually, and both have been doing well.

Low net volatility, high returns. Backtesting of the strategy shows total returns just under 3x the return of the unleveraged portfolios, just what I expect given the leverage costs.

I expect both strategies to be both market-agnostic and age-agnostic. About as close to fire and forget as you can get.

[kristopolous]

The right advice is "don't use a leveraged fund unless you want to be involved and look at the market every day"

I've made good money on them as well, but I shuffle money in and out frequently.

It's not a good strategy unless you really want to study things.

[arcticbull]

That’s true in general, but this strategy is basically set it and forget it (rebalance quarterly for best results), and it works because it’s been carefully balanced to offset decay.

[rayuela]

how do you offset the decay?

[BlackJack]

I like the strategy and employ it on a portion of my 401k. I think you need to do it in a tax-advantaged account, otherwise rebalancing + short term gains will eat away your profits.

Also, that strategy fails in a rising interest rates environment like in the 50s and 60s (not sure of exact years). Fed has indicated keeping rates low for the next two years, but if they start hiking rates after, I think the strategy would underperform.

[arcticbull]

You are probably better off doing this in a tax advantaged account, or if you have a large lump sum you want to invest you can do the rebalancing by adding money over time instead of selling the winner and redistributing it to the loser.

The strategy would fail if both interest rates went up and equities went down or stayed flat. While the potential exists for an underperform condition there in a couple of years I personally suspect the fed won’t raise rates unless equities are performing spectacularly. I’m quite skeptical if their 2 year time frame, even to say we may be looking at the new normal.

[jannotti]

I appreciate your measured response. I certainly had not dug deep into these daily 3X funds, as the daily/drag aspect seemed (seems?) clearly a problem. But, I can't just pretend the 10yr history of UPRO doesn't exist. I'll have to think more about this.

If it were possible (I recognize it isn't, due to margin limits), would it not be better to be 3x leveraged in your margin account, and simply buy the basic S&P and bond products? Wouldn't that avoid the "drag", and you'd end up better off?

[hcknwscommenter]

I don't think you can deduct the interest on the margin loan. The rules are fairly simple. The margin loan funds must be used for investment and not for use. Putting a down payment on a primary residence is certainly personal use.

[arcticbull]

If you have $10K in your checking account and a $440K investment portfolio, and you need to make a $90K down payment, it works like this:

(1) Sell $80K in assets, and use the proceeds, on top of your checking account balance to make a wire transfer.

(2) Now you have $360K in your investment account. You take a margin loan out in the amount of $80K.

(3) Use that $80K to re-establish your $440K investment portfolio.

You haven't used your margin loan to make a down payment, you've sold your assets and used the proceeds to make a down payment. You've then re-taken your investment position using a margin loan. The margin loan isn't collateralizing your down payment, it's making up for a reduction in the net liquidation value of your investment account as a result of your having used it to make a down payment, allowing you to retain your the prior level of exposure to equities in your trading account.

You don't have to go through the actual song and dance, and re-taking your equity positions would result in an IRS wash sale anyways, but that's why withdrawing cash on margin to make a down payment means the margin loan remains an investment expense -- it's there to allow you to retain your desired level of exposure to equities.

[bllguo]

thanks for the link, i will need to give this a thorough read. I understand why most investing advice is conservative and I do plan on having most of my money in those strategies, but I've always thought there must also exist some relatively simple but informed methods for those with higher risk appetites