RR #80 - A Planning Checlist, Portfolio Concentration, and Leverage
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- Опубликовано: 22 окт 2024
- For our very first episode of 2020, we kick things off with some quick updates before sharing Cameron’s ten best financial planning strategies for the new year. After laying out some statistics about the great asset class returns that 2019 saw, we get into the wonderful listener questions we have been receiving over the break. Our first topic is about buying versus leasing cars, and Ben shares his thoughts on some of the reasons he recently converted to leasing. Our second question is about using credit to invest in a TFSA and acts as a great segue into our main topic for today’s show: implementing leverage in an investment portfolio. We discover some fascinating outputs given by a Monte Carlo simulation that compares the reliability of expected returns between diversified and concentrated investment portfolios. Surprisingly, the concentrated portfolio, while unpredictable, actually produces higher returns, even in its worst iterations. We start to think of concentrated portfolios as just another form of leveraging after comparing IUSV to VLUE ETFs, and then move on to the idea of time diversification as it relates to implementing leveraging in Lifecycle investing. As always, we end off with our bad advice of the week, with the 60/40 stocks and bonds model taking centre stage, so hop on and join us for the ride!
Key Points From This Episode:
05:55 - Different corporate cultures and the value of instilling one in your workplace.
08:48 - A top ten list of strategies for financial planning in 2020.
15:34 - Asset class returns from 2019 which were very high across the board.
19:18 - Market unpredictability and why to buy a second-hand car but lease a new one.
22:49 - When to use your unsecured line of credit to invest in a tax-free savings account.
24:51 - Three things that structure a belief: values, biases, and models.
27:49 - Ben’s model and expected returns of diversified vs concentrated portfolios.
34:01 - When concentrated portfolios work well: if high performing stocks are chosen.
35:47 - Ways to achieve higher factor exposure with IUSV vs VLUE ETFs.
40:40 - How unexplained portions of returns are the costs of leveraging via concentration.
42:47 - Why investing using leverage creates ‘time diversification’ and higher yields.
42:47 - Ways for young people to leverage their savings: concentration, derivatives, etc.
50:52 - Time decay on leveraged ETFs and other reasons for leveraging not being a joke.
55:36 - Why ditching a 60/40 portfolio denies market efficiency by increasing risk.
Books From Today’s Episode:
What You Do is Who You Are - amzn.to/2AZ7eAU
Links From Today’s Episode:
Rational Reminder Website - rationalremind...
Barry Ritholtz - ritholtz.com/
Masters in Business - www.bloomberg....
Ben Horowitz - www.forbes.com...
Andreasson Horowitz - a16z.com/
Playing with FIRE - playingwithfir...
RRP with Wes Gray - www.pwlcapital...
The Portfolio Visualizer Website - www.portfoliov...
Allison Schrager - www.allisonsch...
Larry Swedroe - buckinghamadvi...
The Rational Reminder is presented as an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. The funds and portfolios discussed are examples only and may not be appropriate for your individual circumstances.
05:55 - Different corporate cultures and the value of instilling one in your workplace.
08:48 - A top ten list of strategies for financial planning in 2020.
15:34 - Asset class returns from 2019 which were very high across the board.
19:18 - Market unpredictability and why to buy a second-hand car but lease a new one.
22:49 - When to use your unsecured line of credit to invest in a tax-free savings account.
24:51 - Three things that structure a belief: values, biases, and models.
27:49 - Ben’s model and expected returns of diversified vs concentrated portfolios.
34:01 - When concentrated portfolios work well: if high performing stocks are chosen.
35:47 - Ways to achieve higher factor exposure with IUSV vs VLUE ETFs.
40:40 - How unexplained portions of returns are the costs of leveraging via concentration.
42:47 - Why investing using leverage creates ‘time diversification’ and higher yields.
42:47 - Ways for young people to leverage their savings: concentration, derivatives, etc.
50:52 - Time decay on leveraged ETFs and other reasons for leveraging not being a joke.
55:36 - Why ditching a 60/40 portfolio denies market efficiency by increasing risk.
I would love to see Ben discuss the famous HFEA strategy of 55% UPRO 45% TMF versus his 5 factor model portfolio.
I’ve listened to this episode over and over always feeling like I’ve been missing something and I found what it was. The question for you guys is, would it be better for a retiree to take lines of credit against their portfolios rather than selling assets and pulling money out? Also wouldn’t this be safer given they are in more equities than traditionally and the interest rates are low? What’s the practicality of this? Thanks a lot guys I love what you do!
When i heard the comment that the South African fellow made i felt like, this guy read my mind, one of the reasons that made me like this podcast is that it is not US based, i am in Malta and i appreciate a lot to hear a financial podcast that actually gives me information that i can apply here where i live.
I love the idea of a forum or something alike where we can discuss ideas and share our opinions, that would be AWESOME i mean seriously AWESOME
Thanks for the feedback. The forum idea is a top priority right now. We just need to decide on the best way to do it.
@@BenFelixCSI i suggest a Facebook group or a discord server, not as a permanent solution but as an interim one.
Discord is a good option.
Why did you introduce us to portfolio visualizer. Cant stop playing with it.
Ben your point on borrowing when you're young so that you got all those years for compounding to work & being able to ride through bad cycles is really good. Particularly the part where your sequence of return risk towards the beginning of retirement becomes irrelevant if you leverage when you're young.
The only problem is that nobody will lend you at a young age EXCEPT to buy a house.
Great podcast.
One interesting levered etf is SDYL, it tracks the dividend aristocrats and resets it's leverage monthly (so it has slightly less volatility drag).
On the topic of levered ETFs: they too can be subject to margin calls, it says so in their fine print section on risks. :)
Both interesting points. Thanks.
Only if the underlying asset falls greater than 33% in one day, for example in QQQ for TQQQ. Which is very very unlikely.
Hi Ben I read the paper on time diversification, I understand that the option deep in the Money leaps were a great way to implement the strategy, also to my knowledge it would get rid of foreign withholding tax at the same time, so I was wondering why didn’t you consider this option? Thanks!
51:13 LETFs
Does modern 5-factor model account for existance of giant transnational conglomerates which weren't as much a thing during the period from which empirical data is taken? Maybe smallcap underperformance is the new norm.
There have been large multinational world-changing companies many times over. They are all in the data.
US Steel
At&T
IBM
Standard Oil
GE
Eastman Kodak
Even if the current largest companies are different, that doesn't change how asset pricing works. Riskier assets have higher expected returns than safe assets.
Great episode.
I've been toying with the idea of combining lifecycle investing with the Smith Manoeuvre. That is, with each principal reduction payment I re-borrow and invest- but instead of just investing that amount, I would lever up. My only struggle is finding how to implement this strategy.
The banks have up to 3-1 leverage loans with select mutual funds.. IBKR has margin loans.. Do I buy broad market ETFs or concentrate the portfolio. Much to think about. Any ideas?
These are bigger questions than I can answer in a YT comment. In terms of flexibility in the amount of leverage I think futures are worth a look. That's not to say that you should want to lever up that much, but that's another discussion entirely.
43:02 bookmarking
I really wanted to know if you have ever heard of or came across of this portfolio that I saw on BoggleHeads forum of 45% UPRO and 55% TMF? What thoughts do you have on this and how reliable is this data that he provided? I’m looking to replicate it myself but haha its a big deal.
Here’s the link to the forum: www.bogleheads.org/forum/viewtopic.php?f=10&t=272007
It's a lot of risk, and it is not for the heart. I have done this in 2013 along with friends. TRUST ME, it is NOT for the heart. Most people bailed starring at a 50% lose for months on ends. I have a HIGH risk tolerant, so it's different for me.
@@tiendoan1333 What have your returns been? Are you still doing it?
@@Fenzaz UPRO has done incredibly well and even recovered and surpassed it’s pre-pandemic highs.