ask Dcifrths...well, anything...about finance/mkts/ports that is.

[DcifrThs]

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Thanks Barron

Why would leveraging US TIPS be better than leveraging ETFs on 2yr bonds?

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2yr bonds have higher correlations to the rest of a well designed portfolio than TIPS. TIPS at the moment have a higher expected sharpe ratio because institutions here (unlike the UK) don't take advantage of the diversification benefits so portfolios typically underallocate to TIPS at present than would otherwise be optimal.

so leveraging something with similar risk adjusted returns and better diversification benefits to the same risk level as the rest of your portfolio risk target is automatically better. add the fact that it has higher risk adjusted returns and you see that leveraging TIPS to me is more valuable than leveraging 2yrs

NOTE: for this argument, assume i mean same duration.

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Why are you recommending leveraging bonds instead of equities?

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equities come pre-packaged as levered instruments and are already risky enough. the debt/equity ratio is rarely 0. i don't know but i'm sure we can go to damadoran's site and calculate the average debt/equity ratio.

anyways, equities are already risky enough and give great returns to compensate for that risk. but in sharpe ratio space (risk adjusted returns), they are similar to every other asset class.

now, that said, once you construct your portoflio and you want a risk level higher than equities, you do need to borrow and individuals are in a worse spot here than institutions.

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What would be the best way to get a good rate on the money borrowed for leveraging?

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well you don't necessarily need to borrow money to get leverage to the risk level of equities.

but overall, this is where it is tricky. for individuals, it is pretty much impossible so getting a .70 sharpe ratio is also close to impossible.

interactivebrokers i believe has leveraged bond funds for relatively small fees though.

with those and CCFs, you can probably hit .4 at worst to .55 or even .6 risk adjusted returns by levering those bonds to the risk level of equities.

it just depends on how well you cosntruct the portfolio.

Barron

[Newt_Buggs]

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well you don't necessarily need to borrow money to get leverage to the risk level of equities.

but overall, this is where it is tricky. for individuals, it is pretty much impossible so getting a .70 sharpe ratio is also close to impossible.

interactivebrokers i believe has leveraged bond funds for relatively small fees though.

with those and CCFs, you can probably hit .4 at worst to .55 or even .6 risk adjusted returns by levering those bonds to the risk level of equities.

it just depends on how well you cosntruct the portfolio.

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Would it maybe be best to use a financial advisor to help me with this if I can find one that is good? This is pretty far beyond my scope of understanding so I would probably need someone to hold my hand through the process especially since I wouldn't know how to construct an optimized leveraged portfolio to get a good sharpe ratio.

[DcifrThs]

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well you don't necessarily need to borrow money to get leverage to the risk level of equities.

but overall, this is where it is tricky. for individuals, it is pretty much impossible so getting a .70 sharpe ratio is also close to impossible.

interactivebrokers i believe has leveraged bond funds for relatively small fees though.

with those and CCFs, you can probably hit .4 at worst to .55 or even .6 risk adjusted returns by levering those bonds to the risk level of equities.

it just depends on how well you cosntruct the portfolio.

[/ QUOTE ]
Would it maybe be best to use a financial advisor to help me with this if I can find one that is good? This is pretty far beyond my scope of understanding so I would probably need someone to hold my hand through the process especially since I wouldn't know how to construct an optimized leveraged portfolio to get a good sharpe ratio.

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well yea...

but the problem is they'll likely steer you to a stock/bond mix that will give a .35 expected sharpe ratio in all likelihood...

i was hoping to shed some light on the theory behind this more than provide youa step by step guide to portfolio construction...though if you can gain that here then allt he better.

sorry [img]/images/graemlins/frown.gif[/img]...seems like i failed you here newt...

Barron

[Newt_Buggs]

Hh come on, its not like its your fault that I'm ignorant. I really appreciate the help and maybe some day when I have more knowledge and experience this is something that I can look into more and add to my portfolio.

[DcifrThs]

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Hh come on, its not like its your fault that I'm ignorant. I really appreciate the help and maybe some day when I have more knowledge and experience this is something that I can look into more and add to my portfolio.

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well, there are 3 things you can do. and i don't think you're ignorant.

1) ask your financial advisor to hedge your int'l equity exposure (a long ass post ont his i think is towards the front of this thread)

2) add CCFs (collateralized commodity funds) in a small amount to your portfolio. this should be relatively easy and cost a minimal amount (they are funds that take a "100% allocation" and invest some amount in US treasuries and the rest in a commodity futures exposure. the UStreasury investment brings down the overall volatility of that investment, while still preserving the diversification benefits of commodities)

3) get leveraged global TIPS in your portfolio.

Barron

[danzasmack]

Dcifr,

In 45 days someone is going to give you a large some of money to invest. You understand economics well and have a strong grasp of higher level mathematics. However, you have been out of the loop as far as financial markets goes.

What is your plan of action?

[DcifrThs]

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Dcifr,

In 45 days someone is going to give you a large some of money to invest. You understand economics well and have a strong grasp of higher level mathematics. However, you have been out of the loop as far as financial markets goes.

What is your plan of action?

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what do you mean by "invest"?

do you mean you want to start trading securities in a actively managed portfolio?

or do you mean you want to construct a passive portfolio to yield the highest sharpe ratio possible?

thanks,
Barron

[danzasmack]

actively managed

[DcifrThs]

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actively managed

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i'm trying to put myself in the shoes of somebody who is smart and has a foundation in economicsand wants to invest.

the first thing i'd do is learn about how to construct a portfolio (you need to be good at excel or matlab for this to test/play around).

you said you had strong econ background, but how are your math skills? and how much finance do you know (i.e. equity pricing? bond pricing? yield curve basics? Etc.)?

if all of that is solid, you're probably on a good track.

concurrantly to learning how to structure a portfolio of bets, you should also spend time every day catching up on what has been going on (i.e. read the fed's Q2 economic summary front to back) and read all the business/finance sections of the economist and comment/analysis of financial times (that have some relavence to markets).

then i'd start to outline where you think the world is heading. this is hard and takes time and work but you can do it. i start with fixed income in the US, UK, etc. and work out from there but you can start w/ equities or wherever. all markets play in together and there are typically some mispricings in every market...finding the ones worth investing in or the most aggregious shoudl be your job.

then once you have a few ideas, start small and open an account at interactive brokers.com

keep your daily VaR (not the best measure, but decent enough) to a very small level relative to your bankroll. so if you have 100k, maybe start with 3k in daily VaR. this might be tough since futures contracts require thousands in margin but daily moves on your portfolio shouldn't be huge (ideally you have uncorrelated positions or lowly correlated positions...here it helps to have diff bets, or relative value trades, since they don't correlate with directional bets and are typically less risky)

then incrementally add trades and manage the ones you have.

easier said than done but thats what i'd do if i were you.

or you can pick one market to invest in (say commodities or fixed income) and study the hell out of that and build a solely that market portfolio.

hopet his helps,
Barron

[8234joe]

I havent looked thru this post to see if this question was asked... I am looking to self-educate me, myself, and I. I am intesrested in the markets, and economies, but dont feel like spending the money on school. I am 30 years old and make deceny money. My goal is to be able to invest my own money myself thru an online broker. Any ideas?