My daughter is a millionaire

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
Cat, isn't the real issue here that annual variance is essentially meaningless when viewed over a 65 year timeframe?

In other words, If it can be demonstrated that avg annual returns over the very long term for an equity index only port will beat avg annual returns for a mixed port, doesn't annual risk become meaningless? (simply because max risk does not create a RoR situation, even to a black swan event)

[/ QUOTE ]

Yes, trying to make the argument that you have zero risk of loss over 20 years is overstating the case, it doesn't matter if the odds are zero or just tiny. Clearly you can never rule out hyperinflation, gross taxation changes, war, etc, all of which can also wreak havoc on bond returns.

The real argument is that beta is not very important over long periods (20 years +), maximizing your return is.

[/ QUOTE ]

traditionally, maxing return = investing in riskiest asset.

see my other post above and then ask me again if it still isn't clear that maxing return doesn't mean putting all your money in the highest returning asset you can find.

Barron

[DesertCat]

[ QUOTE ]


i do hope that this post provides some base though from which we can work off w/o the harshness [img]/images/graemlins/blush.gif[/img]

again, im sorry. obviously nothing personal.

take care,
Barron

[/ QUOTE ]

You've given me much to think about, stuff that probably slid by me on your earlier posts. It feels somewhat like a "free lunch" to me, I'll post a reply later after I've digested it and understand it better, and tell you if I still feel that way.

In the interim, let me point out that for OP, leveraging his bond exposure in his annuity probably isn't allowed. I don't think you meant that it was, just that we should consider this approach in general for portfolios.

[Humble Pie]

[ QUOTE ]
She is 8 months old

[/ QUOTE ]

KEEP HER AWAY FROM DAVID SKLANKSY.

[DcifrThs]

[ QUOTE ]
[ QUOTE ]


i do hope that this post provides some base though from which we can work off w/o the harshness [img]/images/graemlins/blush.gif[/img]

again, im sorry. obviously nothing personal.

take care,
Barron

[/ QUOTE ]

You've given me much to think about, stuff that probably slid by me on your earlier posts. It feels somewhat like a "free lunch" to me, I'll post a reply later after I've digested it and understand it better, and tell you if I still feel that way.

In the interim, let me point out that for OP, leveraging his bond exposure in his annuity probably isn't allowed. I don't think you meant that it was, just that we should consider this approach in general for portfolios.

[/ QUOTE ]

feel free to PM me your IM name. i'm more than happy to field questions. or post your thoughts here and i'll do likewise.

happy saturday! [img]/images/graemlins/smile.gif[/img]

Barron

[JacKnight21]

Regarding equity/bond/leverage/return

Excellent post on a difficult subject. This is complex to implement and maintain even rebalancing maybe needed if for example bond risk increases because of your leveraged exposure. Just stick to a Equity:Bond ratio of 90:10-80:20 you really only give up a tiny almost theoretical return but gain significantly less real risk. Plus its easy.

Even better take her next 10k installments and play the big one for her.

J

[DcifrThs]

[ QUOTE ]
Regarding equity/bond/leverage/return

Excellent post on a difficult subject. This is complex to implement and maintain even rebalancing maybe needed if for example bond risk increases because of your leveraged exposure. Just stick to a Equity:Bond ratio of 90:10-80:20 you really only give up a tiny almost theoretical return but gain significantly less real risk. Plus its easy.

Even better take her next 10k installments and play the big one for her.

J

[/ QUOTE ]

if you are familiar w/ excel then rebalancing isn't a problem. just set the model to a certain % of each asset and input the prices, then let the allocatino fall out. as prices change, instruct your broker to make the necessary adjustments. the consistency will more than make up for transaction costs.

also, bonds + equities is a start, but isn't the answer. it gets more complex b/c you want global equities, global aggregate bonds (govt + inv. grade corporate + high yield of multiple duration), global real estate, some commodities, emerging market debt and so on.

combining all of that will take advantage of the two last "free lunches" of leverage + diversification in risk terms.

Barron

[RikaKazak]

I think it's a smart idea to invest for your child's future. Your daughter will thank you TONS once she's capable of understanding what you've done for her.

[DcifrThs]

[ QUOTE ]
[ QUOTE ]


i do hope that this post provides some base though from which we can work off w/o the harshness [img]/images/graemlins/blush.gif[/img]

again, im sorry. obviously nothing personal.

take care,
Barron

[/ QUOTE ]

You've given me much to think about, stuff that probably slid by me on your earlier posts. It feels somewhat like a "free lunch" to me, I'll post a reply later after I've digested it and understand it better, and tell you if I still feel that way.

In the interim, let me point out that for OP, leveraging his bond exposure in his annuity probably isn't allowed. I don't think you meant that it was, just that we should consider this approach in general for portfolios.

[/ QUOTE ]

yea, i'll post the close to optimal non-leveraged allocation in vanguard & other funds once i get the OK.

and this is a free lunch. in fact, it is the last great arbitrage. combining diversification w/ leverage, that is.

the main reason comes from the fact that professional asset managers don't push their clients to use leverage. pension funds are slow to adapt to a changing environment and the general understanding of leverage in the investment community is flawed. put those facts together with the evidence that many huge funds aren't truly diversified & the widespread underutilization of diversification and you have a lovely free lunch [img]/images/graemlins/smile.gif[/img]

Barron

[DesertCat]

[ QUOTE ]

the event that falls out of historical volatility ranges that you draw parrallel to a huge bug htiting your windshield at 100mph is just not true. leverage by itself does not automatically increase your exposure to a black swan. what if i leverage a nominal bond 1.05:1? (this can be done by investing 100% of $X into a bond, then repo'ing that bond and taking the remaining cash and buying the same duration bond in a fund for 5% and taking the 95% of borrowed money- at the repo rate- and investing it in cash. NOTE: i've ignored some small costs here like the haircut & fees etc. but it is essencially the same)

[/ QUOTE ]

Let me see if I can understand this by taking off a small bite at a time. Let's assume we go 1.5-1 as you later said. I've got $100k I invest in 10 year treasury bonds, then I repo them, and use $50k of the proceeds to buy more 10 year treasuries.

What repo rate can I get? And I thought repos were only done for short periods, how do I keep a repo in force for long periods? What happens if interest rates double?

[DcifrThs]

[ QUOTE ]
[ QUOTE ]

the event that falls out of historical volatility ranges that you draw parrallel to a huge bug htiting your windshield at 100mph is just not true. leverage by itself does not automatically increase your exposure to a black swan. what if i leverage a nominal bond 1.05:1? (this can be done by investing 100% of $X into a bond, then repo'ing that bond and taking the remaining cash and buying the same duration bond in a fund for 5% and taking the 95% of borrowed money- at the repo rate- and investing it in cash. NOTE: i've ignored some small costs here like the haircut & fees etc. but it is essencially the same)

[/ QUOTE ]

Let me see if I can understand this by taking off a small bite at a time. Let's assume we go 1.5-1 as you later said. I've got $100k I invest in 10 year treasury bonds, then I repo them, and use $50k of the proceeds to buy more 10 year treasuries.

What repo rate can I get? And I thought repos were only done for short periods, how do I keep a repo in force for long periods? What happens if interest rates double?

[/ QUOTE ]

at this point, i don't know what it is but i can look it up via bloomberg when i get to it next. it was typically the "risk free rate" that we used at my old fund to calculate the monthly "cash rate." it closely follows the fed funds rate's moves very closely.

since repo's are only for 30days, you have to go through settle your cash flows every month. but instead of settling, you can typically get it set up so you only basically "check a box" if you want to repo for another month. so basically, money doesn't have to change hands all the time incurring too many transaction costs. you need to know your counterparty though.

in terms of a doubdling of rates, you end up being slightly more leveraged than exactly 1.5:1 since the cost of that leverage has many components. these include:

-loss from increased borrowing rate.
-gain from higher S-T investments at higher interest rate
-all fees associated with it.

basically, you get what you pay for: about 1.5* the exposure. there are some other considerations that are important but complicates things (like you get extra dividends that compound with treasuries etc.) those don't really matter though.

i know you want to get into the details but the more important place to be is at the portfolio level. so what happens if interest rates double and you have the same money invested in the dow jones? you'll lose a great deal, just like you would in bonds. so if you have a bond+equity portfolio, you lose a ton, as you would with many portfolios.

but, with a well diversified portfolio that uses this technique with TIPS, and real estate and commodities, you'll lose LESS than you would if you had just equities or just equities & bonds with the same amt of money invested.

there are scenarios that can hurt severely but those can be imagined for all portfolios. the drawdowns experienced when you combine leverage (of lower yielding asset classes) & diversification will in almost every conceivable instance, be less dramatic & less often than you'd experience with just an equity or equity+bond portfolio. therefore, the overall performance of the portfolio that uses leverage for lower yielding asset classes & diversifies accross all available onces, will exceed that of the normal equity+bond portfolio by a wide margin.

hope this helps,
Barron