Hmm, so in the initial glide path skier posted as an example I could follow, they specifically mentioned 3x equity leverage and the borrowing amounts were for equity only. Hence, I just followed that same pattern (with the understanding that since we're doing equal ratio between equity/bonds, the values would be mirrored on the bond side).Not sure if skier noticed the bold when replying. If you are really meaning 300% equities and 300% ITTs, your amounts borrowed are off. E.g. at 150k portfolio value, you would be borrowing $750k to get to a 300/300 portfolio.
I think 300% equities and 300% ITTs is too aggressive even for early career and has a decent chance of total ruin. See the year 1974: equities returned -28%, ITTs returned returned 4.4%, and the cost of borrowing (assuming borrowing at T-Bill rate) was 7.9%. A 300/300 portfolio would have gone bust that year.
I have a similar savings rate to your plans - currently saving $250k-$300k a year. At the start of 2023, I reduced my leverage to be 120% equities 80% ITT. The reason I did so is that at this level of savings, a very early retirement is possible, reducing the investment horizon. When looking at something like a 10-year investment horizon, leveraged approaches no longer outperform in moderately poor scenarios. Using my backtesting sheet, at the 25th percentile of outcomes for 10 years, a 100% equity portfolio performs just as well as a 120/80 portfolio and significantly better than higher-leverage portfolios.
If I were you, I would aim to have optionality for a very early retirement, which means significantly lowering your leverage. E.g. cut your leverage amounts in half and go 150/150 at the start of your career and quickly glide lower. Higher leverage amounts offer more upside but significantly reduce your probability of a very early retirement.
In terms of going bust on a 3x portfolio due to a crash: from my understanding after reading the lifecycle investing book, the idea is that if you have a really high leverage ratio very early on (so for example, I'm thinking of doing 3x only for a year), then if you go bust immediately, you can easily recover with your high savings rate. Consequently, you can keep making that kind of bet early on until you hit a bull run and your portfolio soars (which would cause the calculations to decrease your leverage and thereby protect your portfolio a bit more). The authors give examples of people who started right before the Great Depression, but still ended up with higher savings than 100% equities. I suppose you actually want the crash early on to grab everything for cheap (with the caveat that you can maintain your job and continue your savings plan).
I understand your point about early retirements, retiring on a 10-15yr horizon definitely changes the calculus for the strategy. However, I feel like early retirement is a very personal choice: at least for me personally, I actually really enjoy my work and see myself continuing to enjoy it in the future. That's another reason why I'm happy to take this level of risk early on, since I don't expect to rush myself with an early retirement so I have more than enough time in a 30yr career to recover from any major losses I take when highly leveraged in the beginning.
Regardless, I do plan on deleveraging from 3x fast: it's definitely really risky so after a year of it, I plan on quickly going down to 2x after which I can slow down a little.
Statistics: Posted by deathnote — Thu Dec 28, 2023 1:00 am — Replies 2882 — Views 333612