Retire at 66% of your FIRE number using margin?

[whywork]

I am trying to see how early can we retire if we make use of margin safely. With certain brokers offering low margin rates (1-1.5%), we have that additional cash available. This cash can be used to invest in market or to use as withdrawals during first 5-10 years of retirement. Or even buy a house and save on rent.

Especially if I use the margin for all my withdrawals during first 10 years and let my regular investments grow untouched. Then my investments will become 2.6 times (at 10% roi). Let's say my FIRE number is 1.5m and I retire at 1m. My brokerage has another 1m on margin. I use up 600k for withdrawals in 10 years. Let's say I pay another 30k in interest on those withdrawals (at 1.5% rate). Meanwhile my assets have grown to 2.6m. I pay off the 600k and am left with 2m.

If we invest 30% of the margin (in safe index funds) then the numbers could be even better. With portfolio margin using up to 50-60% margin is safe to avoid a margin call. Meanwhile our investments are also growing so it makes it even safer to avoid margin call.

Can we say we can retire at 66% of our FIRE number using margin? If not 66 what would be the right % number? Any downsides you see with this? Margin rates can change but that may make that 30k interest to say 100k in the worst case. Still doesn't seem to effect the final number much. Yes there is inflation but our final 2m number seems to be inflation adjusted from the original 1.5m number.

[boarder42]

Margin is callable debt you need to have a plan to pay back any margin borrowed immediately or you'll have a huge tax burden. Margin also only works on taxable funds. 

That said I plan to use margin in my 5 year bridge but can move Roth cont to cover any calls if needed

[Padonak]

Margin is callable debt you need to have a plan to pay back any margin borrowed immediately or you'll have a huge tax burden. Margin also only works on taxable funds. 

That said I plan to use margin in my 5 year bridge but can move Roth cont to cover any calls if needed

Why does margin only work on taxable funds?

[boarder42]

Margin is callable debt you need to have a plan to pay back any margin borrowed immediately or you'll have a huge tax burden. Margin also only works on taxable funds. 

That said I plan to use margin in my 5 year bridge but can move Roth cont to cover any calls if needed

Why does margin only work on taxable funds?

Maybe a tax guru can fill this in but I don't think you can borrow against retirement accounts with margin. I mean it would be a massive loophole in the tax code no one had discovered which I doubt is true with all the research fire people have done.

[boarder42]

Quick Google search reveals the answer

https://www.forbes.com/advisor/investing/margin-trade-ira/#:~:text=Legally%2C%20you%20generally%20can't,of%20IRA%20funds%20as%20collateral.&text=While%20individual%20retirement%20accounts%20don,some%20form%20of%20leveraged%20trading

[MustacheAndaHalf]

I am trying to see how early can we retire if we make use of margin safely. With certain brokers offering low margin rates (1-1.5%), we have that additional cash available. This cash can be used to invest in market or to use as withdrawals during first 5-10 years of retirement. Or even buy a house and save on rent.
...
Can we say we can retire at 66% of our FIRE number using margin? If not 66 what would be the right % number? Any downsides you see with this? Margin rates can change but that may make that 30k interest to say 100k in the worst case. Still doesn't seem to effect the final number much. Yes there is inflation but our final 2m number seems to be inflation adjusted from the original 1.5m number.

To my knowledge only Interactive Brokers has margin loans under 1.5%, and even then only for the part of the loan over $100k (the first $100k costs 1.6%).  So I'd like to know about the other brokers offering margin in the 1-1.5% range.

I only borrowed on margin last year after devising a plan for the market going against me.  If the market surprised me with a -20% drop, I'd begin eating the loss by selling stock to pay down the margin loan.  By about -30%, I'd have taken all the losses and paid off the loan.  If the market kept going lower, I would take unleveraged losses.

With 1.5x margin, a roughly 66% drop wipes you out.  You might have $100k of stocks and $50k borrowed stocks.  When it crashes towards $50k, IBKR sells your remaining stocks and pays off the margin loan, leaving you with about $0k.  If you don't know what margin is safe during 2008, the dot-com crash, or other crashes... you're going to find out the hard way.

Everyone likes leveraged gains... but leveraged losses can take your account from 66% of it's goal to 1% of your goal.

[whywork]

Margin is callable debt you need to have a plan to pay back any margin borrowed immediately or you'll have a huge tax burden. Margin also only works on taxable funds. 

That said I plan to use margin in my 5 year bridge but can move Roth cont to cover any calls if needed

Why does margin only work on taxable funds?

Yes we can’t use margin in tax advantaged accounts. One solution to this is to buy leveraged etfs. For example you can buy UPRO (3x spy) with 15% of your portfolio to simulate 30% margin usage

[whywork]

I am trying to see how early can we retire if we make use of margin safely. With certain brokers offering low margin rates (1-1.5%), we have that additional cash available. This cash can be used to invest in market or to use as withdrawals during first 5-10 years of retirement. Or even buy a house and save on rent.
...
Can we say we can retire at 66% of our FIRE number using margin? If not 66 what would be the right % number? Any downsides you see with this? Margin rates can change but that may make that 30k interest to say 100k in the worst case. Still doesn't seem to effect the final number much. Yes there is inflation but our final 2m number seems to be inflation adjusted from the original 1.5m number.

To my knowledge only Interactive Brokers has margin loans under 1.5%, and even then only for the part of the loan over $100k (the first $100k costs 1.6%).  So I'd like to know about the other brokers offering margin in the 1-1.5% range.

I only borrowed on margin last year after devising a plan for the market going against me.  If the market surprised me with a -20% drop, I'd begin eating the loss by selling stock to pay down the margin loan.  By about -30%, I'd have taken all the losses and paid off the loan.  If the market kept going lower, I would take unleveraged losses.

With 1.5x margin, a roughly 66% drop wipes you out.  You might have $100k of stocks and $50k borrowed stocks.  When it crashes towards $50k, IBKR sells your remaining stocks and pays off the margin loan, leaving you with about $0k.  If you don't know what margin is safe during 2008, the dot-com crash, or other crashes... you're going to find out the hard way.

Everyone likes leveraged gains... but leveraged losses can take your account from 66% of it's goal to 1% of your goal.

Robin hood and M1 Finance offer 2%. Yes interactive brokers is the only popular one that offers 1-1.5%

66% market drop is highly unlikely. Also most market crashes last only 2-3 years. We will only be using margin for withdrawals. So first 3 years assuming there’s a crash I would withdraw only 180k or 20% of margin. Interactive brokers doesn’t issue a margin call at such low margin usage.

The caution about market downturns is a valid point. The 4% swr considers that. Using margin I am curious how that swr will be affected. I am sure we can go for a higher swr but not sure mathematically how high it is

[Radagast]

I haven't seen studies on this, but I doubt it would increase your odds of success, and I think it would most likely lower them. I would try to back test it by entering negative cash amounts into Portfoliocharts and Portfoliovisualizer, and anywhere else where you can back test the concept over the longest time. It might work conceptually for accumulating money, but I think it would fail for taking it out.

[boarder42]

I am trying to see how early can we retire if we make use of margin safely. With certain brokers offering low margin rates (1-1.5%), we have that additional cash available. This cash can be used to invest in market or to use as withdrawals during first 5-10 years of retirement. Or even buy a house and save on rent.
...
Can we say we can retire at 66% of our FIRE number using margin? If not 66 what would be the right % number? Any downsides you see with this? Margin rates can change but that may make that 30k interest to say 100k in the worst case. Still doesn't seem to effect the final number much. Yes there is inflation but our final 2m number seems to be inflation adjusted from the original 1.5m number.

To my knowledge only Interactive Brokers has margin loans under 1.5%, and even then only for the part of the loan over $100k (the first $100k costs 1.6%).  So I'd like to know about the other brokers offering margin in the 1-1.5% range.

I only borrowed on margin last year after devising a plan for the market going against me.  If the market surprised me with a -20% drop, I'd begin eating the loss by selling stock to pay down the margin loan.  By about -30%, I'd have taken all the losses and paid off the loan.  If the market kept going lower, I would take unleveraged losses.

With 1.5x margin, a roughly 66% drop wipes you out.  You might have $100k of stocks and $50k borrowed stocks.  When it crashes towards $50k, IBKR sells your remaining stocks and pays off the margin loan, leaving you with about $0k.  If you don't know what margin is safe during 2008, the dot-com crash, or other crashes... you're going to find out the hard way.

Everyone likes leveraged gains... but leveraged losses can take your account from 66% of it's goal to 1% of your goal.

Robin hood and M1 Finance offer 2%. Yes interactive brokers is the only popular one that offers 1-1.5%

66% market drop is highly unlikely. Also most market crashes last only 2-3 years. We will only be using margin for withdrawals. So first 3 years assuming there’s a crash I would withdraw only 180k or 20% of margin. Interactive brokers doesn’t issue a margin call at such low margin usage.

The caution about market downturns is a valid point. The 4% swr considers that. Using margin I am curious how that swr will be affected. I am sure we can go for a higher swr but not sure mathematically how high it is

Margin can and will be called prior to a 66% drop in the market. There are numerous posts by different users here about the 2020 spring collapse where ibkr gave no notice. Just bc they allow up to that in good markets doesn't mean they aren't covering their ass when the market tanks. Too much risk imo and I'm pretty risky person.

Also buying a leveraged ETF doesn't get you access to cash in a retirement account. But it is similar to margin if you're using it to buy more equities.

[diggo]

It’s not a terrible idea and the odds are in your favour. However - Do you have a plan for the worst case scenario of a 66% market drop? Can you count on any family/friends to bail you out in this unlikely event?

[frugalnacho]

The ultimate free lunch.  Just margin loan yourself into FIRE, what could go wrong?

[ChpBstrd]

This has been thought of. Read this ENTIRE thread before proceeding:

https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Spoiler: show

Market Timer gets wiped out, doubles down, loses again, goes into debt, works his ass off, and has a happy ending in the end anyway, at least according to the posts.

My preferred use for large amounts of margin would be to find low-volatility dividend stocks and secure them with a protective put, collar, or far-ITM covered call strategy that makes a small return higher than the loan interest relatively likely. In the event of a market correction, the put options would prevent a wipeout.

AGNC for example has a price of $15.93 and pays a monthly dividend of 12 cents. The $17 put option with 536 days until expiration was selling today for $2.05. So for a total investment of $17.98 you could expect about $1.44/year in dividends (8% effective yield) with a maximum downside of (17.98-17=) $0.98 or 5.5%.

You could further improve on these numbers by selling the $17 call for another $0.63, which makes your total outlay $17.35, the effective yield 8.3%, and the maximum downside 2%.

The call would eventually be exercised if and when the dividend exceeds the amount of time value remaining - probably 2-3 mos before expiration. The downside scenario in either case would be experienced if mortgage delinquencies or interest rates went up before you had earned more dividends than the maximum downside plus margin interest and minus any remaining time value on the put. But at least the put gives you a firm floor on potential losses. You can always sell at $17. Best case scenario you earn a 5-6% profit on borrowed $ by clicking buttons.

[yachi]

Margin is callable debt you need to have a plan to pay back any margin borrowed immediately or you'll have a huge tax burden. Margin also only works on taxable funds. 

That said I plan to use margin in my 5 year bridge but can move Roth cont to cover any calls if needed

Why does margin only work on taxable funds?

Yes we can’t use margin in tax advantaged accounts. One solution to this is to buy leveraged etfs. For example you can buy UPRO (3x spy) with 15% of your portfolio to simulate 30% margin usage

A better solution is to purchase long-dated options, LEAPS.  You can purchase calls 2 years out on S&P 500 or most large companies.  The leveraged efts I've looked at all reset each day, so you could lose out if the market movement is prior to market open.  With LEAPS, you're in the market until you sell.

[maizefolk]

Yes we can’t use margin in tax advantaged accounts. One solution to this is to buy leveraged etfs. For example you can buy UPRO (3x spy) with 15% of your portfolio to simulate 30% margin usage

3x spy doesn't behave like a 67% margin loan. Every night it gets deleveraged to 3x multiplier, which means it locks in 3x losses day by day when the market is going down.

As a result, leveraged funds are a great way to lose a lot of money even when the market is trading sideways.

[mistymoney]

This has been thought of. Read this ENTIRE thread before proceeding:

https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Spoiler: show

Market Timer gets wiped out, doubles down, loses again, goes into debt, works his ass off, and has a happy ending in the end anyway, at least according to the posts.

My preferred use for large amounts of margin would be to find low-volatility dividend stocks and secure them with a protective put, collar, or far-ITM covered call strategy that makes a small return higher than the loan interest relatively likely. In the event of a market correction, the put options would prevent a wipeout.

AGNC for example has a price of $15.93 and pays a monthly dividend of 12 cents. The $17 put option with 536 days until expiration was selling today for $2.05. So for a total investment of $17.98 you could expect about $1.44/year in dividends (8% effective yield) with a maximum downside of (17.98-17=) $0.98 or 5.5%.

You could further improve on these numbers by selling the $17 call for another $0.63, which makes your total outlay $17.35, the effective yield 8.3%, and the maximum downside 2%.

The call would eventually be exercised if and when the dividend exceeds the amount of time value remaining - probably 2-3 mos before expiration. The downside scenario in either case would be experienced if mortgage delinquencies or interest rates went up before you had earned more dividends than the maximum downside plus margin interest and minus any remaining time value on the put. But at least the put gives you a firm floor on potential losses. You can always sell at $17. Best case scenario you earn a 5-6% profit on borrowed $ by clicking buttons.

That was an incredible painful read. Midway through 2008 I opened up an sp500 graph so reading what he was saying/doing, and checking the graph to see what was going to happen in the next day or two-week. oh Painful.

I'm considering going 100% cash right now.....

[Metalcat]

This has been thought of. Read this ENTIRE thread before proceeding:

https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Spoiler: show

Market Timer gets wiped out, doubles down, loses again, goes into debt, works his ass off, and has a happy ending in the end anyway, at least according to the posts.

My preferred use for large amounts of margin would be to find low-volatility dividend stocks and secure them with a protective put, collar, or far-ITM covered call strategy that makes a small return higher than the loan interest relatively likely. In the event of a market correction, the put options would prevent a wipeout.

AGNC for example has a price of $15.93 and pays a monthly dividend of 12 cents. The $17 put option with 536 days until expiration was selling today for $2.05. So for a total investment of $17.98 you could expect about $1.44/year in dividends (8% effective yield) with a maximum downside of (17.98-17=) $0.98 or 5.5%.

You could further improve on these numbers by selling the $17 call for another $0.63, which makes your total outlay $17.35, the effective yield 8.3%, and the maximum downside 2%.

The call would eventually be exercised if and when the dividend exceeds the amount of time value remaining - probably 2-3 mos before expiration. The downside scenario in either case would be experienced if mortgage delinquencies or interest rates went up before you had earned more dividends than the maximum downside plus margin interest and minus any remaining time value on the put. But at least the put gives you a firm floor on potential losses. You can always sell at $17. Best case scenario you earn a 5-6% profit on borrowed $ by clicking buttons.

I twitch a little whenever I think about that thread.

I read the entire thing in one sitting awhile back, and it was a wild ride. It's a great read, I highly, highly recommend it.

OP, your plan could work, but what happens if it doesn't? How do you bounce back??

[Radagast]

It’s not a terrible idea and the odds are in your favour.

Can you provide evidence of this? And what do you mean? Do you mean that a 6% withdrawal rate leveraged to give a 4% withdrawal rate has succeeded more than 50% (after 30, 40, 50 years? no loss of principal or did not go to zero?)? Or do you mean that a 6% withdrawal rate leveraged to a 4% withdrawal rate has been more successful than an ordinary 6% withdrawal rate? How successful was it with starting CAPE10 ratios of 38 +/-5?

I think I would skip leverage and used a more broadly diversified mix of assets and a VPW.

[ChpBstrd]

This has been thought of. Read this ENTIRE thread before proceeding:

https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Spoiler: show

Market Timer gets wiped out, doubles down, loses again, goes into debt, works his ass off, and has a happy ending in the end anyway, at least according to the posts.

My preferred use for large amounts of margin would be to find low-volatility dividend stocks and secure them with a protective put, collar, or far-ITM covered call strategy that makes a small return higher than the loan interest relatively likely. In the event of a market correction, the put options would prevent a wipeout.

AGNC for example has a price of $15.93 and pays a monthly dividend of 12 cents. The $17 put option with 536 days until expiration was selling today for $2.05. So for a total investment of $17.98 you could expect about $1.44/year in dividends (8% effective yield) with a maximum downside of (17.98-17=) $0.98 or 5.5%.

You could further improve on these numbers by selling the $17 call for another $0.63, which makes your total outlay $17.35, the effective yield 8.3%, and the maximum downside 2%.

The call would eventually be exercised if and when the dividend exceeds the amount of time value remaining - probably 2-3 mos before expiration. The downside scenario in either case would be experienced if mortgage delinquencies or interest rates went up before you had earned more dividends than the maximum downside plus margin interest and minus any remaining time value on the put. But at least the put gives you a firm floor on potential losses. You can always sell at $17. Best case scenario you earn a 5-6% profit on borrowed $ by clicking buttons.

That was an incredible painful read. Midway through 2008 I opened up an sp500 graph so reading what he was saying/doing, and checking the graph to see what was going to happen in the next day or two-week. oh Painful.

I'm considering going 100% cash right now.....

Because history repeats itself and internet forum people always start talking about retiring with stocks bought on borrowed money at the worst possible time? :) Also maybe it feels bubbly to get weekly spam from Interactive Brokers urging investors to take advantage of their margin rates.

The question is, why does no one think of leveraging right after the bottom of a crisis like April 2009 or June 2020 or November 1987 when a leverage strategy was, in hindsight, safe, if only one could obtain the loans? I'm guessing it has something to do with watching six figures evaporate from one's portfolio over the course of the previous weeks, and being defensively focused on "protecting" what one has left rather than exploiting the opportunity. Maybe having a pile of cash pays off in the end if one can see the next correction as the opportunity it is. Of course, as the MT saga demonstrates, getting one's timing wrong with a double-down decision mid-crisis can demolish one's portfolio as effectively as the crisis itself. Who knew the 2020 crash was going to be over within weeks and the 2000 crash would take three years to hit a bottom? Who at the bottom of 1932, down 89% if only 1x levered, could have predicted a 5-year bull market that would crash again in 1937 and not recover until 1954?

Market Timer was appropriately named; his wagers were get-rich-or-bust based on the next sequence of short term investment returns. Leverage usually works against the goal of every FIRE person to hedge sequence of returns risk. It's making the portfolio more sensitive to short-term outcomes rather than less sensitive like you'd want. Thus, when the market goes down 20% in two months, and due to leverage one's portfolio is down 40%, one must liquidate twice as many shares or bonds to pay the next months' bills, even as the debt stays the same. Suddenly, a once-healthy retirement portfolio enters one of those long-term downhill slopes seen on portfolio simulators.

My suggestion above was a way to use leverage without greatly increasing one's vulnerability to a crash. If you're going to leverage, you damn better hedge.

[MustacheAndaHalf]

3x spy doesn't behave like a 67% margin loan. Every night it gets deleveraged to 3x multiplier, which means it locks in 3x losses day by day when the market is going down.

As a result, leveraged funds are a great way to lose a lot of money even when the market is trading sideways.

Performance numbers suggest that's not the entire picture.
https://www.morningstar.com/etfs/arcx/spy/performance
https://www.morningstar.com/etfs/arcx/upro/performance

If 3x leveraged UPRO never goes above 3x leverage, it should never beat SPY by more than 3x.  But it did just that in 2017 (31% vs 102%) and 2019 (22% vs 71%).  Some years it loses by something other than it's 3x leverage, like 2018 (-5% vs -25%) or last year (+18% vs +10%).

For someone taking aim at 1.5x leverage, UPRO might be cheaper than a margin loan.  You could invest 25% in UPRO, acting like 75%, matching the other 75% of your portfolio.  And the expense would be 1/4th of 0.93%, about 0.24%.  If you instead got a margin loan - even at IBKR - you would pay 1.5% on 50% of your balance, about 0.75%.

[boarder42]

This has been thought of. Read this ENTIRE thread before proceeding:

https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Spoiler: show

Market Timer gets wiped out, doubles down, loses again, goes into debt, works his ass off, and has a happy ending in the end anyway, at least according to the posts.

My preferred use for large amounts of margin would be to find low-volatility dividend stocks and secure them with a protective put, collar, or far-ITM covered call strategy that makes a small return higher than the loan interest relatively likely. In the event of a market correction, the put options would prevent a wipeout.

AGNC for example has a price of $15.93 and pays a monthly dividend of 12 cents. The $17 put option with 536 days until expiration was selling today for $2.05. So for a total investment of $17.98 you could expect about $1.44/year in dividends (8% effective yield) with a maximum downside of (17.98-17=) $0.98 or 5.5%.

You could further improve on these numbers by selling the $17 call for another $0.63, which makes your total outlay $17.35, the effective yield 8.3%, and the maximum downside 2%.

The call would eventually be exercised if and when the dividend exceeds the amount of time value remaining - probably 2-3 mos before expiration. The downside scenario in either case would be experienced if mortgage delinquencies or interest rates went up before you had earned more dividends than the maximum downside plus margin interest and minus any remaining time value on the put. But at least the put gives you a firm floor on potential losses. You can always sell at $17. Best case scenario you earn a 5-6% profit on borrowed $ by clicking buttons.

That was an incredible painful read. Midway through 2008 I opened up an sp500 graph so reading what he was saying/doing, and checking the graph to see what was going to happen in the next day or two-week. oh Painful.

I'm considering going 100% cash right now.....

Because history repeats itself and internet forum people always start talking about retiring with stocks bought on borrowed money at the worst possible time? :) Also maybe it feels bubbly to get weekly spam from Interactive Brokers urging investors to take advantage of their margin rates.

The question is, why does no one think of leveraging right after the bottom of a crisis like April 2009 or June 2020 or November 1987 when a leverage strategy was, in hindsight, safe, if only one could obtain the loans? I'm guessing it has something to do with watching six figures evaporate from one's portfolio over the course of the previous weeks, and being defensively focused on "protecting" what one has left rather than exploiting the opportunity. Maybe having a pile of cash pays off in the end if one can see the next correction as the opportunity it is. Of course, as the MT saga demonstrates, getting one's timing wrong with a double-down decision mid-crisis can demolish one's portfolio as effectively as the crisis itself. Who knew the 2020 crash was going to be over within weeks and the 2000 crash would take three years to hit a bottom? Who at the bottom of 1932, down 89% if only 1x levered, could have predicted a 5-year bull market that would crash again in 1937 and not recover until 1954?

Market Timer was appropriately named; his wagers were get-rich-or-bust based on the next sequence of short term investment returns. Leverage usually works against the goal of every FIRE person to hedge sequence of returns risk. It's making the portfolio more sensitive to short-term outcomes rather than less sensitive like you'd want. Thus, when the market goes down 20% in two months, and due to leverage one's portfolio is down 40%, one must liquidate twice as many shares or bonds to pay the next months' bills, even as the debt stays the same. Suddenly, a once-healthy retirement portfolio enters one of those long-term downhill slopes seen on portfolio simulators.

My suggestion above was a way to use leverage without greatly increasing one's vulnerability to a crash. If you're going to leverage, you damn better hedge.

No one thinks to leverage in June 2020?  I did I took out 100k in margin loans and put it in small value in June of 2020

[maizefolk]

3x spy doesn't behave like a 67% margin loan. Every night it gets deleveraged to 3x multiplier, which means it locks in 3x losses day by day when the market is going down.

As a result, leveraged funds are a great way to lose a lot of money even when the market is trading sideways.

Performance numbers suggest that's not the entire picture.
https://www.morningstar.com/etfs/arcx/spy/performance
https://www.morningstar.com/etfs/arcx/upro/performance

If 3x leveraged UPRO never goes above 3x leverage, it should never beat SPY by more than 3x.  But it did just that in 2017 (31% vs 102%) and 2019 (22% vs 71%).  Some years it loses by something other than it's 3x leverage, like 2018 (-5% vs -25%) or last year (+18% vs +10%).

Your bolded conclusion does not follow from the previous assertion.

Because 3x funds are releveraging every night you would expect that in a smoothly rising market they should produce >3x performance because each day as the market rises they are able to parley their increased gains into greater total market exposure. That's essentially what Archegos was doing: every time the share prices of the companies they were invested in went up, that created more equity which they pulled out to further expand their market exposure through even more leverage. As the Archegos story shows, this is also a recipe for disaster and ruin more more rapidly than conventional fixed quantities of margin loans.

Consider three scenarios:

A) I own 100 shares of a company trading at $10 share. ($1000 in equity)
B) I own 300 shares of a company trading at $10 share with a fixed margin loan for $2000 ($1000 in equity).
C) I own 300 shares of a company trading at $10 share with an initial margin loan of $2000 but every night I borrow 2x my equity to lever up to 3x.

If the price of the shares goes up 10% per day for five days:

Scenario A, at the end I own 100 shares at 16.105/share and have $1610.50 of equity, a 61% return.
Scenario B, at the end I own 300 shares at $16.105/share worth $4831.50 with $2,000 of margin loan and have $2,831.50 of equity, a 183% return (exactly 3x).
Scenario C, at the end I own 571.82 shares at $16.105/share worth $9209.30 with $5609.30 of margin loan and have $3560.00 of equity, a 256% return (greater than 3x).

[whywork]

Agree with comment above that using Leveraged ETFs is better than using margin even on low rates like 1.5%. I am curious what would be the optimal portfolio allocation to leveraged ETFs.

The risk we take is the chance of losing a big percent of leveraged ETF allocation when market tanks. If SPY drops 50% and recovers, the 3x ETF UPRO would recover 60% of its original value. This is not as bad as it sounds. Over next 2 years as SPY returns 10% average, our UPRO will recover from 60% to 100%. If SPY drops 66% and recovers then UPRO would recover 40% of its original value. This will take UPRO another 3.5 years to return to 100% as SPY averages 10% returns.

On the other hand the risk to reward ratio is pretty good. If the market doesn't drop but SPY continues to return 10% for next ~2.5 years then UPRO will double. It keeps doubling like that every 2.5 years.

So how about 50% allocation to leveraged ETFs? If market really tanks 50% or lower, then move more SPY to UPRO. Else keep holding and rebalance if leveraged allocation ever goes too high.

[Radagast]

It looks like leveraged to 150% S&P500 with a 4% withdrawal did in fact do better than unleveraged S&P500 with 6% withdrawal starting in 2000.

Of course neither did as well as a broadly diversified portfolio, and a broadly diversified portfolio runs a comparatively insignificant risk of cratering. Why not just choose one of these?
https://portfoliocharts.com/portfolios/
Use a minimum of 50% stocks, but not more than 50% total US stocks (obvious implication is to have a lot of international stocks too). Definitely not more than 40% bonds, but a bare minimum of 10% bonds. Maybe a diversifying asset, even if it is a house you live in or something crazy like bitcoin (I personally don't, yet), just in case?

[Much Fishing to Do]

The dangers of this kind leverage may be very rare but can be violent.  E.g. I think of course my portfolio will probably will not, but 'could' see a 60% drop and then slowly recover, and I may even need to forgo some inflation increases in my withdraws or even do some cuts during that recovery, but thats a far cry from getting wiped out.

The issue I see with this that doesn't seem so rare is the borrowing rate on this leverage increasing greatly over the next decade.  Pulling the FIRE trigger (unless return to equal paying work seems easy in ones case) based on a plan that counted on continuing 1% borrowing costs seems to be pushing it.

I do see a place for using this borrowing that I could foresee using.  E.g., if I had a portfolio consisting of just stocks & bonds in 2008 when both were tanking hard, and could borrow the cash at 1% to fund the annual withdraw for that year, and same thing again the following year when still depressed seems to be a very safe use of this. 

[lhamo]

You have posted elsewhere that you have a 1.8 million stash and are intending to FIRE to a LCOL area.

I really can't get my head around why you are so obsessed with reaching a number (3 million) that is WAY beyond what you really need.  To the point of using very risky leverage strategies to get there.

IIRC one of the reasons you want a large stash is to cover potential high college costs for your kids. Maybe you could consider using just that portion of your stash in this very risky way, and being more conservative with the rest.  If this idea immediately makes you think "but what if it tanks and I don't have money for my kids to go to college" then  I would say it is way beyond the risk level you should be adopting for the stash overall.

[MustacheAndaHalf]

Your bolded conclusion does not follow from the previous assertion.
...
C) I own 300 shares of a company trading at $10 share with an initial margin loan of $2000 but every night I borrow 2x my equity to lever up to 3x.

If the price of the shares goes up 10% per day for five days:
...
Scenario C, at the end I own 571.82 shares at $16.105/share worth $9209.30 with $5609.30 of margin loan and have $3560.00 of equity, a 256% return (greater than 3x).

Your scenario C is closest to the how UPRO's prospectus describes returns.

https://www.proshares.com/funds/prospectus.html?ticker=UPRO
"The return of the Fund for periods longer than a single day will be the result of its return for each day compounded over the period"
So, Scenario D: UPRO (3x SPY) is making 30% a day for 5 days, net return 271%

But looking at historical data on Yahoo Finance, that isn't true, either.  For example, measuring from Thursday close to Friday close suggests UPRO had 3.42x leverage.  If I look at just Friday (open -> close), it's 3.83x leverage.  Even for one market day, or 24 hours from one close to the next, UPRO seems to have more than 3x leverage.

ETF	Thurs close	Friday open	Friday close	Friday %	24hr %
SPY	441.76	442.10	442.49	0.08822%	0.16525%
UPRO	123.92	124.20	124.62	0.33816%	0.56488%

That's also why I like to use stock market data to try and understand how professional leverage works.  Most explanations for "ProShares UltraPro S&P500" (UPRO) don't match the data - even when I quote the prospectus ProShares puts out about the fund.

[mistymoney]

Your bolded conclusion does not follow from the previous assertion.
...
C) I own 300 shares of a company trading at $10 share with an initial margin loan of $2000 but every night I borrow 2x my equity to lever up to 3x.

If the price of the shares goes up 10% per day for five days:
...
Scenario C, at the end I own 571.82 shares at $16.105/share worth $9209.30 with $5609.30 of margin loan and have $3560.00 of equity, a 256% return (greater than 3x).

Your scenario C is closest to the how UPRO's prospectus describes returns.

https://www.proshares.com/funds/prospectus.html?ticker=UPRO
"The return of the Fund for periods longer than a single day will be the result of its return for each day compounded over the period"
So, Scenario D: UPRO (3x SPY) is making 30% a day for 5 days, net return 271%

But looking at historical data on Yahoo Finance, that isn't true, either.  For example, measuring from Thursday close to Friday close suggests UPRO had 3.42x leverage.  If I look at just Friday (open -> close), it's 3.83x leverage.  Even for one market day, or 24 hours from one close to the next, UPRO seems to have more than 3x leverage.

ETF	Thurs close	Friday open	Friday close	Friday %	24hr %
SPY	441.76	442.10	442.49	0.08822%	0.16525%
UPRO	123.92	124.20	124.62	0.33816%	0.56488%

That's also why I like to use stock market data to try and understand how professional leverage works.  Most explanations for "ProShares UltraPro S&P500" (UPRO) don't match the data - even when I quote the prospectus ProShares puts out about the fund.

so with the upro being leveraged, that only effects your returns, you personally are not leveraged? never need to infuse more cash if market drops?

so would doing 50% upro, 50% cash be kind of like that barbell thingy?

[Financial.Velociraptor]

A barbell would be more like 90% cash or more to offset the leverage factor.

[mistymoney]

A barbell would be more like 90% cash or more to offset the leverage factor.

but if you are only at 3x leverage and 10% that would be akin to 30% in the market, which is quite low?

I was thinking 50/50, because with 50% cash - you could weather a 12/13 year bear market. If 90% cash, you could do 22 years, but then what would the 10% in upro be up to by then? Enough? seems iffy.

[habanero]

For example you can buy UPRO (3x spy) with 15% of your portfolio to simulate 30% margin usage

Nope, leveraged ETFs behave significantly differently from a debt-financed investment in the same underlying. If you gear using debt you have no rebalancing. Leveraged ETFs do, volatility is death for bullish (or bearish) ETFs providing a multiple of the underlying.

They work well for short-term bets on direction of the market or if the market is a one-way street, bur for the long haul - not so much.

[Padonak]

A barbell would be more like 90% cash or more to offset the leverage factor.

but if you are only at 3x leverage and 10% that would be akin to 30% in the market, which is quite low?

I was thinking 50/50, because with 50% cash - you could weather a 12/13 year bear market. If 90% cash, you could do 22 years, but then what would the 10% in upro be up to by then? Enough? seems iffy.

This is actually a great point. There is a risk/return spectrum between 100% cash/cash equivalents ->100% stocks -> buying stocks on margin. Unless you are already 100% invested in stocks (other than a reasonable emergency fund). there is no reason to use margin, IMO. Just invest more in stocks instead of paying interest on margin loans and taking the risk of getting margin called.

[whywork]

I don't see any downsides with investing in UPRO.

In a normal market (SPY averaging 10%), UPRO doubles itself every 2.5 years.

Let's say we hit recession immediately after we invest in UPRO. Here is the recovery % of UPRO when SPY goes down and recovers. For example first row says that when SPY goes down 35% and recovers back, UPRO will only recover to 70% of its original value and from there it takes 1.5 more years for UPRO to fully recover

SPY Down% (and recovers)  | UPRO recovery %. | Extra years to UPRO full recovery (assuming SPY averages 10% / year)
35%                                   |      70%                 |       1.5 years
60%                                   |      43%                 |       3.25 years
70%                                   |      35%                 |       4 years

Even in the worst recession, I'm recovering my money in 4 more years and from there will keep doubling every 2.5 years. On the other hand more likely scenario is that I won't have a 60% drop and spy continues to average 10% for next 2.5 years and I double my money.

Instead of going all in, invest 66% spy and 33% upro. If the market drops 30% or more, move to 33% spy and 66% upro. A further drop of 10-20%, move all to upro and stay put. I don't see what's wrong with this. Especially during accumulation stage.

[bacchi]

I don't see any downsides with investing in UPRO.

In a normal market (SPY averaging 10%), UPRO doubles itself every 2.5 years.

Let's say we hit recession immediately after we invest in UPRO. Here is the recovery % of UPRO when SPY goes down and recovers. For example first row says that when SPY goes down 35% and recovers back, UPRO will only recover to 70% of its original value and from there it takes 1.5 more years for UPRO to fully recover

SPY Down% (and recovers)  | UPRO recovery %. | Extra years to UPRO full recovery (assuming SPY averages 10% / year)
35%                                   |      70%                 |       1.5 years
60%                                   |      43%                 |       3.25 years
70%                                   |      35%                 |       4 years

Even in the worst recession, I'm recovering my money in 4 more years and from there will keep doubling every 2.5 years. On the other hand more likely scenario is that I won't have a 60% drop and spy continues to average 10% for next 2.5 years and I double my money.

Instead of going all in, invest 66% spy and 33% upro. If the market drops 30% or more, move to 33% spy and 66% upro. A further drop of 10-20%, move all to upro and stay put. I don't see what's wrong with this. Especially during accumulation stage.

Have you backtested this? What happened in 2008 or 2000?

Do you know how an index swap works?

[habanero]

A 2x or 3x ETF only claims to double (or triple) returns on a single day,
not in the long run. So any theoretical exercise on returns is futile.

This leveraged ProShares ETF seeks a return that is 3x the return of its underlying benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target return and ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings as frequently as daily. Investors should consult the prospectus for further details on the calculation of the returns and the risks associated with investing in this product.

[mistymoney]

I don't see any downsides with investing in UPRO.

In a normal market (SPY averaging 10%), UPRO doubles itself every 2.5 years.

Let's say we hit recession immediately after we invest in UPRO. Here is the recovery % of UPRO when SPY goes down and recovers. For example first row says that when SPY goes down 35% and recovers back, UPRO will only recover to 70% of its original value and from there it takes 1.5 more years for UPRO to fully recover

SPY Down% (and recovers)  | UPRO recovery %. | Extra years to UPRO full recovery (assuming SPY averages 10% / year)
35%                                   |      70%                 |       1.5 years
60%                                   |      43%                 |       3.25 years
70%                                   |      35%                 |       4 years

Even in the worst recession, I'm recovering my money in 4 more years and from there will keep doubling every 2.5 years. On the other hand more likely scenario is that I won't have a 60% drop and spy continues to average 10% for next 2.5 years and I double my money.

Instead of going all in, invest 66% spy and 33% upro. If the market drops 30% or more, move to 33% spy and 66% upro. A further drop of 10-20%, move all to upro and stay put. I don't see what's wrong with this. Especially during accumulation stage.

Thank you for this. That lag to recovery is an important component to consider. I would have loved to have known this 10 years ago, but perhaps best I didn't. I'm toying with reitring/sabatical any day now. Just hanging on to get myself organized, and see how long I can hang in there. I consider every payday a success, and locking in 50/year additional spend, lol.

I'm trying to configure a hedge against a large and/or prolonged downturn - but without sacrificing returns - before pulling the plug. This may be a piece of that plan, but perhaps not until the downturn? Or only a small slice now and see how that goes. Much to plan! If I do go 3x leverage. Right now I'm thinking 10% cash, 10% leveraged and 80% what I was doing before/as is. Then move to 15/15, then 20/20 on the ends as I move along. I'm about 98% stocks/2% bonds right now. That was my plan for the duration, 98/2 but I am leaving earlier than expected (farther out from SS/medicare than originally planned, and I am worried about a prolonged or very deep drop in this situation, so want to build in more safeguards with cash/equivalents.

So upro is 3x leverage sp500. Is there a similar vehicle for nasdaq?

[mistymoney]

A 2x or 3x ETF only claims to double (or triple) returns on a single day,
not in the long run. So any theoretical exercise on returns is futile.

This leveraged ProShares ETF seeks a return that is 3x the return of its underlying benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target return and ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings as frequently as daily. Investors should consult the prospectus for further details on the calculation of the returns and the risks associated with investing in this product.

Thanks - def needs to read the fine print!

[Padonak]

A barbell would be more like 90% cash or more to offset the leverage factor.

But then why not just invest 30% in a non-leveraged stock index fund and have the same risk/return profile without paying higher fees for leveraged funds?

Edited: even if we ignore the difference in fees, investing 30% of portfolio in a non leveraged index fund may have a better risk adjusted return vs investing 10% in a 3X leveraged fund because there is no decay over time if you use a non-leveraged fund.

[Padonak]

I don't see any downsides with investing in UPRO.

In a normal market (SPY averaging 10%), UPRO doubles itself every 2.5 years.

Let's say we hit recession immediately after we invest in UPRO. Here is the recovery % of UPRO when SPY goes down and recovers. For example first row says that when SPY goes down 35% and recovers back, UPRO will only recover to 70% of its original value and from there it takes 1.5 more years for UPRO to fully recover

SPY Down% (and recovers)  | UPRO recovery %. | Extra years to UPRO full recovery (assuming SPY averages 10% / year)
35%                                   |      70%                 |       1.5 years
60%                                   |      43%                 |       3.25 years
70%                                   |      35%                 |       4 years

Even in the worst recession, I'm recovering my money in 4 more years and from there will keep doubling every 2.5 years. On the other hand more likely scenario is that I won't have a 60% drop and spy continues to average 10% for next 2.5 years and I double my money.

Instead of going all in, invest 66% spy and 33% upro. If the market drops 30% or more, move to 33% spy and 66% upro. A further drop of 10-20%, move all to upro and stay put. I don't see what's wrong with this. Especially during accumulation stage.

If this is such a great lifehack, why isn't everybody doing it?

[MustacheAndaHalf]

SPY Down% (and recovers)  | UPRO recovery %. | Extra years to UPRO full recovery (assuming SPY averages 10% / year)
35%                                   |      70%                 |       1.5 years
60%                                   |      43%                 |       3.25 years
70%                                   |      35%                 |       4 years

Even in the worst recession, I'm recovering my money in 4 more years and from there will keep doubling every 2.5 years. On the other hand more likely scenario is that I won't have a 60% drop and spy continues to average 10% for next 2.5 years and I double my money.

Volatility could delay that recovery period even longer.  Take 2020 for example, when UPRO's leverage seemed to be 0.56x instead of 3x.  SPY returned 18%, while UPRO lagged at 10%.

My two working theories on 3x funds is either "volatility drag" or "recovery leverage with special loans".  Looking at 2020 suggests volatility drag, for example:
SPY drops -20%, and from there gains +25%: 0.80 x 1.25 = 1.00, full recovery.
UPRO drops -60%, gains +60%: 0.40 x 1.6 = 0.64, a 36% loss.
That's volatility drag, but I believe 3x funds try to fight it with special loans to increase their leverage.

Last year investing in the S&P 500 beat investing in a 3x fund, even though for the year the S&P 500 gained +18%.  Volatility can deliver sub-par returns from 3x funds, which despite the name do not always have 3x leverage.

[ChpBstrd]

SPY Down% (and recovers)  | UPRO recovery %. | Extra years to UPRO full recovery (assuming SPY averages 10% / year)
35%                                   |      70%                 |       1.5 years
60%                                   |      43%                 |       3.25 years
70%                                   |      35%                 |       4 years

Even in the worst recession, I'm recovering my money in 4 more years and from there will keep doubling every 2.5 years. On the other hand more likely scenario is that I won't have a 60% drop and spy continues to average 10% for next 2.5 years and I double my money.

Volatility could delay that recovery period even longer.  Take 2020 for example, when UPRO's leverage seemed to be 0.56x instead of 3x.  SPY returned 18%, while UPRO lagged at 10%.

My two working theories on 3x funds is either "volatility drag" or "recovery leverage with special loans".  Looking at 2020 suggests volatility drag, for example:
SPY drops -20%, and from there gains +25%: 0.80 x 1.25 = 1.00, full recovery.
UPRO drops -60%, gains +60%: 0.40 x 1.6 = 0.64, a 36% loss.
That's volatility drag, but I believe 3x funds try to fight it with special loans to increase their leverage.

Last year investing in the S&P 500 beat investing in a 3x fund, even though for the year the S&P 500 gained +18%.  Volatility can deliver sub-par returns from 3x funds, which despite the name do not always have 3x leverage.

If 3x funds are a bet against volatility, perhaps they could be hedged by a long strangle options strategy, which pays off if volatility exceeds market expectations. This would also open up a possibility for a best-case scenario in which volatility falls but the stock market goes up so much the long strangle pays off too.

[habanero]

A collegue of mine once joked that he wanted to short both the bull and Bear version of a 3x fund to be long their transaction costs and volatility drag.

[SparkyPeanut]

I have TQQQ, SPXL, UPRO, QLD and TNA.  I very luckily purchased them during the BIG 2020 dip - and I still have them, up 350-400+%. TNA is up the most at 400 plus percent gain. 
Of course I did not purchase as much as I wish I did! :)
Yesterday I sold a few shares of TQQQ and today just a few shares of SPXL. It's the first sell and I just can't bring myself to sell the rest even though I know I should.

At this point it seems to me that buying now (on dips) would only be 'safe' if buying 2x leveraged i.e. QLD for tech and whatever the ticker is for 2x S&P500. I won't be buying any 3x unless we have a very large dip.

2x leveraged seems like a safer option for long term holds as surely the risk of losing everything altogether is MUCH lower? Anybody into the 2x etfs?

[Watchmaker]

I'm not endorsing anything, but for literally hundreds of pages of discussion of using leveraged ETFs, check out these threads on Bogleheads:
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=272007
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=288192

[SparkyPeanut]

I'm not endorsing anything, but for literally hundreds of pages of discussion of using leveraged ETFs, check out these threads on Bogleheads:
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=272007
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=288192

I have seen the leveraged etf discussions at Boogleheads thanks - although I'll check out your links as these many be ones I haven't read.

The ones that I have read were (mostly) all about UPRO(3x), didn't see discussions about 2x.

[whywork]

I have TQQQ, SPXL, UPRO, QLD and TNA.  I very luckily purchased them during the BIG 2020 dip - and I still have them, up 350-400+%. TNA is up the most at 400 plus percent gain. 
Of course I did not purchase as much as I wish I did! :)
Yesterday I sold a few shares of TQQQ and today just a few shares of SPXL. It's the first sell and I just can't bring myself to sell the rest even though I know I should.

At this point it seems to me that buying now (on dips) would only be 'safe' if buying 2x leveraged i.e. QLD for tech and whatever the ticker is for 2x S&P500. I won't be buying any 3x unless we have a very large dip.

2x leveraged seems like a safer option for long term holds as surely the risk of losing everything altogether is MUCH lower? Anybody into the 2x etfs?

2x is a very safe ETF. People point to 2000 tech crash as an argument against it but that was long ago and an exception. The tech scene is quite different now. Even despite that crash, it would do much better now than QQQ.

I personally feel safer holding a lower allocation of 3X than a higher allocation of 2X so that I have more left to double down when market crashes