I did some backtesting simulations that made leveraged investing look pretty awesome. The effective borrow rate for funds like spxl is crazy low, way better than if I were to borrow myself. (Also, fwiw I was pretty conservative and am overall only around 2x-leveraged.)

The internet is very opposed to leveraged investing imo, but I think most of the concerns are pretty dumb. There was this one blog post where this guy ran ten simulations of his own, most of which showed the leveraged portfolio doing comparably to the baseline, but one a couple showed it doing worse and one saw the leveraged portfolio 100x'ing or something... and he concluded that it wasn't worth it??

People will also appeal to volatility drag as a superficially sophisticated knockdown (in short, imagine all four two-step paths in which the market goes up or down by 10% at each step. Then the baseline market averages out to (.81 + .99 + .99 + 1.21)/4 = 1, and a 3x leveraged portfolio averages out to (.49 + .91 + .91 + 1.69)/4 = 1. Volatility drag is those two middle worlds where the leveraged portfolio does badly despite the market as a whole basically ending up where it started.

No, I have a diversified portfolio that consists of 5 asset classes divided into percentages that match my risk appetite.

While I am regularly in derivatives too, currently I am not for some specific reasons.

I think his point is that hedge funds may have higher risk-adjusted returns than the S&P 500, despite lower absolute returns. For (ridiculously unrealistic) example, say you have an average 7%/yr return on the S&P 500 with volatility of ~14% and a hedge fund with a 5%/yr return but volatility of ~1%. At the end of the time period, a fixed $1M investment is clearly going to come ahead on the S&P 500 but the hedge fund is clearly the better fund, as matched for volatility (through leverage) with the S&P 500, the returns would be 70%/yr.

You'd pick the hedge fund because matched for volatility (through leverage or bonds or what have you), the hedge fund performs better.

Same here, if I understood the grandparent they were saying you lose 0.04% on every trade (from spread) and "in a year" that is 10% (250 trades?).

If you have a strategy that has expected returns of x bips per trade then you make an expected x-4 and with leverage 4 * (x - 4). Both have the same "sign", so if x-4 is expected positive, leverage just makes it higher risk-reward.

In fact with leverage you also have to pay interest on the loan, which seems to be at least ~18 bips (or 3/4 of that since the returns are on 4 * cash and interest is on 3 * cash) for a single day loan (far exceeding the "spread cost"): https://www.schwab.com/public/schwab/investing/accounts_prod...

It seems the only way leverage would help is if there were fixed costs to trading (which I assume there are but the GP does not mention).

Could you explain your line of thought (or back of the envelope math)?

Buy low, sell high. How enlightening this guy is...

I fear I'm misunderstanding you. Are you saying despite having higher returns, the higher risk makes this strategy worse? That really feels like handwaving to me, since the only thing I care about is ROI. I understand nonlinearity and how it could tank your investment, but if it doesn't and you make more money then you're criticizing something that never happened. The higher risk is already baked into the ROI, because it includes the times that failed. The point is, in aggregate, you make more money - and most of the time that is the only thing I care about when investing.

Or am I misunderstanding you?

Money is not a limiting factor, risk is. If you have a low risk strategy, you won't have problems borrowing money to invest in it.

Its not silly, because the amount of reward depend on amount of risk.

So, if you compare returns of different strategies/funds, you need to first rescale them to the same amount of risk

Because startups, while they may have a low probability of return, have a high potential upside, whereas low-risk (and essentially zero-risk, like US government debt) investments have fairly locked-in maximums as well as minimums.

Sure, the higher returns in low-risk investments, the better returns have to be in high-risk investments to justify choosing the latter over the former with the same risk sensitivity.

Why? A couple of billions should still be a tiny drop if compared to the market cap of S&P 500. What do those active portfolio managers provide to you?

That's not obvious at all. One's risk appetite is very personal.

I would chop it up into three equal parts and do three different high risk investments. But I'm crazy.

Spoken like someone who has only operated in the recent bull market.

Using a mortgage to buy a reasonable house that you can afford is a good idea.

Using leverage to buy as much real estate and/or stocks as you can get away with is a terrible idea with some significant downside risk. Leveraged stock purchases are notorious for working great until the market turns and blows up your account. Even leveraged funds have significant slippage that isn’t obvious to the casual investor who thinks they’re just going to get a clean 2X return.

One of my most poignant memories from the 2008 crash was watching a few people I knew go from feeling like they were financial geniuses to bankrupt and struggling. The common theme among all of them was that they were leveraged to the hilt in real estate. They thought it was easy money when it felt like the market could only go up. Then it stopped going up and we all know what happened next.

There’s lots of metrics that try to balance the risk and reward. Often, the risk is based on the volatility of the asset. The common alpha metric does this by incorporating the assets volatility compared to the overall market volatility. There’s others like Sharpe ratio etc.

Factoring that volatility is particularly important in long-term investing so your choices don’t, as you say, tank your investment. So maybe you interested in cyclicals over the last nine months and your investments went gangbusters. Does that mean that same strategy will work in perpetuity? Probably not, because cyclicals tend to have high volatility. Risk -adjusted metrics attempt to quantify that risk.

I tend to think it's not worth it to try to hedge against that unless know you're going to need hard cash for a specific purpose during a recession, like meeting payroll in your own company.

My ide of diversifying is to hedge against industry-specific risks like space launches if Kessler syndrom hits, internal combustion tech if the ICE car ban becomes reality, real estate if the Detroit scenario happens, etc.

Every 15 years some banks fail and we shake our heads. But by and large, investing in banks is probably one of the safest investments one can make, no?

Exactly. I have seen this idea float around that just because they have taken a risky position they will be able get better rewards. Risk may be necessary for above market rate returns, but it is not sufficient. A proportionate amount of those taking the risk will be cleaned off the amount that was risked. Why do you think its not going to be you ! Of course when you use time effectively or use other hedges one can reduce the exposure.

Which data show this? Less volatile stocks can, in certain periods of time, be levered to return more than more volatile ones. But that is dependent on borrowing rates being favourable and very specific, and to my understanding rare, equity market dynamics.

Do you have suggestions for these?

You don't minimize risk by reacting to daily market fluctuations. You minimize risk by choosing an asset allocation that allows you to ignore those fluctuations.