Investing With Leverage (Borrowing to Invest, Leveraged ETFs) 

True!

You need to be high risk when you are young, obvious isn't it? When are you going to do it, when you are 55? I am wary of a depression though.

Agreed I use leverage but I don’t use margin

Who cares about drawdowns? Pros and pessimists only look at short term incidents, and advise against this to cover their asses. Over the very long-term, such leveraged ETFs return much more if you can focus on what you started with, and not what you've gained, or how little you gained over the short term. People panic because they don't remember or record their initial investment (lose track of initial amounts and/or don't keep track of long-term charts, etc.). As long as you pick ETFs that have returned fairly steadily over the long-term (i.e: NASDAQ 100 and S&P 500), you just have to hold on and always remember your initial amount, and not what you have at the present time, because that will change and/or go down drastically. If you're making monthly contributions, chart those as well, and prediction charts over the long term. And you'll see that you'll end up a winning over 7, 10, 15, 20 or even 40 years. We're all "short-term" creatures and it's why this looks scary and always has such warnings by advisors in order to cover their asses. Personally I prefer 2x (QLD) over 3x (TQQQ), my heart can only handle so much! And the 43% yearly long-term return with QLD (over the last 10 years, even through major pandemic crash) is certainly adequate. HQU is the Canadian version of QLD. For Canadians, use the WealthSimple broker (WealthSimple.com) which charges 0% commission on all trades. It's great. Use code UEE9DA to get $10 free from WealthSimple when you trade 100$ or more. Best broker for Canadians!

@@chriswantstomakeit what's not so obvious is for a youngster to use leverage - which is the point of the vid. There many ways to take on higher risk. I think borrowing to invest is not talked about enough.

I'm dead hahahahahaha!

your*

😅😂

This can't be unseen

😂😂😂😂😂😂

Brent Ross ahh haha

Dave is great for getting debt junkies out of debt, but he's a con artist when it comes to investing advice.

Thurgor Supreme well if you had leverage you sure are feeling it now lol

@@BrentRoss Depends. You can use a 3x leverage account but only invest 1/3 of your equity in it to receive similar returns as 100% in equity without risking as much capital. Very contingent on how people are using it.

@@Thurgor_Supreme yeah i saw one his videos where he was yelling for 10 minutes straight about being frugal. Can't take advice from someone who can't talk like a normal person

did you dollar cost average, or did you follow some other process?

@@commonsense-og1gz I used my own "weighted" dollar cost averaging approach through my most recent buy into SOXL maxing out in Oct 2023. Basically divided all my cash into 52 equal parts with a schedule to buy in once a week for a year. However, if the price was lower than the previous week, I bought twice as much as the previous week. If the price was higher than the previous week, then I would reset the amount back to scheduled allotment.

Thanks Fabio!

Thanks!

Value premium still exist! 😊

Why not?

Thanks! If you prefer audio I wonder if my podcast would also be useful to you. It's longer and unscripted (so less structured). rationalreminder.ca/podcast-episodes

Awesome. I have not applied it personally but it is something that I consider often. What are you using to access leverage?

@@BenFelixCSI in my stable growth account though a bank broker I am using a Margin account for 2:1 leverage with the stocks as security. In my high growth/high risk account I use CFDs for 5:1 leverage, these are a base buy and hold position with day trades around the central position.

Thanks! Covered calls limit your upside. Yes, you get some extra income, but if we are operating on the assumption that stocks have positive expected returns you are giving up some of that expected upside by selling calls. The strategy also affects the distribution of outcomes, where you have limited upside but maintain all of the downside (less the option premium). The strategy is also tax inefficient due to the added income from option selling. Maybe a video eventually.

Thanks!

I think your'e making a point about behavioral factors, which I agree with, but a leveraged investor should be selling stocks after a crash to avoid being over leveraged right?

Thank you! Also thanks for tuning into the podcast!

Simulations or observing 13 years of past data? The market has had an unprecedented rise since 2007 in terms of returns and risk-adjusted returns, so looking at leveraged ETFs over that period could be misleading. In a volatile or down market leveraged ETFs could be ugly.

@@BenFelixCSI Right yes. Sorry, historical data. I did calculations of 5 to 10 year returns based on purchasing them since their inception, and they outperformed even when one bought them at the worst possible time, right before the financial crisis. We had had an unprecedented bull run yes, but it seems if one could stomach the volatility, assuming the fund doesn't get wiped out or anything, one could do quite well. I'm not saying someone should go 100% into a 3x leveraged semiconductor ETF, but a small sized portion of capital allocated, after a large pullback like we have seen, into a leveraged S&P 500 ETF looks like it actually could be quite promising.

@@napalm8030 I agree with your idea: to get in after a large pullback. What did you learn (e.g. size of position, re-balancing, ...), if you actually used this strategy in the last two years.

@@BenFelixCSIrisk adjusted return is bullshit idiot i became a millionaire due to leverage etfs I average on the down with qld and I try to buy upro when spy breaks 200 day moving average and some gold crosses . This idiot just sites academia like an idiot hedge funds on average beat the market before fees . Top 50 funds outperform after fees long term before fees the number is crazy ex, de shaw average roi net of fees is 15 and it charges 3-30 befor fees is like 25-27 percent plus for class a shares . Ben is just not educated enough in finance . Hell I bet he doesn’t have access to high tier prime brokers like ubs Neo etc . He just sites broke dumb professors who can’t even afford a Bloomberg terminal and credible education management system . I beat the market every year . It’s easy it’s just difficult when you mange 100 million plus because of slippage wide spreads etc even with block orders there is no such thing as arbitrageurs professors are just broke and stupid

How did it work out the last 8 months?

If I were to use leverage in my personal portfolio I'd be deciding whether to use margin or futures. The downside of futures is that I could not get exposure to my current portfolio (which I have deemed to be optimal for me). That would be an important compromise to consider. If I use margin I can maintain exposure to the assets that I want.

That's great! I'm glad it was helpful.

The point of leverage is not always just to boost returns but sometimes it can help lower the risk adjusted for returns. Let say you invest 100% in spy, you are not leveraged but are pretty much all in on market risk. Now let say you take 50% of your money and put it in a 2x s&p 500 leveraged etf, you have more or less the same market exposure but have 50% of your money left to play with. Put that 50% in any asset with a positive return expectency that is not correlated with spy (like gov bonds) and you will have a lower risk adjusted for returns then if you would just put 100% of your cash in a s&p 500 etf. The only question that remains is if this gain in risk adjusted return is enough to offset the added cost of using leveraged product... If you know what you are doing, I think it can be

M Power okay that does make a lot of sense in terms of helping your diversification but I still believe that the added cost of using leverage isn’t worth it were something such as a recession to happen right after you invested as it could take up to even a few years for the market to recover. I do understand what you’re saying but I just believe that one should invest the money they have and that they are ready to lose should a catastrophic event occur and by using leverage you are adding risk to this strategy. But thank you for the clarification👍🏻

@@domenicomartistocks in the case I laid out, if a recession hit, you would be better off being invested 150% (100% equity /50% short term bills) then only 100% in equity unless the negative correlation between bonds and stocks were to break. So to your point yes, if you want to make more money there is always some risk creeping in somewhere, you just need to be wise enough to know those risks exist and to figure out which one you can handle. I heard some financial planner say that for most of his younger clients a 60% bonds 40% equity is optimal not because thats what the numbers dictate but because it is, on average, the level of volatility his clients can assume long term without making terrible decisions along the way... so your advice would be correct for most people.

The longer you hold the investment for, the more you'll get in dividends and appreciation. I don't see where the time limit would come from.

diamine665 because with leverage, the longer you hold the stock, the more interest you are paying so you essentially are hoping you can get rid of the investment as soon as possible

Thanks! I am currently working on an ESG/SRI video.

Excellent. Shorting is a possibility but not currently on the list of upcoming topics.

​@@BenFelixCSI Great! There are short biased ETFs, right? Also, does shorting also always have positive expected returns? I really haven't even started studying this subject, I plan to. But I imagine if you are shorting a $30 stock, you're not gonna bet that it's gonna be less than $30 months from now with more than 50% probability, that seems insane. You would bet that it's gonna be less than $34 or something like that

Shorting can be expensive to maintain a position and it has unlimited downside. Scary stuff.

Very interesting. It has been a decade of record low volatility and record high returns (combined, record high risk-adjusted returns). It would be in a volatile market that the time decay of the levered ETFs could work against you. In any case, you got a great outcome!

Interesting! What is your main learnings during the 13 years of owning QLD, going through 2009 financial crisis and 2020 pandemic? Is it possible that the value is completely wiped out during a excessive drawback, or the ETF is delisted from the market?

Any specific suggestions?

@@BenFelixCSI More info on using ETF and index options as a form of leverage (as discussed by Ayres & Nalebuff, but with more practical detail) would be greatly appreciated! Love your work, I've kept an eye out for info on leveraged investing for years and this is possibly the most rational and approachable analysis I've seen.

I touched on that here ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-w_aOERmUWdA.html

Yes, it is on the menu for our second episode of 2020. I think we will discuss leverage for both the portfolio topic and the planning topic. There are good angles to discuss leverage in both contexts.

Ben Felix you guys are legend!!

Hi Dave, did you use your dividend stocks to re-balance the leveraged ETF?

why would you invest in single stocks with leverage, thats a sure way to lose

Justin , you say ; “ However you must use the funds explicitly for investing and not for the initial purchase of the house, but then you go and say for most people this means purchasing a house (first) with a mortgage, paying it off and then borrowing against it .... so my question is I guess, weren’t you advising against doing precisely that ? And as a following question, How would most be people go ahead and do that ? What is CRA ???

That's a good set-up. If you use Scotiabank at 1.5% today, they have a re-advanceable mortgage product. Which means, the principal portion of the mortgage payment is instantly made available to you in your HELOC. Just keep purchasing investments until you get to your (un)comfortable leverage level.

Thanks! I write the words first and read them as I speak.

The incentive that the wealth tax creates for leverage is fascinating. The Ayres and Nalebuff paper suggested 2:1 leverage.

Interestingly while Buffett professes to believe in avoiding leverage, much of his success is attributed to it. _Furthermore, we estimate that Buffett’s leverage is about 1.7 to 1, on average. Therefore, Buffett’s returns appear to be neither luck nor magic but, rather, a reward for leveraging cheap, safe, high-quality stocks._ www.aqr.com/Insights/Research/Journal-Article/Buffetts-Alpha

@@BenFelixCSI In my view, one can use leverage to buy what Buffet calls "cheap, safe, high-quality stocks" when there is a compelling buying opportunity, say after the market has undergone a 20% plus correction. Given one's investment horizon, not sure how long one has to wait for such an event to occur but that is a different point. Otherwise one will be taking a bet of trying achieve an expected return that is higher than his cost of borrowing (that too expected return not guaranteed return) vice versa earning a guaranteed return that equals the cost of borrowing if one were to pay down debt. They key issue with leverage is that it amplifies the loss (just as it does wonders on the gains) and if there were successive periods of losses, the arithmetic of compounding can be quite devastating to the portfolio if one bails out at the wrong time. Investing is not an exact science hence one can argue on either position interestingly :-)

Nice! Actionable information is what I am aiming to provide. I'm glad this video was useful to you.

That's an expensive fifteen minutes!

@ K Roddy for how long did you keep tqqq. I read it starts to lose its values if you keep if long term. I'm new in investing and was doing well with the tqqq and SQQQ, but got to confident and bought a lot of tqqq and it went down right after. This was on friday now I'm not sure if I should cout my losses right away or if I'm better off holding long turns Any input will be appreciated.

We discussed it in a recent podcast episode. I will cover it in a video eventually. rationalreminder.ca/podcast/76

Thanks!

Tried to simulate it and you do need a spread. I'am unsure how to calculate it though and although i tried to dig into it I didnt come up with a good solution. I build an excel tool with historical data and tried to simulate it, but I only found decent Index Data that goes back to 1978. I will try go ahead an redo it in python to get better statistical results... I hoped to get more input from here...