I’m 100% in unleveraged equity index funds. If I were to want to decrease how long I am I’d just hold some cash, right? If I wanted to go more long with leverage, would it make sense to preferentially do that in IRA accounts or in taxable?
If I were to want to decrease how long I am I’d just hold some cash, right?
Right, e.g. 50% cash and 50% index fund would be 0.5x leverage. But this isn’t once-and-done. You have to keep the ratio balanced as the index price changes, or you’re changing that leverage factor. Notice that you tend to buy low and sell high when maintaining balance this way: As the bubble inflates, you’re gradually pulling cash out of it, and when it finally crashes, you don’t lose what you’ve already pulled out. And then you have a lot of cash on hand during the crash to buy the index when it’s on sale. Had you not been maintaining the balance, all the gains from the inflation would be lost at the crash.
Rebalancing does have some transaction costs, so one shouldn’t do it too often. I do it about once a month or whenever volatility is dangerously high, but you’d get similar performance doing it once per quarter and when vol is high. The timing doesn’t have to be too exact. Some do it whenever the portfolio has deviated from the target ratio by a certain percentage.
And the balance doesn’t necessarily have to be in cash for you to get similar benefits. Some other mostly-uncorrelated asset can work. Cash is not exactly risk-free. The dollar’s performance has some amount of volatility relative to other currencies, and inflation means that you lose real value over time when holding cash. My portfolio balances the TQQQ against the anticorrelated TMF, with the mostly uncorrelated UGL as a ballast, and yes, some cash as well.
If I wanted to go more long with leverage, would it make sense to preferentially do that in IRA accounts or in taxable?
I’m less certain about this part. It really depends on your financial situation and goals. Probably preferentially IRA, because taxes add up a lot. There are limits to how much you can put into an IRA each year. If you’re balancing a portfolio distributed among multiple accounts, and one is an IRA then it can seem to be more tax-efficient to keep a portion of the cash you’re balancing against outside the IRA, but if you over-allocate and lose, then even if you have the money to make up for it, you can’t just replace your losses by depositing more money in the IRA due to the contribution limit, and you’ve lost the tax benefits since you’d have to do the balance in a taxable account instead. I’m not sure what to recommend here.
I’m putting the maximum amount in my Roth IRA every year, and it’s pretty small compared to what I can afford to invest. If you manage your investments well, then you might want to retire earlier than age 59 & 1⁄2, which might make one think twice about using an IRA. However, a Roth IRA allows you to withdraw your contributions at any time without penalty, so there’s little reason not to max it out. You can’t access its growth without penalty until 59 & 1⁄2 (with a few exceptions), however, so if you’re going to retire early, you still need to have a source of income to help make up the gap until age 59 & 1⁄2.
I’m 100% in unleveraged equity index funds. If I were to want to decrease how long I am I’d just hold some cash, right? If I wanted to go more long with leverage, would it make sense to preferentially do that in IRA accounts or in taxable?
Right, e.g. 50% cash and 50% index fund would be 0.5x leverage. But this isn’t once-and-done. You have to keep the ratio balanced as the index price changes, or you’re changing that leverage factor. Notice that you tend to buy low and sell high when maintaining balance this way: As the bubble inflates, you’re gradually pulling cash out of it, and when it finally crashes, you don’t lose what you’ve already pulled out. And then you have a lot of cash on hand during the crash to buy the index when it’s on sale. Had you not been maintaining the balance, all the gains from the inflation would be lost at the crash.
Rebalancing does have some transaction costs, so one shouldn’t do it too often. I do it about once a month or whenever volatility is dangerously high, but you’d get similar performance doing it once per quarter and when vol is high. The timing doesn’t have to be too exact. Some do it whenever the portfolio has deviated from the target ratio by a certain percentage.
And the balance doesn’t necessarily have to be in cash for you to get similar benefits. Some other mostly-uncorrelated asset can work. Cash is not exactly risk-free. The dollar’s performance has some amount of volatility relative to other currencies, and inflation means that you lose real value over time when holding cash. My portfolio balances the TQQQ against the anticorrelated TMF, with the mostly uncorrelated UGL as a ballast, and yes, some cash as well.
I’m less certain about this part. It really depends on your financial situation and goals. Probably preferentially IRA, because taxes add up a lot. There are limits to how much you can put into an IRA each year. If you’re balancing a portfolio distributed among multiple accounts, and one is an IRA then it can seem to be more tax-efficient to keep a portion of the cash you’re balancing against outside the IRA, but if you over-allocate and lose, then even if you have the money to make up for it, you can’t just replace your losses by depositing more money in the IRA due to the contribution limit, and you’ve lost the tax benefits since you’d have to do the balance in a taxable account instead. I’m not sure what to recommend here.
I’m putting the maximum amount in my Roth IRA every year, and it’s pretty small compared to what I can afford to invest. If you manage your investments well, then you might want to retire earlier than age 59 & 1⁄2, which might make one think twice about using an IRA. However, a Roth IRA allows you to withdraw your contributions at any time without penalty, so there’s little reason not to max it out. You can’t access its growth without penalty until 59 & 1⁄2 (with a few exceptions), however, so if you’re going to retire early, you still need to have a source of income to help make up the gap until age 59 & 1⁄2.