Newbie Question - Why do non-leveraged returns matter?
So say I have two portfolios, one with a 15% return and okay beta and one with a 3% return but INSANELY low beta (say the risk free rate). Surely I will almost always be better as a personal investor pumping shit loads of cash into the latter with TONS of leverage (I know more isn't always better, but just a decent amount), considering as the risk is so minimal (even with leverage).
Same with index funds - surely the risk of the S&P500 tanking enough for leverage to truly fuck you is so low (and even then, if it tanks that much everyone is fucked) that its worth just putting a decent amount of cash and optimised leverage in?
As a bonus question, how do personal investors actually work with long-term leverage? Say I have 100k, and want to lever 2x (so 200k I think? Not entirely familiar with terminology) in an index fund, will anyone actually offer that amount of money over like a 5 year time span? Is it even worth it with the interest payments?
Apologies if this is dumb / misinformed, just curious.
Hey man, this is actually a really good question. I've actually thought of this myself (why don't I leverage myself tits up into an S&P index for years on end) but I couldn't think of an answer. I highly suggest you move this to the HF forum cuz you'll get better answers there. What I can say is that the simplifying assumptions obviously won't hold (e.g., beta doesn't encompass more risk, you justify a higher expected return by taking on the commensurate risk, you could totally combine the portfolios etc), but that's BS and isn't answering the main question that's obvious.
Got me thinking lmao
Edit: I've crowdsourced this question with my network and I've only gotten average answers lmfao
lol imagine the scenes if we could just pump the S&P with leverage...we would be Bezos 2.0 from McDonalds pay
“Surely the risk of the S&P 500 tanking enough for leverage to truly fuck you is so low” is a view that has resulted in a very expensive lesson for a lot of people. Let’s take the 100K portfolio levered to 200k (so 100k margin loan or 1x leverage) and the past year as an example. Peak to trough from Dec 2021 to October 2022 the S&P dropped ~25% (Your 200k portfolio dropped to 150k). Doesn’t seem too bad, though here’s the problem - you still owe that 100k margin loan, which means your real equity went from 100k down to 50 (50% drop). On top of this, you’re paying 10% annual interest on this margin loan, so with interest you’ve now gone from a $100k investment to $40k (60% decline) on just a 25% drop in the market. You are also going to get margin called and either have to sell shares or put more cash into your account to avoid forced liquidation, so you can’t just sit on that $150k portfolio (which is now 2x levered on your $50k real equity) and wait for it to go back up. Reason being if that 150k equity value now drops to 100k, your initial 100k investment is now 100% wiped out and the entire value of the portfolio is the 100k margin loan you still owe - your broker is going to take steps to avoid this liability on their end well before you get to that point which makes your ability to weather downturns with leverage significantly more challenging.
ahhh that makes sense. I'm guessing truly risk free investments (e.g. bonds) don't yield enough to pay off interest.
How about if you dollar cost average with leverage? i.e. you add £100 every month and lever 2x on that investment. Old borrows get paid off (even at a loss), but in the long term, it's expected you can ride the increase. Again, apologies if dumb lol. I suspect broker won't lend that often?
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