Using leverage with a low volatility portfolio
I saw a post on an effective altruism forum that really amazed me. It's so simple, but I just never thought about it as a newbie investor. His idea for investing long-term was essentially DCAing into the global market portfolio* with a 2x leverage. The GMP had half the volatility and half the max drawdown of the S&P500, whilst returning just 0.5% less annually. So theoretically, with a 2x lever (excluding cost of borrowing), you could make much larger returns by investing with leverage in the GMP.
On average, I think it would have worked out to be around 20% CAGR before fees. I'm guessing HFs can't utilise this because they can't borrow money, but why don't more retail investors make use of it?
Of course returns like this are probably less achievable looking forward due to bond rates, especially when stocks are still performing amazingly, but I'm sure it could still outperform.
*the GMP replicates the global market portfolio, resulting in a low volatility (as certain asset classes have very little/inverse correlation, leading to huge diversification). Theoretically (I think? Pls correct if wrong), it means as long as global GDP grows, this portfolio grows.
hedge funds do in fact use leverage…
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