Hi all!
I'm looking for some advice/sanity check regarding an index investing plan I have, I'm from the Netherlands and we have no relevant tax issues. My background is in physics and this is the first time I'm doing something like this, so my math and computer understanding is pretty good, but I don't have a lot of experience in investing. I have about 400k euro for this project. My goal is creating a portfolio that creates good returns without unnecessary safeties. There is some math in here, but I'll explain in words as well, it should be fairly easy to follow.
My plan is to invest in index ETFs with optimal leverage. I'll illustrate with a very simple portfolio of only two assets: Vanguard Total Stock Market ETF (VTI) and iShares 20+ Year Treasury Bond ETF (TLT) because they anti-correlate nicely(@).
In order to determine the weights of these ETFs in my portfolio I'll calculate how I can make the most, considering the amount of leverage I can take on safely. This leverage I'll calculate from the worst monthly return in the past 10 years. If it is minus 10% for instance, I'll double that (for safety) and I'll take its reciprocal to dictate the leverage. In this case 5X (because 1 / (2 times 0.10) = 5).
I feel that this amount is safe because I'll automatically rebalance whenever needed, if it falls out of the optimal leverage range, for instance if it's at 4.5 because of a profitable period, I'll reset it to 5 by buying some more. And I'll do the opposite if it reaches 5.5 in our example@@.
Thus, mathematically, we need to calculate (in image because reddit doesn't support LaTex):
(This basically says: what are the optimal portfolio weights considering you'll take on margin/leverage exactly as mentioned earlier)
However, taking on margin/leverage costs interest. Interactive Brokers charges 2.51% (0.21% per month) at the moment of writing, so we have to account for those costs as well. And we need to update our math, specifically equation 1:
(Same as above, but now considering cost of margin)
I've realized can do better than this by using leveraged ETFs, and rebalancing daily on close to get cheaper margin at around 1% per year, but I'll leave that out of this discussion. A fairly detailed example is here. I'm still investigating hidden costs.
I'm planning to do all rebalancing (leverage, portfolio and perhaps leveraged ETFs daily) automatically through the API using the computer.
My questions:
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Does this make sense? What would you do differently and why? Is there anything I'm missing?
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There are a couple of arbitrary numbers in here: leverage rebalancing thresholds (4.5 and 5.5 in our example), the lookback period (10 years) and most importantly the worst return period (1 month here). I feel like I can do better, especially on the last one, but taking 1 day seems too aggressive, and using the max drawdown in 10 years is too defensive (because I can leverage rebalance constantly)
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MOST IMPORTANTLY: How can I get a financial professional that actually understands my plan and the math to look at this. All pros you can get at a consumer level seem marketing people. I don't mind paying.
(@) I would, in reality probably have 3-4 assets total, very similar to this, but with more international exposure.
(@@) The range is in optimization problem in itself, because going back and forth does incur a little transaction costs
Submitted September 24, 2017 at 02:56PM by JohnRezzi http://ift.tt/2jXLyfp
