Start with investing 50% first, and increase by 25%p for the next 2-4 years (depending on leverage).
from an asset allocation point of view: I would add in some CHF Corp Bonds and 5% of Swiss RE Funds as diversifiers
My bigger risk is having to stay longer in the workforce to the point of breaking my mental health beyond an ability for medium term repair. Long DCA doesnât cut it for me. If weâre in for a crash, Iâm in for a 10+ years journey to reach FIRE anyway so the gains of not being fully invested wouldnât really balance the risk.
That is very personal to me. Other people with other life situations should have different priorities and outlook.
1 Like
So youâre deliberately not having ANY US?
I trust neither the US, nor China with my assets. China is why Iâm out of EM too as not investing in them altogether is easier than adding an EM ex-China fund to the mix, with the risk of having to find an EM ex-China ex-Russia fund when theyâre considered investable again (turns out I mostly donât trust superpowers. Middle powers have to bargain and make concessions, superpowers can choose to simply act as they please).
That too is a personal outlook, other people would assess the risk of assets confiscation or manipulation differently. My stance may be considered as extreme and many investors, including the general market consensus, have way more faith in the integrity and/or alignment of interests of the US and foreign investors than I do.
3 Likes
does it make sense to hedge downside risk?
I think EM ex-China is enough as sanctions have cut Russian stocks anyway.
Hedging comes at a cost so my surface assessment would be to say no. What would be your suggestion to do so?
Iâm still pondering that but I expect Russia to be uncut at some point. They may represent only a smaller part of the market, though, so taking steps to avoid them may not be warranted.
My personal opinion is that since Tariffs are taken away, the American economy cannot be used as a weapon to make president feel like God. Hence now we are seeing American military being used for similar objectives.
Venezuela, Iran and next Cuba before who knows what
2 Likes
well you mentioned you donât want to delay FIRE by many years. hedging might cost you, say, 1 year, but avoid the 5 year loss.
I would have to estimate the drag. As a first very quick surface search, I donât seem to find options on the MSCI World ex US index. I donât think using a set of products to recompose it would be time efficient enough for me.
As a basis, I donât currently see âtotal lossâ as a scenario that much worse than my current situation (it may be a failure of imagination, mind you) so I donât find trying to avoid it motivating enough to actively study ways to do so.
Edit: as an aside, diversification is my hedge against bigger drawdowns. Leverage is also meant to âfineâ tune expected risk and returns. Of course, it isnât perfect as the future wonât be like the past, but it gives me confidence enough to trust my strategy.
What is your thesis/conviction for leverage on these assets and what leverage ratio do you intend?
Leverage: leverage is, to me, the one consistent way to take on more risk beyond 100% stocks and be able to expect more returns. The risk adjusted returns are (probably) worse than unlevered assets but Iâm ok with it as Iâm willing to take on the additional risk. I donât trust myself to consistently generate additional returns by stock picking or market timing.
Assets: my first target portfolio was 120% stocks (EXUS). Stocks, bonds and gold are largely uncorrelated (RE is somewhat correlated with stocks and bonds). Iâm convinced that by mixing those assets, I can get a portfolio generating lower returns but also smaller drawdowns which can then be pushed to the level I want using leverage. My loose model theory is risk parity.
Iâm planning on a x1.4 leverage ratio, which should allow the portfolio to survive a -40% drawdown (of the portfolio), which covers all historical crises since 1968 when I simulate it very loosely (using US assets so not directly transferable) on testfol.io.
2 Likes
Do i get this correctly, you buy gov bonds at <0.5% interest while taking out margin at (>1.5%)? What is the thinking behind this approach?
what do you mean by this? for each 100k of assets, having 40k of debt?
1 Like
Uncorrelated asset classes working together behave differently than the sum of their parts. The part of bonds returns that is leveraged in a ârisk parityâ portfolio is as much the capital appreciation when it occurs as other assets fall as the pure yield.
Iâm searching for a good page explaining risk parity strategies but canât find one that doesnât sound incredibly smug (Investopedia is among the worst offenders). AQR captures my approach best but doesnât explain it in much depth: Risk Parity: Why We Lever
To note that I donât claim to do risk parity per se, Iâm mostly deriving inspiration from it. Iâm willing to underperform and tackle more risk for a portfolio and strategy I have constructed myself, trust and am confident I can follow through dire times.
For each 100k of net portfolio value having 40k of debt so:
100k net portfolio value composed of:
- 140k of assets;
- 40k of debt.
1 Like
Thanks for this, itâs interesting to see how other people think about it. Say in terms of debt, I canât stand to have any, so I see your portfolio as a ton more risky (edit: in terms of both underperformance of âthe marketâ as well as negative returns due to debt - but thatâs just me being afraid of debt) than eg being 100%, 1x leverage, long-only VT/VWRL, but if it works for you then allâs good, as it only needs to work for the holder!
Edit 2: how do you mean âsmugâ?
1 Like
Leverage introduces new risks that arenât there in an unlevered portfolio so, in some regards, it is infinitely more risky than an unlevered portfolio (one question I would for example ask myself is what additional risks I actually take simply by having a margin account rather than a cash account at IBKR no matter the assets I hold in deposit).
RE: smug: re-reading the Understanding risk parity: strategies and real-world examples page of Investopedia, I might have over-reacted.
Parts like the one quoted below make me think the message is âitâs complicated fancy stuff requirering advanced knowlege that most investors donât have the required background to understandâ which I donât find is true.
The approach is favored by sophisticated investors and hedge funds due to its complex quantitative calculations, which lead to a more refined portfolio composition compared to traditional allocation methods.
[âŠ]
Implementing risk parity requires complex quantitative analysis and is favored by sophisticated investors and hedge funds for its ability to optimize returns at targeted risk levels.
I find the core principles actually somewhat intuitive and easy to understand and a few charts can give you the gist of it. I may be over-inflating myself over things I think I grasp but may not understand fully but I donât think the quantitative approaches to implementing it necessarily have to be that complex and sophisticated. Of course, assets managers have a harder time selling their products if theyâre not seen as sophisticated data jugglers floating above the masses.
1 Like
Wow. Thatâs quite substantial! I guess everyone is different. I wouldnât want that level of debt.
1 Like
I did actually look at the same page before posting my question about smugness, and did find myself thinking âwooo sophisticated investors doing complex QuAnT1t4tiV3 analyses, they probably sit behind many many screens and point at graphs while rubbing their chinâ, but I didnât find it inherently smug.
Donât forget to rebalance early enough (e.g. rebalancing bands), you donât want to be forced to delever at the lowest point.
Also consider more efficient vehicles for leverage than a margin loan. Especially if you have bonds in your target allocation, their futures will be the chapest leverage available (and hedging their own currency exposure at the same time).
2 Likes