I fully agree, and have said it multiple times on the forum. For most investors, it is inappropriate to be 100% in stocks. 18 years without a real financial crisis gave a false sense of security to people who have never been through one.
This isn’t about timing the market. It’s about finding an appropriate allocation for oneself that one can actually maintain even under the emotions that come with a crisis.
The leverage at the efficient frontier is half of the story. The line that connects risk free returns to the efficient frontier also contains points that are an unleveraged mixture of risk free and efficient frontier, on the left of the tangent point.
The idea of an efficient portfolio is to maximize return at constant risk, or to minimize risk at constant returns and each investor picks their comfort zone. This is very different from maximizing returns in absolute.
I thought the general idea was to pick the allocation with the highest risk/return (sharpe ratio typically?) and then leverage (or deleverage) to reach the desired volatility target.
There are several approaches to that because modern portfolio theory remains theoretical and more difficult to implement in practice, but the important part in what you said is this:
leverage (or deleverage)
The desired volatility target can be on the deleverage side, too.
Leveraging or deleveraging is done by walking left or right on a line going through the risk free point and some chosen point on the efficient frontier. If that line is chosen to be tangent to the efficient frontier, then every point on that line maximizes the return (y axis) for the chosen volatility level (x axis). On the left of the tangent point this is without leverage (mixture with positive weights), on the right of the tangent point this is with leverage.
You normally don’t have access to the risk free rate for leverage. Quite a lot of different things have risk premia, but only few of them manage to jump the hurdle of:
You can put your tangent on the efficient frontier but not at the risk free rate and not on gross return products. This shifts the calculus towards more stocks, because their risk premium can jump it. There is more than stocks, but it is not thaaaat simple.
You’re right to point out the difference between theory and implementation. I think of the risk free point as the interests of a savings account with a bank that has state guarantee, but that only implements what’s on the left of the tangent point.
There’s another aspect to consider with the efficient frontier: it fluctuates a lot when you change the period of the data, making it very challenging to actually implement.
Getting leverage (the part of the line on the right of the tangent point) with the same rate is not realistic for the rest of us. But since even the tangent point is too risky for most investors, it’s also not recommended to venture to even riskier leveraged allocations.
I wish. At the bank you get risk free minus some significant spread. In Switzerland the banks have a structural problems with the risk free rate at or below zero. Many people are going to take the money out and put it under the mattress if they apply the spreads like they normally do. So they just charge all kinds of fees instead.
I agree!
Anyhow, the reason I mentioned this is that the original discussion was referring to what the theory says 
What happened and SCHD is +2.3% today?
Microsoft +14% ?
Bonkers.
Agree, Win11 is a disaster 
One of the best days for my portfolio as all my sectors did well:
Obviously should have bought more gold yesterday…
are we measuring portfolio performance in days now, or did you just need a silver lining already? 
Pretty sure either I or Bessent don’t understand economics.
You can do stocks buybacks using debt or free cashflow.
You can do bonds buybacks using free cashflow or issuing equity.
You cannot do bonds buybacks while running a deficit for more than a while (while you have some cash available), at which point in time you then have to issue more debt and it presumably backfires?
Of course, he could issue short term debt to buy back long term debt but that would be trading rates probably issued when they were lower for rates that are now higher in a bet that they’ll go lower in the future while every single policy the US administration is currently pursuing spells rates going higher in the future?
Edit: also, the US debt has reached $40T. They’re likely to hit their debt ceiling of $41.1T during or before summer next year. Good luck with that…
Edit2: of course, at this point, $4B is really small potatoes but just as such, it’s very unlikely to really make a dent.
Isn’t it clearly what’s happening. I think they’ve kept issuing short term rather than long term debt when long term debt came up for renewal. That’s just accelerating the process.
Alternatively BOJ was doing Intervention all along the yield curve in the past decade, I guess US could try this experiment (but here it’s treasury, not fed so I don’t think that’s what’s happening)
This. The Treasury doesn’t have the tools the Fed has.
It might be me. If rates are up on lower coupon bonds, that means they’re trading below par. Depending on how they account for them, he might have near infinite liquidity to buy bonds below par while issuing debt at par (so potentially less debt on the books).
I’ll have to dig deeper on how the Treasury does its accounting and what the US debt really is.
Impact of Bessent’s jaw-boning fading fast. Maybe it did more harm than good: failed to manage the long term rates, but re-ignited the debasement trade.
It’s a finger in the dike, but you’re in a world of rising interest rates, fiscal profligacy and above-target inflation, and frankly the US has been an outperformer compared with other countries’ bond markets
You say it’s “fading fast” but USDCHF (and, by extension, my spreadsheet) is still down a bunch over the last five days!