Maybe my use of expected return is confusing. As I said, the arithmetic return is positive. The geometric return is 1. Maybe I should have clarified expected return in log-space, or expected geometric return.
Playing this game is only attractive if you can rebalance it against other assets (e.g. human capital), or if the marginal utility per value is higher at higher totals (uncommon, but e.g. you gona swim with the fish if you don’t cough up x USD by tomorrow, but you don’t have it).
It is not attractive if your human capital is negligible in comparison to your portfolio and/or you have a log utility of wealth.
That’s about 1% more geometric return per year. Others tear themselves up over a tenth of that in ETF fees (though that has no added volatility). One has to decide themselves if they want to market time to end this sudden and temporary leverage now or later. In general later seems acceptable to me, at least if we time randomly.
In a sense, we have always been unknowingly leveraged until now.1 Now we know that we were, and also know that it will end soon. We can just choose to end it now instead of later.
We can also think about it the other way around: You can lower the volatility by 5%, but you loose 1% of return. Where do you stop? Once you reach a cash only portfolio?
To prevent sudden spikes to leverage level one could smooth this out over a longer duration. Start rolling down to desired leverage level. Somewhere in the middle pay the expense with a margin loan (or any other leverage construct). This way you wouldn’t be bound by this external schedule.
One could even do easy and blowup safe daily leverage, by liquidating the required assets for the expense, and replacing some of the portfolio with 2x or 3x ETF, so we are back at the original 1.33x. Taper down from there. Liquidated assets go into multiple fixed deposits below 100’000 CHF.
Now I’m interested how that would look, fffff…
Footnotes
1: This is assuming the expense would have happened anyway. Which is probably not really true. Also this leverage is a bit strange: You could dip below 0 net worth, but nobody is going to margin call you (until the day it is due). If you can’t pay, the opportunity for buying this good is taken away from you. If this is something serious like a necessary health expense, this can be game over. Other things like being liable for an expensive accident, just take away your right to have any portfolio assets, but stop there.
I found it hard to find stuff I wanted to sell - I guess it is “Endowment effect” bias as I equally find it difficult to find stuff of value to buy…
In the end I took a middle ground by selling 10% of the top X holdings - (I was going to sell 10% across everything, but I cut off the tail end as it was too much work to do small amounts) so ended up selling around 3%.
I figure I have 7% liquidity including the yield. Then I can sell the further 6% next year which can come from stocks or gold holdings.
Sold amounts were put into BOXX. I was deciding between CASH CHF, CASH USD, BOXX or BIL.
I needed to free up some cash recently and knew about it a few months in advance. What I did was write covered call options with a time horizon close to when I needed the cash plus a strike price only moderately higher than the current price of the equity. Made some decent money off the premiums, sold some of the equities at a higher price that as is (when implementing the strategy), continued to collect dividends during that time, etc.
I rarely flat out buy or sell stocks, almost always do those transactions enabled by options to get a better price and a premium.
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