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Total Posts: 103
Joined: Apr 2018
Posted: 2020-06-28 07:22
Suppose I'm in my 20s with a good paying job and have $100k to invest. (The numbers are made up, but you get the idea.) After taking into account living expenses, taxes, setting aside some emergency fund, etc, I project that I will have $1mn in 20 years. My objective is to maximize my investment return in 20 years and I don't plan to withdraw anything before then. Does it make sense to use 10x leverage on my current $100k investment so that I can invest the the full $1mn that I expect to have?

In other words, does it make sense to invest the income that you have yet to receive? The future income is just cash that I'll receive in the future, so why not invest it today? Of course there's risk of losing your job or unforeseen expenses, etc, so we need to err on the conservative side. But still, if I expect to accumulate several times my savings today, shouldn't I also lever up my investment by several times?

I've never heard anyone suggesting this idea of levering up your investment based on future income. In fact, most people would advise to invest a fraction of your saving, instead of levering up, let alone 10x leverage. So there are probably some obvious cons that I'm missing. Curious to hear what this forum thinks.


Total Posts: 1126
Joined: Jun 2005
Posted: 2020-06-28 09:41

Under worse-case scenario few things might happen in correlation:
- you lose your job for long
- very likely the economy will be bad
- your investment might be performing bad too.
- If so, getting out of this investment will be difficult because liquidity will dry up.

All in all, if you estimate MDD at zero or affordably small, then you see the green light in the decision.


Total Posts: 1074
Joined: May 2004
Posted: 2020-06-29 09:57

That is usually done with real estate. You borrow an amount based on your income and buy a house today that you'll pay over the next 20 years or so. That tends to work because real estate is not marked to market daily, so you don't panic over short term fluctuations, and as long as you can service the debt, you're good. The asset (your house) is also not that correlated to your job, except in a GFC type scenario (where it really matters).

Now you're proposing to do essentially the same, but with an asset that is marked to market and more correlated to your job...

First, I don't know any bank that will lend you $900,000 to lever you $100,000 equity to buy an investment portfolio (I assume we are talking stocks here, but let me know what you are thinking)

Second, you could get the leverage from futures, but with a narrow universe. Do you really wanna buy $1,000,000 of NQ in your IB account with $100,000 equity? Then a 10% drawdown will take you out.

IMHO you need to take robust decisions. You don't know what you income will be for the next 20 years. You don't know what the markets will do for the next 20 years. Trying to optimise with leverage just puts you in a more fragile position.

"Earth: some bacteria and basic life forms, no sign of intelligent life" (Message from a type III civilization probe sent to the solar system circa 2016)


Total Posts: 43
Joined: Sep 2009
Posted: 2020-06-29 12:49
This reminds me of Permanent income hypothesis ( Tl;dr: the utility optimal rate of consumption depends not only on your current income but also on future expected income. You could probably derive an answer to your question using the same framework, by replacing the constant real interest rate with a stochastic one in the optimization problem.

In a similar vein, I always thought it made sense to try to denominate your future income in some real asset to hedge against inflation. Say buy gold forwards and take delivery using your future paychecks. But as already mentioned people do pretty much directly that when they buy a house on mortgage.


Total Posts: 1126
Joined: Jun 2005
Posted: 2020-06-29 13:17
This is a recent example. Sort of packing yourself/your skills as equity and making ICO (IPO).

But I am not sure if your employer (=boss) will like the idea, unless marketing department supports you as a superstar.

The oldest example is Bowie bonds.


Total Posts: 103
Joined: Apr 2018
Posted: 2020-06-29 14:22
The correlation with losing a job is not an issue here because I don't intend to withdraw the money. Let's assume here that I have enough emergency fund to cover some period of unemployment. I've also been fortunate that my income so far has been positively correlated to market volatility, which tends to rise during bad times. Though I admit there's no guarantee that will continue indefinitely.

@NeroTulip: Getting 10x leverage of an equity index may be impossible, but the idea is just to get very aggressively long. A few ideas off the top of my head: buy very high beta stocks, call options with large delta vs premium, leveraged ETFs. Even getting wiped out on futures is not the end of the world, since it's only 10% of my total future income.

Buying a house on mortgage is indeed exactly the same principle. But the difference is that you can't realize your profits unless you sell the house and move to a smaller one. So you can't really enjoy the return in 20 years.
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