Having another PP for a VP but with a 2:1 leverage (using CFDs)?

[hedgehog]

First: what's a CFD? Contracts for difference. Google will tell you. If you are a US person you are banned to owning them but otherwise feel free to do so.

So my idea is - strictly for your variable portfolio, just live your permanent portfolio alone - to leverage all 4 of your asset classes by 2:1. How about that? It is still highly hedged and when one asset class goes down in value 50% you get wiped out for that 25% of your total variable portfolio - a rather unlikely, but possible, still, scenario. My guess is that the benefits of this method - low standard deviation, solid growth - outweigh the risks - you get wiped out 25% of your assets - every 50-100 years?  I mean come on, in my opinion just ALL other options are worse for a variable portfolio.

Your take? Does backtesting mean anything?

Maybe you can work it out if you are a US person as well.

[hedgehog]

No one? )

[D1984]

How exactly do CFDs work as regards the collateral you have to post? My understanding from Googling it is that a Contract for Difference has (unlike a futures contract) no set agreed upon future price and no agreed upon settlement future date. So what happens (hypothetically) if you enter into a CFD for an ounce of gold (or whatever the minimum position size you are allowed to trade) when gold is at, say, $1400 an ounce and it later goes to $900 an ounce? I presume you have to put up an additional $500 in this case as collateral (plus pay any interest charges on the contract)? Isn't this really just like a futures contract that can be carried over and rolled over in perpetuity as long as you are willing to put up collateral (if applicable) and pay any interest charged?

Also, it seems that this would only be a good idea so long as short-term interest rates charged are less than 2-4% real (i.e. less than 2 to 4% after inflation). Any more than that kill your returns as the PP doesn't return more than that long-term, on average. From roughly 1981 through the early 2000s the PP returned less annually (on average, of course....some years it returned much more and some much less) than Treasury bills. Given that broker's interst rates are typically at LEAST the t-bill rate plus about 1.5%, any period whereborrowing rates outdid the PP's average rate of return for a few years or so would kill the CFD strategy's returns.

Finally, you said "leverage all four of your asset classes"...how exactly do you leverage cash or T-bills/cash equivalents like money market funds? One dollar is one dollar so you can't really have a contract for "difference" when the underyling price of the asset is always one dollar and thus there is no "difference" to begin with (the price of gold, stocks, or bonds, for instance, can differ in dollars but the price of one dollar is always one dollar by definition). I suppose one could have a CFD (or a futures contract) to deliver X quantity of dollars at X date in the future (or in the case of the CFD, at no predetermined date until you chose the close out the contract) but if one is using dollars as one's everday earning/spending currency--i.e. as the money one gets paid in, saves in, and spends in--then that contract isn't really leveraging anything. I guess what I'm asking is this: If you have $10,000 in USD in your brokerage account and contract to deliver $10K USD at some point in the fututre, then what have you leveraged or what difference have you agreed to gain/lose by? Now, if you had $10K in USD and agreed to a CFD for the equivalent amount in Yen or in Euros, that I could see (since the price in dollars of a certain amount of of Yen or Euros could fall or rise and you'd gain/lose according to what it did) but a dollars for dollars CFD or futures contract makes no sense to me....perhaps I'm missing something important here?

[frugal]

Some time ago I made the same question or I read here about it.

People with PP don't expect high returns and don't want big DRAWDOWNS.

How would you feel losing 50% in that leveraged portfolio?



regards!

[hedgehog]

Investor/trader education on CFDs from Investopedia: http://www.investopedia.com/university/ ... uction.asp

Demo trade CFDs with a leading UK broker: http://www.gftuk.com/range-of-markets/cfd-pricing/

I have to say I have yet to do the above research for myself on the topic. First I asked you.

Please not we are not talking about your retirement nest egg here but your VP, play money you can afford to lose.

[hedgehog]

So now you have learned what is to be learned about CFDs. I am still looking for a good provider, though.

As I said before this is for your variable portfolio, definitely.

Anyone tried this? At least on paper/computer?

[Ad Orientem]

My four rules for speculative investing...

*Never speculate with money you can't afford to lose.
*Never dip into your PP or other dedicated investments to cover speculations that go south.
*Never speculate or invest in anything if you don't have a good understanding of how it works and what the risk/reward ratio is.
*Never speculate or invest in anything that could potentially leave you on the hook for more than what you originally were prepared to risk. This usually precludes using margin.

If you are meeting those four criteria then knock yourself out.

[hedgehog]

My four rules for speculative investing...

*Never speculate with money you can't afford to lose.
*Never dip into your PP or other dedicated investments to cover speculations that go south.
*Never speculate or invest in anything if you don't have a good understanding of how it works and what the risk/reward ratio is.
*Never speculate or invest in anything that could potentially leave you on the hook for more than what you originally were prepared to risk. This usually precludes using margin.

If you are meeting those four criteria then knock yourself out.

Sorry, maybe it was not clear to you that

I put this thread in the Variable Portfolio section

So my idea of this VP has nothing to do with a PP

Come on, I mean I can't believe we can't have a normal discussion of such a basic (but very interesting, nonetheless!) concept here! Namely, besides your PP, what happens if you leverage 2:1 all the 4 elements in a separate VP. Plain and simple.

It is at least as sound of an idea as putting your chips on some speculative stocks.

[dragoncar]

See here:

http://forum.earlyretirementextreme.com ... php?t=2033

I think a lot of people are worried that talk of leveraging the pp signals losses in the near future

[hedgehog]

See here:

http://forum.earlyretirementextreme.com ... php?t=2033

That is already to complicated to me where he says he is tweaking it here, changing it there I lost the line. What I would be looking for is simply leveraging a solid PP 2:1.

Thanks for sharing, nonetheless.