Is it time to lever up?

[clacy]

Bernanke has just said that we will have ongoing QE until UE is lower than 6.5%.  I suspect that it will actually go on longer than that, because I think the economy will remain sluggish regardless of UE and that real household incomes are continuing to decline which will ensure a weak economy.

So with borrowing rates low and a Fed that is clearly committed to inflating asset prices, do we add a layer of leverage?

The last 3 years would have been an amazing time to run a leveraged PP.  Has Bernanke just ensured that this will continue for the foreseeable future?

[melveyr]

What kind of leverage would you use?

My first thought is:
33% VTI
33% TLT
33% GLD

Are you thinking something more extreme?

[clacy]

I guess I don't really consider a cash-less PP, leveraged although by changing the allocation, you are certainly gearing up for more growth by eliminating cash, which for the foreseeable future seems to be a very low yielding asset class.  I see your point, and that could be a viable option.

There are a lot of options and I probably wouldn't limit myself to only using 2x leverage or whatever. 

I've tracked the following portfolio at etfreplay and it seems to be very similar in terms of DD and volatility to the standard PP, but performs better:

DEF  18%
IEF    18%
LTPZ 18%
SHY  25%

That is sort of a core, low volatility position where you sub LTPZ (LT tips etf) for Gold,  you use DEF (defensive equity etf) for your stock portion.  Cash remains the same, and you use intermediate treasuries instead of LTT. 

Then your leverage portion would be as follows:

SAA 7% (2x scv)
TMF 7% (3x LTT)
UGL 7% (2x gold)

Over the last 36 months that produced:

CAGR:  14.8%pa
Sharpe:  1.89
Max DD:  -3.93%

Compared with a standard PP:

CAGR:  11.3%pa
Sharpe:  1.51
Max DD:  -3.72%

That is over the last 36 months, re-balanced quarterly.