Leverage Stock Investments While Young?
October 12, 2010 - Individual Investing, Volatility Effects
Should long-term investors view their retirement portfolios more like houses than savings plans? In other words, should they start out with considerable leverage and draw the leverage down gradually over time? In their October 2010 paper entitled “Diversification Across Time”, Ian Ayres and Barry Nalebuff investigate the effects of initially implementing and then gradually phasing out leverage for long-term (retirement) equity investment. This strategy exploits the large present value of investments made early in life, while protecting accumulated wealth from equity market volatility late in life. Tests limit initial leverage to 200%. Using return data for U.S. stocks and margin interest rate estimates over the period 1871 through 2009, they conclude that: Keep Reading