Altruists who don't care too much about risk (and young people in general) should plausibly use leveraged investing. What's the best way to get leverage?
- Margin borrowing seems like the default solution. I might try it if there's nothing better.
- Theoretically options could be used, but I'm unsure whether they work in practice.
- Supposedly futures offer massive leverage, but I haven't explored the details, and they seem hard to trade yourself. I'd like something I can just buy and hold for a long time.
- Something else?
Ideally, there should be a fund that you just buy into to get leverage, with someone else handling the details. But leveraged ETFs don't work because they're optimized for day trading and as a result lose money for buy-and-hold investors.
If you are e.g. maximizing log wealth and prices are a gaussian brownian motion, then leveraged ETFs and leveraged positions are equivalent for small amounts of leverage, and the ETF is better for large amounts of leverage.
ETFs take their losses in small doses, a day at a time, while a leveraged position takes its losses with the probability of wipeout. If you scale down the leverage position when things get bad (or get margin-called), then you make the leveraged position closer to the leveraged ETF. Both losses are quadratic in expected volatility (for small leverage), and expected volatility is linear in the number of days for a GBM.
In this setting, the leveraged position is a bet on the anti-correlations of day-to-day movements, i.e. that volatility scales sublinearly with time. I think empirically this hasn't been true recently on the scale of months, but has been true on the scale of years---that said, there are more direct ways to bet on this question if you feel like betting.
Presumably your issue is not day trading vs. buy-and-hold, but that you aren't risk-averse (or at least you don't care so much about a wipe-out). If philanthropy as a whole is risk averse, then the same analysis applies for philanthrpists in aggregate, and this is coming down to your personal efforts to drag philanthropy towards an optimal aggregate allocation.
Let me know if you have a reference to understand this better. :)
It doesn't seem intuitive to me because with a leveraged ETF, you lose from volatility alone. In contrast, if you bought stocks on margin and those stocks went up (with whatever degree of volatility you want so long as it didn't trigger a margin call), then you wouldn't lose from volatility because you're not buying and selling. Maybe you're suggesting th... (read more)