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.
My main reason for pessimism is the comparison between US equities and international equities; I guess that forward P/E's are higher in the US than elsewhere. This is largely based on the high Schiller PE / current profit margins in the US though (along with comparable P/E and high P/B ratios), so it would be good to know if you think this is a bad basis for extrapolation.
The "plausible stories" I was referring to were about how mispricings could persist. My understanding is that many investors' allocations between US and international equities isn't very flexible. Such investors could make up a large enough majority and short-selling could be unattractive enough that a moderate mispricing could persist. There are also principal-agent problems related to benchmarking, and well-documented market optimism about continuing growth vs. regression to the mean, that seem to point in the same direction.
But I haven't thought about this angle very much either, so it would be good to know if you think these mispricings would get fixed.
Do you know why not? I moved my 401k to all international equities, and I assume many retirement investors have this option.
That said, it does seem that US investors don't invest enough internationally: 27% of US mutual-fund equity is international, while international equity accounts for 51% of the total market.