SSKILLZ1: Margin Leverage
Have you ever been on margin ? 53.5% cash sounds very bearish and I'm curious whether you're taking an 18 month view and how much your cash allocation shifts over short periods of time? Does this mean that you wait until the market drops another 20% and then you get back in ? You seem to be very aggressively timing the market.
Margin is a very useful tool but I've never heard anyone else on this message board say they use it. I've been an average of perhaps 12% on margin over the last 20 years and it's paid off handsomely. Only on rare occasions have I been off margin entirely. My long term returns well exceed my margin borrowing rate, which also happens to be fully tax deductible. But I have a relatively high tolerance for risk and could not recommend the same for most investors.
However, risk comes in many forms and it seems many on this board are willing to invest their entire portfolio in just a few microcaps. That's much more risky than being 10% on margin with a large and diversified portfolio of 70+ stocks. My portfolio is kind of like a mutual fund that rarely takes on a substantial cash position.
I'm getting more conservative now, so I might some day raise a significant cash position, but I'd have to be quite bearish to do that, and I'm only mildly bearish at this time. Furthermore, the experts prove to us again and again, that market timing is a tricky business, the success of which may depend more on luck than skill. Hulbert's newletter reviews seem to bear that out. A further problem with getting in and out of cash is the tax implications and inefficiencies of churning one's portfolio. Not to mention illiquidity in certain microcaps. Much better to hold those rather than try to get in an out.
A simplification of risk tolerance might be presented as the opportunity to wager on the toss of coin. 50/50 odds. You could only do it once, but the risk/reward profile is excellent. If it's tails you lose your wager, but if it's heads you win not 100%, but 400%. The expected return works out to 150% - either one leaves with $0 or with $5 on every $1 bet. Hypothetically, how much of your porfolio would you risk on such a wager ? My risk tolerance is such that I might put down 20% or even more.
