Gyroscopic Investing

Ok, I firmly believe that holding cash that's earning next to zero percent is a major drag on a portfolio. It's my biggest issue with the permanent portfolio in the current low-interest rate environment. That being said, the tremendous diversification of LTTs, Gold and Stocks is a brilliant low volitility strategy, even if LTTs turn out to be a poor long-term investment because the real rates are negative and the dollar is in trouble.

So.....can anyone come up with a downside to the following strategy?

take whatever you have for investing.....let's say 300k

buy 200k TLT
buy 200k VTI or SPY or VT or whatever
buy 200k GLD or IAU or whatever

short 300k SHV

Now you've got a zero margin balance right? Is this not in effect a zero percent loan that you're using to buy a very conservative portfolio with a high likelihood of profit. The possibility of losing money on the PP without cash is nearly the same as with...maybe 5 of the last 40 years. And even if you did lose money it would likely be very small. The return without cash is 1-2% higher also.

You're not going to lose any on the SHV short because the upside potential in a year is practically zero.

I took a look this for the last ten years that we've had extremely low short-term rates and from Jan 2003 forward it's avereaged about 19% return with a standard div of 11% or so. Absolutely fantastic because you're doubling your investing power with a near zero percent loan and covering practically all investing bases.

Please poke holes in this modest idea to juice returns safely.

If you could do that, the corporate bond market wouldn't exist  ;D

You can't use the proceeds from a short-sale to make other purchases. Although it would be nice to be able to borrow at the risk-free rate 

Ok my fault for not being very clear. I wasn't talking about shorting and investing the proceeds.......

Reg T is 50% so you don't need to short anything to purchase double the investments of whatever dollar amount you actually have. You can just do it provided you have a margin account.

My point is.......once you short SHV or anything else you temporarily wipe out your margin balance. I'm looking at my online brokerage account where I had purchased about 140% worth of securities based on my total equity. I was holding a margin balance and paying about 5% interest on the margin balance. well....I shorted an amount of SHV equal to the margin balance and now my margin balance is zero.

Here's the question......am I on the hook for any margin interest when my margin balance is zero? If not......how is this not a zero percent loan to invest?

No free lunches.

I guess if no one knows then I'll check with my broker tomorrow. If there's no margin interest chargin because the margin balance is zero this seems like the safest way to add leverage to a high return, low volitility, near optimum portfolio.

Of course I'd still appreciate anyone's thoughts, particularly if they do actually know the answer.

This may help:

http://answers.yahoo.com/question/index ... 009AAPbokx

There are brokers, such as Interactive Brokers, who have low margin rates. They tend to have a lot of a'la carte charges regarding market data and minimum trades, so they may or may not be of any help with this.

Kshartle wrote: Ok my fault for not being very clear. I wasn't talking about shorting and investing the proceeds.......

Reg T is 50% so you don't need to short anything to purchase double the investments of whatever dollar amount you actually have. You can just do it provided you have a margin account.

My point is.......once you short SHV or anything else you temporarily wipe out your margin balance. I'm looking at my online brokerage account where I had purchased about 140% worth of securities based on my total equity. I was holding a margin balance and paying about 5% interest on the margin balance. well....I shorted an amount of SHV equal to the margin balance and now my margin balance is zero.

Here's the question......am I on the hook for any margin interest when my margin balance is zero? If not......how is this not a zero percent loan to invest?

Can you explain this a bit more?  Why are you shorting shv?  I don't understand exactly what you're doing, but would like to.

AdamA wrote:
Can you explain this a bit more?  Why are you shorting shv?  I don't understand exactly what you're doing, but would like to.

Basically because it appears to wipe out the margin balance in my taxable online brokerage account. As of last week I owned about 140% worth of ETFs with respect to my actual equity. So I shorted SHV in an amount equal to the 40%. It brought my margin balance to zero. My question is......if I don't have to pay interest since the margin balance is zero.....and there's no risk of losing money being short SHV (since rates are effectively zero) am I not in the position of having a zero percent loan to invest up to double my equity.

Of course leverage carries additional risk but the reality is in a zero short-term rate environment having a portfolio that's 1/3 gold 1/3 LTT and 1/3 stocks is extremely low-risk and has been incredibly profitable during these last ten of super-low rates. The chance of significant loss seems extremely remote so I just want to add leverage without paying for it.

If you've been short STTs for 100% of your total portfolio equity and long 200% of your equity in the diversified portfolio these past 10 years it has worked out to something near 18.5% returns on average and only 11% STEDV.  Those are insane numbers and if the FED is promising several more years of it I'd like to take advantage.

I'm asking if anyone sees a problem.

When you accept margin agreements you also accept a lot of unsavory terms such as the broker being able to loan out your shares as well. As I've said many times, I have never once seen a leveraged strategy work without introducing other significant risks.

SteveGo wrote: This may help:

http://answers.yahoo.com/question/index ... 009AAPbokx

There are brokers, such as Interactive Brokers, who have low margin rates. They tend to have a lot of a'la carte charges regarding market data and minimum trades, so they may or may not be of any help with this.

I appreciate the link SteveGo. I must confess though, I'm having a hard time following the Q&A. These guys should work for the FED the way they present info. I'll settle this tomorrow with a call to my broker.

craigr wrote: When you accept margin agreements you also accept a lot of unsavory terms such as the broker being able to loan out your shares as well. As I've said many times, I have never once seen a leveraged strategy work without introducing other significant risks.

Yes a margin account would carry slightly more risk than a cash account. However this is Merrill Lynch. Regardless of your opinion of them...I think we can agree that if they were found pilfering from client's margin accounts we are probably in such bad shape that we're only counting on physical gold at that point.

Aside from those risks and the obvious (I'm invested double what I actually own) does this not appear to be close to a "free lunch"?

Kshartle wrote:

AdamA wrote:
Can you explain this a bit more?  Why are you shorting shv?  I don't understand exactly what you're doing, but would like to.

Basically because it appears to wipe out the margin balance in my taxable online brokerage account.

Why does this happen?

I assume the shorting gives you a credit to your account that offsets the margin balance I had. Now this was just a theory but I can tell you the margin balance was wiped out. I'm long 140% of my equity and short 40% of it and have no margin balance. So do I still have to pay margin interest? That's my question.

Kshartle wrote: I assume the shorting gives you a credit to your account that offsets the margin balance I had. Now this was just a theory but I can tell you the margin balance was wiped out. I'm long 140% of my equity and short 40% of it and have no margin balance. So do I still have to pay margin interest? That's my question.

If you have a margin account with money your broker has loaned you, then you are paying interest on it, no matter what you do with the money (including shorting SHV or anything else).

Are you thinking that you somehow wouldn't have to pay interest on your margin account if you shorted something that was very unlikely to go up in value such as SHV?

You don't short with money your broker loans to you so I'm a little confused by the question. Also, the question of whether or not I have to pay interest has nothing to do with the low likehood of SHV gaining value.

What I'm saying is I purchased some securities on margin and had a margin balance. I sold short SHV by an amount equal to the margin balance. My margin balance now shows zero. My question is.....if the margin balance is zero am I still paying interest? Of course it sounds too good to be true so I'll clear it up with the broker tomorrow.

Did you clear it up finally? I'm quite sure this does not work in a traditional margin account. Maybe if you have Portfolio Margin it might, but I don't know.