Lifecycle investing

[highfalutin]

This is my first time posting a finance-related question here, but I thought there might be some smart people who can point me in a good direction. Some creative thinking might be useful. What is the best way to set up an IRA to have leveraged stock market exposure? What I have in mind is approximately 2:1 exposure to an index such as the S&P 500. I am in my mid-twenties and have about 20,000 USD in an IRA which is completely invested in a mutual fund called Thrivent Mid Cap Growth A. And I have felt for a while that I should put the money in something with higher risks and higher yields at least until I am thirty. When I saw that Robert Shiller at Yale recommended a book titled, Lifecycle Investing, I eagerly read it. The authors suggest doing exactly what I have described above. I called Vanguard a couple days ago and ended up feeling a little discouraged: My complete lack of investing experience may prevent a brokerage firm from approving me to buy stock options in order to achieve my goal of leveraging.

 

[coolpapa]

Originally Posted by highfalutin

My complete lack of investing experience may prevent a brokerage firm from approving me to buy stock options in order to achieve my goal of leveraging.
Sounds like they made the right decision.

 

[scientific]

if your brokerage won't let you do something, switch brokers.

but for your purposes you would be better off borrowing on margin to buy an index fund or etf

 

[Stewbone]

If this is your retirement account then I wouldnt be buying on margin.

If your looking to up your risk then Vanguard has plenty of high risk funds.

 

[Concordia]

You do have to be careful with leverage.

Volatility in its raw form can be waited out. Volatility created by margin debt often can't.

 

[highfalutin]

I understand that the Internal Revenue Service prohibits using an IRA to invest on margin. Call options, however, might be permitted in an IRA.

Originally Posted by rich_202

Wouldn't a leveraged ETF such as SSO give you double the exposure to the S&P 500?
Perhaps, but that particular ETF is not designed for long-term investing, as the article states. I have not yet heard of a good ETF for this purpose, or any truly viable solution for that matter.

 

[tj100]

Originally Posted by highfalutin

Call options, however, might be permitted in an IRA.

Call options are permitted by the IRS, but most custodians don't allow them because the odds are that you'll be holding a contract that you can't legally exercise because of the contribution limits. With a contribution limit of just $5K, it's pretty easy to buy a call that would require more cash than you can contribute to exercise. I know what you're thinking - you intend to sell the call, not exercise it, when the time comes - but most compliance departments don't see it that way. They see you buying a contract that they're not going to let you exercise.

 

[v0rtex]

Originally Posted by highfalutin

What is the best way to set up an IRA to have leveraged stock market exposure? What I have in mind is approximately 2:1 exposure to an index such as the S&P 500.

If you have to ask the Internet, you probably shouldn't be buying stocks on margin, lest this happen.

The Lifecycle Investing guys have not succeeded using their strategy, it's just a pet theory of theirs.

 

[highfalutin]

When I started this thread, I have to admit I wasn't terribly optimistic about finding a quick solution. The problem is that I don't really know what I should be doing with my IRA. I guess there are two options.

1. Set and forget with a broad index or a mutual fund.
2. Spend many, many hours learning about investing -- not really knowing where to begin.

Penny stocks?

 

[highfalutin]

How hard would it be to create an ETF that tracks the S&P 500 -- times two -- for the long haul? Does it require a degree in finance? And while we're at it, how about a 2:1 leveraged ETF for each of the most promising emerging markets? Even if it's not a smart retirement investment for everyone, I am sure some investors would find such things useful especially as part of a larger portfolio.

 

[tj100]

Originally Posted by highfalutin

How hard would it be to create an ETF that tracks the S&P 500 -- times two -- for the long haul? Does it require a degree in finance? And while we're at it, how about a 2:1 leveraged ETF for each of the most promising emerging markets? Even if it's not a smart retirement investment for everyone, I am sure some investors would find such things useful especially as part of a larger portfolio.

ProShares has basically everything you're looking for in the Ultra S&P500 fund, and has some emerging market coverage as well.

 

[svd]

Originally Posted by tj100

ProShares has basically everything you're looking for in the Ultra S&P500 fund, and has some emerging market coverage as well.

These don't work long term. This is a pretty good explanation as to why. In flat markets these funds lose money.

http://etfdb.com/2009/the-truth-abo...sting-or-dont-use-a-toaster-to-cook-a-turkey/

 

[tj100]

Originally Posted by svd

These don't work long term. This is a pretty good explanation as to why. In flat markets these funds lose money.

http://etfdb.com/2009/the-truth-abo...sting-or-dont-use-a-toaster-to-cook-a-turkey/

Just to be clear, I'm not advocating the strategy. OP asked if such a fund could be built, and I was merely pointing out that such a fund already exists.

Whether it's a good idea to invest in or not depends on personal circumstances - but it's something that I would almost never recommend.

 

[highfalutin]

Thanks to you all for responding to my stupid questions. There are other things I would rather do than learn investing, but doing so might be really important for me. Honestly it all kind of reminds me of the subject of nutrition: The bookshelves are full of bad advice, and I recently ended up getting a biochemistry book and learning more than any normal person should need to know about carbohydrates and triglycerides. If doing something similar is required for investing, I'm open. But where do I begin?

 

[otc]

Originally Posted by tj100

Call options are permitted by the IRS, but most custodians don't allow them because the odds are that you'll be holding a contract that you can't legally exercise because of the contribution limits. With a contribution limit of just $5K, it's pretty easy to buy a call that would require more cash than you can contribute to exercise. I know what you're thinking - you intend to sell the call, not exercise it, when the time comes - but most compliance departments don't see it that way. They see you buying a contract that they're not going to let you exercise.

That doesn't really make sense...maybe it is time to find a new broker?

You might not be able to contribute enough new cash to exercise a call option, but technically the entire balance of your account can be liquidated to buy the shares.