Safe Asset Allocation for Retirees With No Income Who Use Pledged Stock Loans and Have Already Borrowed a Large Amount! rev. 2.0

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Safe Asset Allocation for Retirees With No Income Who Have Already Borrowed a Large Amount Through Pledged Assets, rev. 3.0

This simulation assumes the worst market period from 2000 to 2009, when the market fell for ten years and bottomed around 2009. The Excel file link is at the end of the article.

This applies to investors who are already retired, have no other income, have already pledged assets, and have already borrowed a large amount. If the market is at a high like 2000, then falls for ten years and drops 80%, they must pay very close attention to asset allocation and risk control.

If you fit that situation, you should gradually raise your cash position into a safe range.

If you are still working and will not touch your investment assets, this article and simulation do not apply to you.

In the example from video 00454, we originally set aside funds with half in cash and half in 2x leveraged funds. Here we revise that: first invest twice the already borrowed amount in money market funds. Details follow.

First Place Twice the Borrowed Amount in Money Market Funds

The simulation uses a minimum maintenance ratio of 130%. For US investors, it still leaves $249,329 of remaining borrowing capacity, which is very safe.

Suppose you already pledged and borrowed a large amount. For example, you have $3,300,000 in assets and have already used $400,000.

First remove $800,000 from the $3,300,000. Put 100% of that $800,000 into cash, invested in SWVXX or SGOV, or 00864B for Taiwan investors. After subtracting that $800,000 from total assets of $3,300,000, allocate the remaining $2,500,000 as follows:

60% of $2,500,000, or $1,500,000, in the unlevered QQQ (00662).

20% of $2,500,000, or $500,000, in leveraged QLD (00670L).

20% of $2,500,000, or $500,000, in cash, SWVXX or SGOV.

Together with the $800,000 above, this gives $1,300,000 in money market funds.

In Up Years, Move 30% of That Year's Leveraged Fund Gain Into Money Market Funds

Based on the above allocation, beta becomes about 0.75: ($500,000 in 2x leveraged funds x 2 + $1,500,000 in unlevered funds) divided by total assets of $3,300,000.

If you have already borrowed, your investment allocation cannot be fully invested, because the borrowing itself is already leverage. The investment allocation must therefore be more conservative.

Use smart rebalancing. In down years, move 2% of $3,300,000, or $66,000, into the 2x leveraged fund.

In up years, move 30% of that year's leveraged fund gain into money market funds.

For the money market fund interest rate, we use half of the pledged loan interest rate. For example, if borrowing interest is 5%, we calculate money market interest at 2.5%.

We recommend that the amount borrowed at the start should not exceed 20%. If you have already started borrowing, you must review your own risk. Our simulation suggests that even if you have already borrowed 20% of assets, the allocation above can still be reasonably safe if you keep a relatively large cash position. Your final assets may just be somewhat lower.

If the amount you have borrowed is more than 20% of current assets, no simulation can pass the safety test; you need to raise the cash position even more.

Draft: James