Who Can Use Stock Pledging, Who Can Use Leveraged Funds, and Understanding Their Risks

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Who Can Use Securities-Backed Lending, Who Can Use Leveraged Funds, and the Risks of Both

• Understand the risks of pledged borrowing and leveraged funds.

• Who can use securities-backed lending: only investors who will never sell their assets, have enough assets, and understand how to combine leveraged funds with cash. In Taiwan, this generally means people with more than NT$10,000,000 in stock assets. In the United States, it means investors with more than US$1,500,000 in a taxable investment account. US retirement accounts cannot be pledged. Leveraged funds cannot be pledged. Therefore, if you invest in leveraged funds, it is recommended to hold them in retirement accounts. You must always keep cash far greater than the pledged loan amount to avoid bankruptcy risk.

• Who can invest in leveraged funds:

• People who are still working and still have many years before retirement can consider a small amount of leveraged funds. Leveraged funds can be paired with cash to reach Beta 1.0, with the cash position serving as an emergency reserve. Using a lifecycle investing approach, younger investors can let beta be slightly above 1.0. If assets are still limited and retirement is more than ten or twenty years away, time can reduce the risk from slightly higher Beta and may produce higher long-term returns.

• Anyone using pledged borrowing must prepare enough cash, and the cash must be far greater than the amount borrowed. Pair it with leveraged funds to reach beta 1.0.

Enough cash will not fall when the market falls, which helps avoid forced liquidation.

People Who Do Not Pair Leveraged Funds With Cash and Keep Cash Far Above the Loan Amount Should Not Use Pledged Borrowing

• Who should not use securities-backed lending:

• Anyone who has not watched videos 00004, 00452, and 00454 and does not understand what we are saying should not use pledged borrowing.

• Anyone who does not use leveraged funds with cash and keep cash far above the loan amount should not use pledged borrowing.

• If your cash is not far greater than your pledged borrowing amount, you should not use pledged borrowing. You must always keep free cash far above the pledged loan amount. When the market falls, cash does not fall, so you will not be forced into liquidation.

• To avoid forced liquidation when the market falls, you need to prepare a very large cash reserve. This will make your beta far below 1.0 and reduce investment returns, so you need leveraged funds to bring beta back to 1.0. People who cannot use leveraged funds and also keep a large cash reserve should not use pledged borrowing.

• Who should not invest in leveraged funds:

• Retirees who do not use pledged borrowing should not invest in leveraged funds.

• When the market falls very quickly, leveraged funds can shrink very quickly and approach zero. If your assets are shrinking sharply and you do not have pledged borrowing capacity available, you must sell assets.

Selling Assets While Leveraged Fund Positions Are Shrinking Toward Zero Can Leave You Without Enough Assets

• Because leveraged funds fall and shrink very quickly during market declines, if you do not use pledged borrowing and must sell assets for living expenses, your assets can go to zero.

• It is like raising chickens during an epidemic: when only a few chickens are left, if you still have to kill your own chickens to eat, eventually you will eat them all.