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FIRE in the hole [Members]

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I believe – Finumus here – that Financial Independence, Retire Early (FIRE) types give leveraging your mortgage to invest in equities an undeserved free pass.

I think it’s unnecessarily risky. And my opinion is shared by one of our fictitious protagonists today – a couple of 30-year old newlyweds named Ed and Caitlin.

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  • 1 Boltt June 27, 2024, 2:47 pm

    Thanks Finumus – I have to agree 6% guaranteed (saved interest) is pretty damned temping v the vagaries and volatility of the market. The good old days of 1% mortgage rate v 6% P2P/prefs have long gone.

    I’m organising moving my Sipps to II and am a little tempted to leave them in cash (near 5%) as the size is only a little more than my o/s mortgages, and I want clear most of them over the next 5-10 years.

    I suppose leveraging up while draining your Sipp is also an option for the optimistically brave (not one for me!)

  • 2 Brod June 27, 2024, 5:25 pm

    Or they could just buy the vanilla ETF and be £175k down, no?

  • 3 Rhino June 28, 2024, 10:26 am

    Great article.
    I’ll have to make a decision in late 2026 when the current situation of a ~1% interest only offset comes to an end.
    Thankfully should be able to pay it off if need be with no CGT worries thanks to my horrendous gilt losses 😉
    I’m probably not going to go big on leveraged ETFs regardess of the rationality, but I do always appreciate reading the thoughts of more rational minds.
    I’ll have to see what interest rates are like down the line and think about what the threshold should be with respect to whether the juice is worth the squeeze, or whether I’m picking up pennies in front of a steam-roller. Thats enough metaphor mixing for now, enjoy your weekend!

  • 4 Alternator June 28, 2024, 12:13 pm

    Thanks Finumus, food for thought. An interesting comparison, focusing on mortgage costs versus returns on equities in taxable accounts, and the alternative of using embedded leverage in ETFs. More broadly, using the same logic, one might question the validity of conventional financial advice to take on a large mortgage for home purchase whilst at the same time investing in a tax-deferred pension holding a balanced 60/40 portfolio of stocks and bonds. The arguments about expected post-tax returns on equities still apply in this case. Moreover, you are in effect borrowing a large portion of the mortgage from the bank in order to buy government or corporate bonds. This only makes sense if you believe that the eventual after-tax return on those bonds will exceed your mortgage interest rate. Isn’t the reality that governments can almost always borrow at lower interest rates than individual mortgage holders? Wouldn’t that suggest taking on a lower mortgage and building a more modest investment or pension portfolio but holding 100% equities? Or even more bravely using leveraged equity ETFs as you suggest!

  • 5 Fly to the Moon June 28, 2024, 1:41 pm

    I was surprised this article didn’t generate more comments, then I realised I didn’t receive it via email like I normally do. Any reason for that?

    I found this one thought provoking (as Finumus’ articles often are) and it prompted me into action – I’ve sold some unsheltered GIA holdings and will be putting the proceeds into fixed term bonds (<£85k each) which mature when my mortgage fixed term expires, with a view to paying the mortgage down/off then. Another factor which played into my decision was Labour Government risk re CGT increases – decided to lock in the 20% rate now…

  • 6 The Investor June 28, 2024, 2:55 pm

    @flytothemoon — Yes there’s an email snafu going down. 🙁

    Will be sending it to all Moguls on Wednesday. Sorry for the confusion!

  • 7 Laurence June 28, 2024, 4:00 pm

    Very interesting thought process, thanks for sharing.

    One quibble. In the scenario where shares go down by 70%, then on paper having no mortgage but being wiped out is better. No disagreement there. However, in practice those situations are almost always followed by a recovery over years or decades of extremely high investment returns. At such a time, to still have £150k invested could lead to huge returns, whereas the position that has been wiped out will never recover.

    So are there better ways to access the same economic position without the risk of the share portfolio being wiped out? That could include using some 3x leverage funds combined with some unlevered funds. Or alternatively, selecting funds that hold highly leveraged companies.

  • 8 Fatbritabroad June 29, 2024, 7:57 am

    Very thought provoking especially as like ti I’m in a similar position to these fictional characters

    £269k mortgage at 0.99% till 2027 property 580k

    300k equiities (all isa held ) . I’ve been wondering myself when to take some out and convert to cash

    I guess my one gripe is who leaves themselves with no cash at all n this scenario especially a fire type ? That’s really not realistic

    I also have 30k in cash and am now adding to that monthly. I can live on that for a year if I absolutely had to . Our mortgage is 2x joint salary though as well so not drastically leveraged from that pov

    As long as you have multiple back up plans famous last words I don’t see an issue witj borrowing to invest as someone else has said by having a pension and a mortgage you are implicitly doing the same thing

  • 9 Fatbritabroad June 29, 2024, 8:10 am

    And incidentally I’d definitely be putting some of that 500k in pensions as well. Provided the mortgage is affordable in the interim of course

  • 10 PC June 29, 2024, 10:20 am

    Interesting article. This question comes up a lot online.

    For me the key thing is having a buffer and a safety margin. In other words allowing for being able to pay the mortgage while being out of work for 6 or 12 months and allowing for markets going up and down.

    For the past 20 years I had an interest only mortgage and put money from my Limited Company into my SIPP. I saw it simply as a question of cost borrowing compared to likely investment returns, with a good margin because it’s a guess. IR35 spoiled that but I still have a small interest only mortgage and still have my SIPP but no longer contribute to it, just reinvest income.

    I’m more than happy to do that because I can easily pay off the small mortgage balance from my SIPP or earnings.

    To me this is just obvious but I know there are many people who see this as too risky. My response is that everything is risky including putting cash in a building society and hoping that inflation doesn’t reduce it’s value.

  • 11 Delta Hedge June 29, 2024, 11:47 am

    @Finumus: thank you for the super piece.

    I also only spotted the article had dropped by chance (when checking in on weekend reading) as nothing on email.

    On your 27 July 23 “Leverage for the Long Run” Mogul piece @comments #37 and #42, and under my previous moniker @Time like infinity/@TFI (too close to @TI when abbreviated, and so changed), I’d mentioned the Dual Momentum Systems (‘DMS’) LETF strategies.

    For someone in Ed’s and Caitlin’s position I think they could be a way forward. Here’s 7circles’ summary of DMS:


    The seventh DMS is ‘MaxPain’ which:

    “Invests in [the] 3x leveraged versions of Russell 2000, S&P MidCap 400, or S&P 500 and 3x Intermediate Treasuries when markets are going down”.

    It’s the most aggressive DMS strategy, by far. Its rules are here:


    Although its risk adjusted metrics are bad, absolute returns are amazing over time: 34% p.a. Jan 1980 to Mar. 2024, but with (according to Portfolio Visualiser) an over 75% drawdown since 2014 and – in consequence – returns of only 11% p.a. since then.

    The metrics for all 7 DMS are covered by its creator here, in his presentation to the Silicon Valley chapter of the American Association of Individual Investors:


    Now, there’s no way that a sane person with £1 mn (like Ed and Caitlin) are going to put it all into any strategy like that with the massive drawdowns that it has, even in normal times.

    And in a geopolitical worst case like the Ukrainian/Taiwan one which you highlight for illustration, where the 7/13/20 % circuit breakers on US exchanges would get tripped multiple times in the first day; it’s going to loose 99%+, therefore making recovery of capital all but impossible over any timescale.

    However, if Ed and Caitlin, instead of them buying the house:
    – Put 50% of the £1 mn Ed received into 30 year duration TIPS back when they hit 2.5% p.a. real yields a few months ago.
    – Put 40% into a broad commodity ETF.
    – Put only the remaining 10% into a MaxPain triple leveraged ETF strategy; and,
    – If Ed and Caitlin didn’t then rebalance between those 3 limbs, and held each limb for 30 years.
    Then the TIPS would mature at a real terms price which would be twice their purchase value (i.e. double the TIPS full inflation adjusted starting value over 30 years), thereby covering the whole of the real terms £1 mn starting value of the entire portfolio, and leaving Ed and Caitlin whole, even in the worst scenario where both the commodities ETF and the MaxPain 3x LETFs go to zero.

    Although the MaxPain limb could well go to zero over 30 years (for the valid reason highlighted by your Ukraine/Taiwan scenario), it’s a bit of a stretch to imagine an unlevered broad commodity ETF (also held for inflation protection, as a back up for the TIPS) could suffer the same fate.

    So, realistically, Ed and Caitlin would end up ahead in real terms given 30 years, even in a worse case scenarios.

    And if the 10% in MaxPain did perform as back tested from 1980 and returned anything like the 34% p.a. nominal return it has had overall since then (about 30% p.a. in real terms, using the 3.8% p.a. average US inflation rate from 1960 to 2022) then, over 30 years, the real value of the whole portfolio could rise 100x.

    That’s not a bad risk to reward ratio for, in effect, going maximally all out risky with just 10% of the £1 mn that Ed and Caitlin have, and fully expecting to lose all of it, and then maximally risk off with at least 50% of the £1 mn (to reiterate: not rebalancing the 3 limbs of the portfolio, and holding each of them for the full 30 years until the long duration TIPS have matured).

    P.S. incidentally Noahpinion thinks we’re already into your nightmare scenario:

  • 12 Delta Hedge June 29, 2024, 4:22 pm

    Further thought following the excellent observation by @Laurence #7 above that:

    “In the scenario where shares go down by 70%,……, in practice those situations are almost always followed by a recovery over years or decades of extremely high investment returns. At such a time, to still have £150k invested could lead to huge returns, whereas the position that has been wiped out will never recover”.

    Perhaps this is the best option for Ed and Caitlin:
    – Spend £750k on the nice house
    – No mortgage
    – Put the remaining £250k into unlevered SPXP ETF
    The Ukraine/Taiwan scenario outlined above then happens:
    – If it escalates to an out and out global war then Ed & Caitlin are probably not going to be around to worry about their balance sheet
    – If instead it stays contained then they sell their SPXP holding for £75,000 (a 70% loss) and then they put that sum immediately into the 2x levered XS2D ETF to capitalise on the S&P 500’s likely strong recovery.
    – Coming off an unprecedented 70% daily fall, the S&P 500 will likely then go up like a rocket ship when it becomes clear that the world isn’t actually ending. QE from Central Banks to keep liquidity going will add fuel. We saw this movie before coming out of the March 2020 Covid crash. This will be like that but on steroids and on fast forward.
    – Such a strong bounce will likely see the volatility drag of the 2x leverage of XS2D being swamped out. In all likelihood – from a 70% drawdown start on the underlying S&P 500 index – the XS2D ETF would go up in % terms by close to its’ leverage factor for the initial part of the S&P 500’s recovery.
    – Once the S&P 500 has made good half its losses (by going from a 70% to a 35% drawdown) then it’s probably not unreasonable to assume that XS2D will have gone up 4x turning £75k into £300k.
    – At that point Ed and Caitlin sell XS2D and buy unleveraged SPXP again.

  • 13 Delta Hedge June 30, 2024, 12:38 pm

    If in future the FCA allows US ETFs to be held here under the Overseas Fund Regime, then Ed and Caitlin could greatly ameliorate the impact of the Ukraine/ Taiwan crash scenario, e.g.:
    – Buy a £750k into house as before with no mortgage.
    – Put £25k into BTAL ETF (AGF U.S. Market Neutral Anti-Beta Fund ETF): this is long positions in low beta U.S. equities and short positions in high beta U.S. equities.
    – Put £25k into CAOS ETF (Alpha Architect Tail Risk ETF (an MF conversion from AVOLX)): this uses actively traded options to try to provide positive returns during tail risk events of 25%+ drawdowns that happen within a month’s time period, and minimises return drag with positive carry.
    – Put £200k into Simplify US Equity Plus Downside Convexity ETF (ticker: SPD): this goes 98% into S&P 500 (unlevered) and has 2% in puts (with a put options ladder of medium range options #1 (6m) + #2 (9m) and long range options #1 (12m) + #2 (15m), for a total of four components at 0.5% each).
    WTSHTF over Ukraine/Taiwan, Ed and Caitlin are going to be nowhere near 70% down, but in the meantime they can gain nearly 80% long exposure to the S&P 500 through SPD ETF (£196k/£250k). When and if the tail hedged event (geopolitical here) happens, then they will have a much larger amount than 30% of their original £250k left to go leveraged long into the S&P 500 for the recovery using XS2D (or SSO, for 2x leverage, if they’ve access to US ETFs) or 3LUS (for 3x leverage, or UPRO if they’re using the US ETF options).

  • 14 The Investor June 30, 2024, 4:08 pm

    @Delta Hedge — You seem to put a lot of faith in these various complex structures products. They may well perform but experience suggests they are as likely to fall on their face, for reasons which may not be obvious right now. Let’s check in five years’ time to see where they’re at… 🙂

  • 15 Delta Hedge June 30, 2024, 5:28 pm

    You may be right @TI, but there’s 4 things which I’m fairly confident are true which Ed and Caitlin should bear in mind:
    1. Equity returns are skewed. Good luck finding Bessembinder’s 4% of winners. As the average stock selection outperforms the median, a no more than average luck and/or ability investor should index.
    2. Equities offer asymmetries in both directions. Positively, you can only lose what you put in, but can make multiples of invested capital. Negativity, a 20% fall needs a 25% rise to break even, a 30% fall needs 42% to recover, 50% down needs 100% up and being down 80% needs a whooping 400% increase to get back onside. So, whilst it’s worth giving up some returns to avoid some losses, there’s a convex payoff to avoiding the most collosal impact tail risks (Ukraine/Taiwan in @Finumus’ scenario).
    3. In a crisis, both correlations and anti correlations tend towards +1, but this does not mean everything will fail to diversify. Bonds can help (2009), but sometimes they can make worse (2022). More and more varied diversification (diversity of diversification) is probably better; and this means looking at other things as diversifiers – like Global Macro Hedge Funds, Trend Following/Managed Futures, Commodities, Gold, and even Structured Products.
    4. It’s much better to be leveraged long coming out of a crash in the underlying asset class or security than going into the crash leveraged long.

    IRL tail hedge products are a mixed bag. The real world backtests are often short and generally only have the Feb/Mar 2020 Covid crash ‘in sample’.
    – BTAL ETF only went up 10%. Scarcely much better than cash. In fairness, unlike the next 2, it’s not really tail risk hedging per se.
    – Cambria Tail Risk ETF (TAIL) popped by 20%, which is not so shabby.
    – CAOS ETF popped by a respectable 25%.
    More importantly, CAOS has managed to go up consistently in the midst of an equity bull market in the year since its MF to ETF conversion from $75 to $85 now. In contrast, TAIL is down half from its Apr 2017 launch and BTAL spent the period from its Sep 2012 launch fluctuating up and down between $17 and $26.

    [Standard disclaimers:
    Not investment or any other type of advice or recommendation. Always DYOR. No one should just follow a pseudonymous comment poster. Figures given are from reading off by sight from a line chart on Investing com, and might well be wrong]

  • 16 AoI July 3, 2024, 12:27 pm

    Buy £1m house in Berkshire with the cash, name it Hathaway, raise 10 year JPY mortgage at 1.5% (have to haggle with Nationwide), buy Mitsubishi, Mitsui, Itochu, Marubeni and Sumitomo with the proceeds. Dividends pay the interest, get to work on baby making.

  • 17 Tom Grlla July 3, 2024, 2:00 pm

    Very thought-provoking, thanks.

    I suppose my first question would be – would a 3x leveraged ETF be even better? (as I know they exist). Or was that not considered because the volatility would be too much for the couple to stomach?

    Comments-wise, I find the 10-year performance graph fascinating i.e. that after nearly 10 years (last Autumn) the ETFs were basically neck-and-neck. You’d be pretty disappointed with that, no? I imagine if you’d started in say, 2010, it would look much better for the 2x.

  • 18 Laurence July 7, 2024, 10:19 pm

    Some more thoughts on leveraged funds. For those with large unsheltered portfolios, they could be used to expand the value of tax shelters over time.

    For example, an investor with £150k portfolio, £50k of which is sheltered, who desires 100% equity exposure. If they have £50k of equity in ISAs and £100k in a GIA, they will pay capital gains taxes and dividends on a significant part of their returns.

    If they hold a 3x levered fund with the £50k in the ISA, and have £100k in cash outside, this is significantly mitigated.

    Over time, the higher expected return inside the ISA should increase the value of the sheltered portfolio disproportionately.

    Of course this can go the other way if equity returns are bad.

    Just a different version of putting the higher returning assets in tax shelters first.

  • 19 Delta Hedge July 10, 2024, 7:38 pm

    @TI #14: just spotted your earlier (April 2009) piece on structured products here:


    And I see that Joachim Klement also agrees with you in his post only today here:


    In fairness to myself, the US ETFs (none of which are available here) which I had in mind don’t quite fit into the category of structured products considered by either JK or yourself previously (at least AFAIK).