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I was reading the bogleheads forum and it seems that lifecycle investing or leveraging a mixed portfolio of stocks and bonds have popular topics for a while now. Whether you achieve it through box-spreads, LETFs or future contracts.

For example if you backtest something like NTSX (60% stocks 40% bonds levered up by 1.5x) it performs similarly to the S&P 500 but with far less volatility.

If you backtest half NTSX and half 70/30 x2 portfolio (50 NTSX / 35 SSO / 15 UBT) at the start of the lost decade it has similar volatility as the S&P 500 with significantly better returns.

Here are both strategies at the start of 1998.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=2ldHFD96vjQ5VDwhJ61W4j

2022 was also a good stress test for NTSX where bonds and stocks both crashed. And NTSX still held up well. I’m wondering if either of these strategies are reasonable for someone who’s young and has a 35+ year investment horizon.

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Leverage (taking on debt to use for investing) can increase your returns, at the cost of additional ongoing interest expense. If your interest expense is less than the money earned by the investments, this will yield you net profit.

However, you must consider what that does to the overall risk of your portfolio. Too much debt can remove your flexibility to hold onto investments for longer periods [because you may need the liquid cash now, to pay off your debt, if you run into financial difficulty]. Also note that past returns do not indicate future results; backtesting is not a guarantee.

Consider also the total debt you have, not just a theoretical additional margin account or similar. Debt from house, car, school, etc., should be totalled together. It can often make sense for someone with a long time-horizon to, for example, invest in a simple diversified stock portfolio, before they finish paying off the mortgage on their house. But even that [which many people may do without realizing they are effectively investing with leverage] has risks.

Keep in mind that leverage that eats into your ability to sell your house [an 'underwater' mortgage would cause you a financial hit if you had to sell], can spell disaster if you lose your job and have to downsize / move for work.

Also note for other readers - this is different than an actual 'leveraged ETF', which is not suitable for long-term investing; it is structured differently than taking on personal debt for investment, because of the way it rebalances daily - check out other questions labled 'leveraged-etf' on this site for details.

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  • Thank you for taking the time to answer. Regarding LETFs this topic goes into holding LETFs long term. bogleheads.org/forum/viewtopic.php?t=272007 Since inception LETFs like UPRO have outperformed the S&P 500 (which is a 15+ year time horizon). If you backtest simulated LETFs (I know you said backtesting is pointless but they did so using Monte Carlo simulations) going back to the 50s it ends up underperforming. However if you combine it with leveraged treasuries (TMF/UBT) the downside gets canceled out and it ends up outperforming the market in 35+ year time periods.
    – Eric Gumba
    Commented Mar 25 at 22:49

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