Russian Roulette– more data

Leverage strategies using high cost retail investment products expose investors to significant risks, especially at fair to high market valuations.   Even very low cost strategies are exposed to significant risk as the market and economic cycle matures strongly suggesting that leverage is more strategic than a long term asset allocation play.  

In the last post I looked at longer time frames for leveraged investment using the Shiller/Yale data set for the S&P 500.  I use the same data set to analyse annual geometric returns over 5 year and 10 year rolling periods: 

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As you can see (before net tax relief – interest tax relief less tax on investment gains), the underlying long term returns on a leveraged strategy with prime + 1.25% and a mutual fund MER of 2.5% yield wide zones of both losses and returns.   These zones are fairly well defined and certainly show the risks of high cost leveraged strategies when buying at fair to high market valuations.

A look at the annual geometric return for 5 year rolling periods shows greater volatility with respect to returns and emphasis the reality that leverage should really be a short term strategy:

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And again, as in previous posts, the next two graphs are shown with only the prime interest costs, but even here it is clear that leverage is increasingly less attractive the more mature the market and economic cycle:

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