Wayne, the case for leverage with altruistic investment is in no way based on the assumption that arithmetic returns equal median or log returns. I have belatedly added links to several documents that go into the issues at length above,.
The question is whether leverage increases the expected impact of your donations, taking into account issues such as diminishing marginal returns. Up to a point (the Kelly criterion level), increasing leverage drives up long-run median returns and growth rates at the expense of greater risk (much less than the increase in arithmetic returns).
The expected $ donated do grow with the increased arithmetic returns (multiplied by leverage less borrowing costs, etc), but they become increasingly concentrated in outcomes of heavy losses or a shrinking minority of increasingly extreme gains. In personal retirement, you value money less as you have more of it at a quite rapid rate, which means the optimal amount of risk to take for returns is less than the rate that maximizes long-run growth (the Kelly criterion), and vastly less than maximizing arithmetic returns.
In altruism when you are a small portion of funding for the causes you support you have much less reason to be risk-averse, as the marginal value of a dollar donated won’t change a lot if it goes from $30M to $30M+$100k in a given year. At the level of the whole cause, something closer to Kelly looks sensible.
Hi Carl, thanks for your response and for posting the links. I have now retracted my initial strong downvote of your comment.
I understand and am sympathetic of the view that altruists investing to donate should be a lot more risk-seeking than when investing to fund their own future consumption. My concern was entirely based on your recommendation to invest long term in leveraged ETF’s. I did not think this is a good idea because leveraged ETF’s can have realized returns that deviate substantially from its underlying index in a bad and unexpected way. Given current market conditions of elevated volatility, they are especially dangerous and more likely to have poor performance. The original EA post was about taxes and likely from someone with limited investment experience. I thought your advice could actually be harmful and lead to distressing investment results.
From your links, I saw that Brian Tomasik conducted simulations of leveraged ETF’s and concluded that altruists should consider them as an effective way to apply leverage. I did not review his work in detail but it does alleviate my concern of holding leveraged ETF’s over long periods. Still, as discussed in the links you shared, this should be done with caution and with awareness of the complicating role that other factors play (e.g. fees, choice of portfolio to lever, market conditions). If investors are unaware of these risks and complexities, there could be a backlash.
Since your comment now contains a cautionary disclaimer and the various links that clearly indicate the challenges involved with leverage, I think it’s unlikely to be misinterpreted anymore. Thank you for your response!
Wayne, the case for leverage with altruistic investment is in no way based on the assumption that arithmetic returns equal median or log returns. I have belatedly added links to several documents that go into the issues at length above,.
The question is whether leverage increases the expected impact of your donations, taking into account issues such as diminishing marginal returns. Up to a point (the Kelly criterion level), increasing leverage drives up long-run median returns and growth rates at the expense of greater risk (much less than the increase in arithmetic returns).
The expected $ donated do grow with the increased arithmetic returns (multiplied by leverage less borrowing costs, etc), but they become increasingly concentrated in outcomes of heavy losses or a shrinking minority of increasingly extreme gains. In personal retirement, you value money less as you have more of it at a quite rapid rate, which means the optimal amount of risk to take for returns is less than the rate that maximizes long-run growth (the Kelly criterion), and vastly less than maximizing arithmetic returns.
In altruism when you are a small portion of funding for the causes you support you have much less reason to be risk-averse, as the marginal value of a dollar donated won’t change a lot if it goes from $30M to $30M+$100k in a given year. At the level of the whole cause, something closer to Kelly looks sensible.
Hi Carl, thanks for your response and for posting the links. I have now retracted my initial strong downvote of your comment.
I understand and am sympathetic of the view that altruists investing to donate should be a lot more risk-seeking than when investing to fund their own future consumption. My concern was entirely based on your recommendation to invest long term in leveraged ETF’s. I did not think this is a good idea because leveraged ETF’s can have realized returns that deviate substantially from its underlying index in a bad and unexpected way. Given current market conditions of elevated volatility, they are especially dangerous and more likely to have poor performance. The original EA post was about taxes and likely from someone with limited investment experience. I thought your advice could actually be harmful and lead to distressing investment results.
From your links, I saw that Brian Tomasik conducted simulations of leveraged ETF’s and concluded that altruists should consider them as an effective way to apply leverage. I did not review his work in detail but it does alleviate my concern of holding leveraged ETF’s over long periods. Still, as discussed in the links you shared, this should be done with caution and with awareness of the complicating role that other factors play (e.g. fees, choice of portfolio to lever, market conditions). If investors are unaware of these risks and complexities, there could be a backlash.
Since your comment now contains a cautionary disclaimer and the various links that clearly indicate the challenges involved with leverage, I think it’s unlikely to be misinterpreted anymore. Thank you for your response!