Climbing The Wealth Ladder By Leveraging (?)

The past few months have been rather hectic as I began adjusting to life with a new member in the family household. That probably also explain the lack of posts on this site for the past 9 months or so.

I still regularly share my portfolio updates every quarter (and still beating the market this year) but have not posted anything outside of that in this year. So, this is probably the only post I have this year that is not relating to portfolio updates. Most of my sharing is now on Telegram channel which I encourage you to join.

It was only until recently that I have a bit more time to sit down, read a few books, and reflect on the investment journey I have so far.

And two books especially stood out. In fact, these two books got me thinking so much that I decided to write a post on it.

The first one is The Wealth Ladder: Proven Strategies for Every Step of Your Financial Life by Nick Maggiulli. He's also the author behind Of Dollars And Data. He's one of the financial bloggers who I regularly follow in the past few years. I agreed with a lot of what he says, like why it's important to keep buying equities. In fact, his first book (Just Keep Buying) is exactly about that. The Wealth Ladder is his second book and I read it from cover to cover in just about 2-3 days, which is probably amazing to me considering how little time I have on a daily basis recently. The book provides a structure on six different kind of wealth levels, ranging from Level 1 (where you have a net worth of less than US$10,000) to Level 6 (US$100 million+). To move from one level to another, your net worth needs to multiply by a factor of 10.

Without moving across the level, you will probably not really feel much of an impact your wealth could have on your daily living. For instance, having US$800,000 in your net worth is great but it won't be very different from having US$400,000 in your net worth, as they are all in the same wealth level. This is also why people often feel that their accumulation of wealth is not bringing them as much changes as they expect it to be.

Once you move to the next level, you begin to really feel the difference. For example, you move on from not checking the prices on the restaurant menu to probably not checking the prices of your next vacation bill.

The book shares great details on what it's like to be on each level of the wealth ladder, and also how you could move from one level to another. There is a great summary of the book which you can read here. I strongly encourage you to buy the actual book yourself and read it.

Multiplying your net worth by a factor of 10 is easier said than done, and it gets progressively harder at the later levels.

That got me thinking.

Is it possibly to apply leverage to increase your wealth accumulation?

Before you start bashing the whole idea of leveraging and relate it to a fool's errand, it's important for us to understand that most of us are already doing leveraging.

When you take a mortgage loan to purchase your house, you are already doing leveraging. In fact, the leveraging ratio that we used in property purchase is often 1 to 4 which is pretty high.

So if you are already leveraging in your home ownership journey, why not also leverage on your wealth accumulation journey?

This is what Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio covers. This is also the second book that I read recently that left an impression on me. It is a rather old book published in 2010 by two Yale professors named Ian Ayres and Barry J. Nalebuff. But I believe a lot of the principles shared in this book remain.

The whole essence of the book is trying to prove and convince readers that leveraging your portfolio is a smart thing to do. It reduces risks and increases returns. I know it might sound contradictory to some but just hang on while I explain.

The kind of leveraging that was proposed in the book is leveraging across time. For example, if you believe in gradually accumulating $1M in your savings at the end of of your working life and constantly allocating 80% of your accumulation to your portfolio, you are actually exposing your portfolio to a lot of risk at the end. The logic is simple. In the early years of your portfolio building, you don't have a lot in terms of absolute amount. This is different towards the end when your absolute amount triumphs what you have at the start. What if it's a bear market when you decides to retire? Aren't you exposing yourself to too much uncertainty here as your portfolio will have the biggest risk only when you are about to retire? And nobody can tell for sure when a bear market is happening.

To counter that, the authors propose going hard on leveraging when you are young so that you try to have same absolute amount of money exposed to the market like what you could have at the end of your working life. This ensure that you are diversifying your risk across time. Back to the example above, if your end goal is to have $800K in your portfolio and you only have $200K now in your thirties, you should consider leveraging to get your portfolio as close to $800K as possible. With a big caveat. That is to only limit your leveraging ratio to 2 at worst. By leveraging, you will try to mimic the same kind of exposure your portfolio could have to the market now as compared to the future.

In the example above, you might not have $800K even after you leverage (and keeping it to a ratio of 2). That's fine. You keep it as it is after you leverage it, and continue to save and earn in the coming years. That will eventually come a year when your portfolio could have grow to a decent size that you could hit $800K with just a leveraging ratio of 2. And before you know it, you will start reducing your leverage as you are hitting closer and closer to $800K.

The authors released several testing results to show how such leveraging method prove to be superior in almost all scenarios and I encourage anyone to pick up the book and have a read yourself.

Personally, I am still trying to digest that to identify if this is something suitable for me. In fact, I would imagine leveraging might not be a suitable method for most people given the inherent risks it might have if not managed well.

If you are looking for some real life examples of how this is done by an investor in Singapore, you can check this out. FirePathLion has documented how he uses leverage to invest in index funds and generates superior returns, and that has certainly helps in his wealth accumulation journey.

As I look forward to continuing beating the market this year (and hopefully for many more to come), I hope to be able to identify more ways to accelerate the wealth accumulation journey and be happy to share them in this space.

So, stay tuned!

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