I currently invest about 60% in US index funds and 40% in Swedish index funds (which are heavily internationally exposed, so it’s not purely domestic).
I mostly see the risk in extreme single-day crashes, which are very rare. Even during COVID‑19, daily drops were only a few percent, which you can handle with daily rebalancing.
If you rebalance continuously, the portfolio value E that tracks the index S with leverage L roughly follows:
dE/E = L ⋅ dS/S implies E = E\_0 ⋅ (S/S\_0)^(L)
* S\_0 = the index value at the start of the period
* E\_0 = your portfolio value at the start of the period
This assumes daily rebalancing, and although extremely rare, huge intraday crashes could affect the portfolio. The main takeaway is that the final index value S is what largely determines the long-term outcome.
I’m currently using a leverage of 1.33 with an annual interest rate of 1.64%, and I’m thinking about increasing it. With daily rebalancing, it seems like it could work in my favor, but maybe I’m missing something?
What leverage levels do you typically use, and how do you reason about them? I’m trying to figure out what might be optimal for a long-term portfolio.