How to beat the S&P 500
Before I actually post anything: This is NOT investment advice. This is PURE speculation and nothing else. Do not follow this advice. It might give you ideas, but if you lose money, I am not at fault. As always, do your own homework before attempting any investment action.
Ok, now here's my idea. One way to beat the S&P 500 is through the use of an "enhanced" index fund that uses the following strategy: use futures to synthetically generate exposure to the S&P 500. This requires you to put down roughly 25% of the full amount. Take the remaining 75% you have and try to invest it in short-duration bonds that will beat treasuries over a year. The sum of those two actions should theoretically give you exposure to the S&P 500 + some alpha, which is what investment managers are suppose to do.
My idea is to do the strategy myself. The added kink is that I would take out a 0% balance transfer and deposit that money with the remaining 75% to increase my leverage and I should be able to "beat" the S&P 500. I would deposit the remaining money in a money market fund to decrease my volatility.
How could I get screwed with this idea? There are several ways:
1. Tax implications: on an after-tax basis, this might be a shitty thing to do. I do not even pretend to know what the tax implications for this would be at all.
2. Futures are marked-to-market: while the end result of a future will still be the same as a forward, the marked-to-market nature adds to the fun with margin calls. While taking out a 0% balance transfer will off-set that because you are over-collateralized, you might eat into the principle amount of the balance transfer.
3. S&P 500 Tanks: Hopefully you'd get the S&P 500+ with this strategy, but if the S&P is at -15%, and you are getting -14%, that still sucks and you would still lose money.
So for right now, this will remain in the recesses of my mind as I try to go about more mundane things to increase our net worth. Just thought I would share.
Tags: personal finance investing
9:43 AM
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5 comments:
I presume you've read A Random Walk Down Wall Street and are familiar with the efficient markets hypothesis as well as Goodhart's Law (actually only tangentially relevant, here, really)?
Have not read random walk, am familiar with efficient markets, not familiar with goodhart's.
Plus, this doesn't violate any sort of efficient market hypothesis. It's just using a cheap form of leverage (hopefully) to increase return.
Well, what you're describing sounds to me like a variety of arbitrage. If you find that it works, you might not want to tell anyone about it, or you're likely to find it suddenly not working.
Oops, too late. :)
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