Money Can Anyone Recommend A Good Leveraged IRA?

[QueensFinest]

So I'm 22. I would like to open an IRA before April (So I can credit this towards my 2008 taxes). Since my time horizon is long, and I do believe that the economy will eventually bounce back, I would love to open one in a highly leveraged mutual fund. I will be 'depositing' the max amount, $5,000

Unfortunately, the only highly leveraged mutual funds that I've seen (DireXion, Rydex), have a minimum initial investment of $25,000.

Can anyone recommend one to me that has an initial investment of $5,000 or less?

 

[CuppaJoe]

Wow! I'm impressed, 22 years old and maxing out an IRA. How rare is that? I'm sure someone will come along with some good ideas. Wherever you invest it, you can always move it within the IRA later.

Welcome to the forum, QueensFinest.

 

[FIRE'd@51]

You can avoid the 25K minimum by opening a brokerage account in your IRA and buying an ETF, such as ProShares

 

[QueensFinest]

You can avoid the 25K minimum by opening a brokerage account in your IRA and buying an ETF, such as ProShares

Thanks for the advice. Unfortunately, I'm looking for a leveraged mutual fund, because:

1. ETF's are supposed to trade like short-term instruments - the brokerage fees would kill me.
2. I would have to disclose every trade I make to compliance (I work for an agency-broker). It would be...quite a pain.

(However...I've been doing pretty good paper trading - I started an account on wallstreetsurvivor.com on the 20th and already returned over 100% for January - but of course I'm more risky when it's fake money)

 

[FIRE'd@51]

Thanks for the advice. Unfortunately, I'm looking for a leveraged mutual fund, because:

1. ETF's are supposed to trade like short-term instruments - the brokerage fees would kill me.
2. I would have to disclose every trade I make to compliance (I work for an agency-broker). It would be...quite a pain.

I wasn't suggesting trading the ETF frequently. You can buy an hold it just like any other stock. BTW, many mutual funds have a 60-day lockout period after you sell. In any case, I took your post to mean that, since you had such a long time horizon, and expected the stock market to increase over time, why not lever the expected return on a broadly diversified index so you have a known beta, rather than try to pick high-beta stocks.

 

[QueensFinest]

I wasn't suggesting trading the ETF frequently. You can buy an hold it just like any other stock. BTW, many mutual funds have a 60-day lockout period after you sell. In any case, I took your post to mean that, since you had such a long time horizon, and expected the stock market to increase over time, why not lever the expected return on a broadly diversified index so you have a known beta, rather than try to pick high-beta stocks.

Most Leveraged ETF's perform poorly when held for longer than a couple of weeks. For example, since it's inception on 11/7/08, FAZ - the Financial BEAR 3X, has returned -32.27%. It's opposite, FAS - the Financial BULL 3X, has returned -81.34% in the same time period. Why is this? If the BULL does terrible, shouldn't the BEAR perform inversely --> shouldn't it return a great amount?

If I believe that the market will increase over time, why shouldn't I choose a mutual fund with a high-beta, so my returns can be magnified? Do you know of any funds that do track indices? Thanks for all of your advice so far.

 

[Gotadimple]

Do you know of any funds that do track indices?

There are several mutual funds that track indices, and there are many ETF's that track indices -- it all depends on which index or indexes you want to follow.

IndexUniverse.com may be helpful in identifying index eft's that meet your needs. In addition, if you already have a brokerage account, your broker's web site can identify index mutual funds.

-- Rita

 

[samclem]

QueensFinest,
Just to back up a step: Are you sure you want to actively trade (i.e. bet/speculate/gamble) with this money? A leveraged fund is going to be a managed fund, and it is going to employ various mechanisms to control more shares than it physically owns. All these factors (active management and the friction/overhead that is required to leverage) drive up the costs you'll pay for the fund. Probably a lot. Costs matter, and will seriously degrade your performance over the years. Just because you believe the market will eventually go up is no reason to buy a leveraged fund, unless you happen to know when it will be going up. Because if you buy into a fund like this and the market doesn't go up soon, these costs will eat you alive and you would have been much better off to have taken a more conservative aproach. Oh, and you also have to time the "get out of here" moment exactly, because when the share prices start down, your very volatile leveraged fund will drop much faster. Like a stone. On Jupiter.

The alternative is to simply invest the money in one or more index funds that buy the physical stocks themselves. When their share price goes up (as you rightly believe they will) you'll benefit. You'll have bought in at a bargain, and you don't have to time when to jump out of the mutual fund. Just hold on as the stocks appreciate over time. In the meantime, you'll be pocketing any dividends paid by the companies--probably buying more MF shares with them.

It's tough to be smarter than the market, and it's even tougher to make two correct calls (buy and sell) and to get the timing right. Most people are far better off with a low-cost, no bells-and-whistles fund. I would recommend that you put your IRA money in such a fund and keep playing the trading game with the make-believe accounts. Odds are good that this (dull) strategy will put you well ahead of a more exciting one.

 

[haha]

Most Leveraged ETF's perform poorly when held for longer than a couple of weeks. For example, since it's inception on 11/7/08, FAZ - the Financial BEAR 3X, has returned -32.27%. It's opposite, FAS - the Financial BULL 3X, has returned -81.34% in the same time period. Why is this? If the BULL does terrible, shouldn't the BEAR perform inversely --> shouldn't it return a great amount?

If I believe that the market will increase over time, why shouldn't I choose a mutual fund with a high-beta, so my returns can be magnified? Do you know of any funds that do track indices? Thanks for all of your advice so far.

This same poor performance that you reference is also a feature of leveraged mutual funds. It comes not from the form of the investment, but from the substance.

Spend some time looking into how the 2x,3x etec. funds work and you may decide to pass.

High beta is different from leveraged. Leveraged funds may have high betas-at least over short periods, but your example above shows that over a longer period they are apt to have a high beta in one direction only- down.

High beta funds do not necessarily employ leverage. If you want high beta without leverage, you can find it easily enough.

Whether high beta is a good thing or not depends on the future.

Ha

 

[mjarzoms]

Just be careful as leverage increases your risk. Great on the way up but sucks on the way down. Bear Stearns being just one example, along with all of the interest only mortgages out there.

I would recommend doing this in a small after-tax margin account instead, so you can find out if you can actually invest like this or not on a small scale. To me retirement accounts should be slow and steady as she goes, more conservatitve than your after tax accounts.

 

[QueensFinest]

Thanks for the advice.

FYI, I opened my 2008 IRA in March, with the funds going to FLVCX. Up 45% so far.

My 2009 IRA was opened recently, it's an Indian Mutual Fund. That's up 5% so far....

Next year I will move all of it with my 2010 IRA to some leveraged mutual funds via ProFunds - $15K minimum there.

 

[clifp]

If you want a leverage mutual fund you might want to consider a closed end fund. Unlike an open end fund these have a (mostly) fixed pool of money to invest. Many of them employ leverage to increase their gains (and also losses.)

They trade like an ETF, but unlike an ETF they often trade at a considerable discount to the underlying value of their assets 15% being relatively common right now. The major disadvantages is they have fairly high expense ratios 1-2% being typical.

These are often overlooked by younger investors. Check out ETFconnect.com for more information.