## Effective Altruism ForumEA Forum

MichaelDickens

The Risk of Concentrating Wealth in a Single Asset

I have no comment on whether it's a good idea to build the global market portfolio with leveraged ETFs, but since you asked:

You can use the etf.com screener to find ETFs matching your criteria. I just searched on there and based on the 10 minutes I spent looking, I think this is about the closest you can get:

20% SPXL: 3x leveraged S&P 500
30% EFO: 2x leveraged MSCI EAFE (developed markets, excluding US)
5% EDC: 3x leveraged emerging markets equity
40% TMF: 3x leveraged 20+ year US Treasury bonds
5% UGL: 2x leveraged gold


This is still not really the global market portfolio, but it's at least kind of close. Also a couple of these ETFs are really small, so they'll have high trading costs.

Donor-Advised Funds vs. Taxable Accounts for Patient Donors

labor has an opportunity cost of \$3 million per year

This seems really high. You could hire an experienced investment manager for a lot less than that. But the general structure of your analysis seems sound.

Another consideration is that you can probably reduce correlation to other altruists' investments (I wrote about this a bit here, and I'm currently writing something more detailed). Uncorrelated investments have much higher marginal utility of returns, at least until they become popular enough that they represent a significant percentage of the altruistic portfolio. And leveraging uncorrelated investments looks particularly promising. So you could get more than a 1% excess certainty equivalent return that way.

Donor-Advised Funds vs. Taxable Accounts for Patient Donors

Yeah, because adding leverage will increase taxes on dividends. My calculator correctly accounts for this, but I didn't account for it in my previous comment. But it doesn't lower the certainty-equivalent rate by much.

Also, do you happen to know how effortful and feasible tax loss harvesting might be for leveraged portfolios in taxable accounts?

It shouldn't be too hard, but I don't think you'd get much benefit from it. I'm not sure though, I'm not too familiar with the mechanics of tax loss harvesting.

Donor-Advised Funds vs. Taxable Accounts for Patient Donors

5% is the geometric mean return, the Samuelson share formula uses the arithmetic mean on the numerator (see here. So the correct formula is (5% + 0.16^2/2)/(0.16^2 * 1) = 2.45.

Donor-Advised Funds vs. Taxable Accounts for Patient Donors

Do you know if it possible to give to an EA Fund from a DAF?

That should definitely be possible.

Donor-Advised Funds vs. Taxable Accounts for Patient Donors

We can estimate how valuable that would be by comparing the certainty-equivalent interest rates (I talked about this here).

Some quick analysis using leverage.py:

Historical long-run global equities have returned about 5% with a standard deviation of about 16% (source). Let's use that as a rough forward-looking estimate.

• With a relative risk aversion (RRA) coefficient of 1 (= logarithmic utility), the certainty-equivalent interest rate of an un-leveraged portfolio is 5% (logarithmic utility doesn't care about standard deviation as long as geometric return is held constant). With optimal leverage (2.45:1), the certainty-equivalent rate is 7.7%. That means the ability to get leverage is as good as a guaranteed 2.7% extra return (= 7.7% - 5.0%).
• With RRA=1.5, optimal leverage = 1.63:1, and the excess certainty-equivalent rate is 0.8%.
• With RRA=2, optimal leverage = 1.22:1, and the excess certainty-equivalent rate = 0.14%.

I think altruistic RRA is probably somewhere around 1 to 1.5, so under these assumptions, the ability to use leverage is roughly as good as a guaranteed 1-3% extra return.

(FWIW I think you can also get better return by tilting toward the value and momentum factors, so if you're willing to do that, that makes the ability to invest flexibly look relatively more important.)

Donor-Advised Funds vs. Taxable Accounts for Patient Donors

I wonder if there's scope for circumventing this issue by setting up a registered charity that can take donations from a DAF and then forward on to wherever the donor desires. Even an existing charity like CEA could act as a middle man like this. Is this a completely silly idea or a promising one?

I'm not sure about this, but I don't think charities are allowed to give money to for-profits.

The Risk of Concentrating Wealth in a Single Asset

My thinking is that donating during drawdowns might be particularly bad

This is true, and the standard deviation fully captures the extent to which drawdowns are bad (assuming isoelastic utility and log-normal returns). Increasing the standard deviation is bad because doing so increases the probability of both very good and very bad outcomes, and bad outcomes are more bad than good outcomes are good.

Is it actually the Sharpe ratio that should be maximized with isoelastic utility (assuming log-normal returns, was it?)?

Yes, if you also assume that you can freely use leverage. The portfolio with the maximum Sharpe ratio allows for the highest expected return at a given standard deviation, or the lowest standard deviation at a given expected return.

The Risk of Concentrating Wealth in a Single Asset

Thank you, I appreciate the positive feedback, especially from someone as knowledgeable as you!