A Frumpier Risk Free Rate

People talk about leveraging all the time.

Usually people leverage up because they want to make wads of cash and are over optimistic about their risk management capabilities - OR - they want to make wads of cash and have perfectly reasonable estimation of their risk management inadequacies, BUT they are risking someone else's cash.

In any case, leverage is like that girlfriend that ditched you, tossed your heart off a 100 foot cliff into a pool of piranhas, but still you wouldn't mind another shot with her.

Her frumpy friend 'de-leverage' on the other hand, sure you hang out with her now and again, but she's not in the same league.

How do you deleverage? You stuff a lot of cash under your bed.

Let's stuff 98.73% of our total portfolio value under our bed in crisp dollar notes and invest the rest in the S&P 500.

We go from earning 6.5% per year over the last 50 years with the S&P to a frumpy 0.8%!

You know what else earned 0.8% over the last 50 years?

The 13 week treasury bill index.

More 'risk free' than you can shake a stick at.

But this new 'risk free' has even less risk - the average volatility is a magnitude smaller than its counterpart.

0.55% versus 0.0056%!

Crazy, huh?

It reminds me of looking at hedge fund portfolios immediately after October '08. Most who could had huge portions of their portfolios in cash - perhaps 80% or more of their portfolio in cold-hard-cash.

No doubt in money market funds rather than under beds; but nevertheless; the rush to cash was phenomenal.

When 'sassy leverage' carves open your heart and throws it into a hornet's nest; 'frumpy deleverage' is always there to take you back.