Most people invest the bulk of their money later in life, when they’re earning enough to put serious cash away. But that creates a big problem: your retirement outcome ends up hinging on market performance in just a narrow window—basically, when you’re in your 50s and 60s.
This is one of those personal finance truths that flies under the radar for most people. You see that famous chart showing how stocks return 8% a year over 30 years, and it’s easy to think, “Great—I’ll just start investing in my late 20s or early 30s, stay consistent, and I’m good.”
But that’s not how it really works. Those 30-year studies assume you invest a big lump sum at the beginning and let it ride. In real life, most of us are dollar-cost averaging—putting in a little each month as we earn. So even if you’re investing for 30 years, the average dollar you invest only has maybe 10 or 15 years in the market.
Add in the fact that stock returns are anything but smooth, and the picture gets even murkier. Timing suddenly matters a lot more than you’d think. Depending on when you hit your peak savings years and what the market is doing at that time, your returns could be way above—or way below—that headline 8% number.
In their paper Life-Cycle Investing and Leverage, Ian Ayres and Barry Nalebuff make a pretty bold claim: if you want to reduce retirement risk, you might actually need to take on more risk early on—specifically, by using some leverage.
That sounds backwards at first. Leverage? Isn’t that supposed to be dangerous? But their argument is pretty straightforward: by spreading your stock market exposure more evenly across your entire career, instead of back-loading it, you lower the chances that bad timing derails your plan. The way to do that early in life—when you don’t have much money saved—is by borrowing a bit to invest. It’s not about betting big; it’s about balancing the scale over time. Their data shows this approach can lead to better outcomes and less volatility in retirement wealth.
The Value of Diversification over time
If you want to check it out, I also wrote about this paper four years ago: time flies!
One of the biggest takeaways from this study is that young people should actually be holding more than 100% of their portfolio in stocks. The idea is pretty simple: early in your career, you don’t have much money saved, so even if you’re fully invested in stocks, your overall exposure is still tiny compared to your future wealth.
As time goes on and your savings grow, you gradually dial down the leverage and eventually invest without it at all—just like the traditional models recommend later in life. But the difference this early leverage makes over a lifetime? Massive. According to their research, using this strategy could increase retirement wealth by up to 90%. That’s the kind of improvement that could let you retire six years earlier or give you the financial cushion to maintain your lifestyle well past age 85—potentially even to 112.
Here’s the problem: even if you’re 100% in stocks in your 30s, that’s still probably less than 10% of what you’ll eventually save. In other words, your risk profile says you’re okay with stocks, but your actual exposure is way too low in the early years. That mismatch is where the opportunity lies.
Their solution? Borrow to buy stocks when you’re young, just like most people already do when they buy a home with a mortgage. We’re totally fine taking on debt to buy real estate in our 20s, but we shy away from doing the same with equities. Ayres and Nalebuff think we should rethink that, and I am fully onboard with them.
Now, it’s not always easy to borrow against your future income. There are ways to get some leverage, like buying on margin or using derivatives. But both strategies require at least some regular maintenance. Margin loans are subject to margin calls: you have to find additional capital to use as margin (from where?!?) or reduce the loan amount…by selling at the worst possible time. Using deep in the money call options might be a better way: you can get 2:1 leverage at a borrowing cost close to a risk-free rate plus 70bps or so. However, they are not risk-free solutions since the outcome is path-dependent: you are basically exchanging one sequence of return risk with another.
Just a quick note about leverage in general: it only makes sense if the expected return (on stocks, in this case) is greater than the implicit margin rate. In the paper data (going back to 1871), they find that equities returned 9.1% (or 6.85% real), while the cost of margin was 5%. There is obviously no guarantee that future returns will be so high, nor that you can get cheap leverage.
Basic Capital
The paper includes this passage:
“With the shift away from defined benefits to defined contribution pensions, much of early savings comes from tax-advantaged and employer-matched 401(k) plans. Thus our advice is especially relevant for the allocation of stocks inside a 401(k) plan. Unfortunately, current regulations effectively prevent people from following our advice with regard to their 401(k) investments. The reason is that an employer could lose its safe-harbor immunity for losses if any one of its plan offerings is later found by a court to not be a prudent investment. Allowing employees to buy stocks on margin is not yet considered prudent, although we hope this analysis will help change that perspective.“
Well, it looks like that perspective has indeed changed: hello Basic Capital.
The Good
Basic Capital is doing something pretty interesting: they’re offering 5-to-1 leverage inside a tax-advantaged account like a 401(k). No margin calls, no forced liquidations.
That alone makes it a standout, by solving exactly the problem raised by Ayres and Nalebuff. The leverage is there—more than enough, actually—and you can scale it over time. As you get older and closer to retirement, you can simply shift more of your contributions into an unleveraged plan, gradually bringing your overall exposure back down. That’s the lifecycle glide path they talked about.
One of the biggest hang-ups with using leverage, like margin calls, messy derivatives, risk of getting wiped out in a downturn, is addressed here by using preferred equity financing. Think of it like an interest-only mortgage, but for your investments. I won’t go into all the mechanics (you can check out their site if you’re curious), but the bottom line is this: it’s a creative way to bring leverage into retirement planning without some of the usual downsides.
The Bad
The cost of using leverage through Basic Capital is roughly SOFR + 2%. That’s not outrageous, but it’s a bit more expensive than other options. For comparison, margin rates at Interactive Brokers top out around SOFR + 1.5%, and if you’re using derivatives, the implied financing cost can be closer to SOFR + 0.4%.
But here’s where it gets interesting: unlike margin loans or derivatives, this rate appears to be fixed for five years (according to Matt Levine, I didn’t find the duration of the loan on Basic Capital website) That’s a key difference. Most leverage options are floating, resetting daily with interest rates, so you’re exposed to the risk of rising rates.
Setting aside the possibility that a saver could profitably time this opportunity, use leverage when rates are low, this is neutral in principle: if risk premia are priced on top of the risk-free rate, fixing the cost of debt of 5 years instead of O/N doesn’t make a huge difference. But it might be beneficial in the context of Basic Capital.
Why?
The Ugly
Here’s how the Basic Capital structure actually works: you don’t repay the principal of the loan, but you do have to make monthly interest payments. And instead of reducing your investment or using your 401(k) contributions to cover those payments, Basic Capital has built the repayment mechanism into the portfolio itself.
Here’s the setup: 85% of your account goes into a “diversified bond ETF,” and the remaining 15% goes into SPY (the S&P 500 ETF). That bond allocation isn’t there for safety, it’s there to generate enough income to cover the interest on the leverage. The bonds have to produce more yield than the cost of borrowing, creating positive carry to pay back Basic Capital. The 15% equity slice gives you the upside exposure.
But let’s dig into that 85% for a second. “Diversified bonds” here doesn’t mean Treasuries or high-grade corporate bonds. It means private credit—think high-yield debt, all the way down to dirty junk. Basically, you can’t slip a single investment-grade bond into this portfolio or the yield drops below the borrowing cost, and the whole carry strategy falls apart.
So what does this look like in portfolio terms? If you’re getting 5x leverage, your final exposure is 75% equities (that’s 15% times 5) and 425% (!!!) in credit spread.
The basic issue with this idea was beautifully explained by a picture included in this post from Verdad:
There is a point, right after we enter into Junk Bond zone, where yields continue to go up but returns don’t. Verdard calls it, appropriately, fool’s yield.
Here’s where things start to unravel. The difference between yield and return is defaults. Just because a loan pays 10% interest doesn’t mean you’ll earn 10%. Some of those loans won’t pay back at all, and that gap is where returns quietly get eaten away.
That’s the weak spot in Basic Capital’s plan. You’re effectively 425% exposed to credit spread risk, but that doesn’t mean you’re earning high returns. Even if the private credit funds they use perform average, which is a big assumption, that might not be enough. And if those funds pick bad loans, or more likely, charge fat management fees that eat into performance? Now you’re leveraging something with a negative expected return. Not a great place to be.
And the fees don’t stop there. Basic Capital charges a 0.5% management fee—which, to be fair, isn’t crazy by 401(k) standards—but that fee is charged on the whole portfolio, including the credit-heavy portion that’s already skating on thin ice. Then there’s the kicker: they take 5% of any gains. That introduces a classic incentive mismatch. You, the saver, carry all the leverage and credit risk. They, the platform, skim off the upside.
When using leverage in a non-100% stock portfolio, we should always ask ourselves: would it be better to just go 100% stocks and forgetaboutit?
At the end of the day, this is the real question: will all this complexity, leverage, private credit, and fee layering actually beat good old-fashioned Vanguard & Chill?
Personally? I’d take the under.
[personal note that would not matter to anyone: Basic Capital is backed, among others, by Lux Capital. There has been a moment in the past when seeing Josh Wolfe would have meant to me that Futurama meme: shut up and take my money. Sadly that moment is long gone and…confirmation bias alert…I might be onto something?]
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