Investing Zero to One

General investing advice and information.

Basics

I generally recommend the Bogleheads theory of investing. This involves investing in a few ETFs or mutual funds as a diversified portfolio. For example, a 3 fund portfolio. I use Schwab funds, but any with low expense ratios will suffice. This is a set and forget strategy that requires very little work.

An important piece is figuring out your asset allocation for each fund. The simplest setup is just use a target date fund, picking your expected retirement year. SWYGX is one such Schwab fund with a target retirement date of 2040.

TDFs follow a glide path that generally invests in stocks when you are young (higher risk), and moves towards bonds as you get older (less risk). You can push the target year later than your normal retirement year if you are comfortable with more risk for a longer time.

Target date funds are not a good idea for a taxable brokerage account. They are mainly only good for a 401k or IRA accounts for tax reasons. See this thread and this SEC filing for why.

This brings up an important question: are there TDF-like funds that can be used in a taxable account? Yes, iShares has some. This reddit thread has some good pointers.

In most cases this is all people need to do basic investing with reasonable return.

Diversifying further

Though the above combination of stocks and bonds is perfectly reasonable, I like to diversify further into a few other categories. Mainly I add the following, either in ETFs, futures, or physical assets where applicable:

These in sum do not exceed about 8% of my portfolio, and is weighted more towards gold. I reduce my bonds allocation by 8% to make room for these.

The reasoning is to keep some investments non-correlated with stocks/bonds. This correlation matrix site is useful for investigating this.

When trading options, liquidity matters, and Schwab ETFs do not have much option liquidity. For such cases, I might use different ETFs or futures to represent the same category. For example:

Here is an example of my allocation as of June 2025:

Holding cash

Banks are going to give you complete shit return for holding your cash. A HYSA will give you better return, but sometimes suffer from bad checking account features. For example, Wealthfront has very bad check-writing abilities.

Most brokerages are also not going to give you much for your cash. Excess cash in your brokerage should be put into a money market fund. For example, at Schwab you can use SWVXX. The key point is many brokerages won't automatically sweep to this for you, so it requires you to do trades. Fidelity has better auto-sweep services. You can find good money market funds at Yieldfinder.

If you don't do this yourself, your brokerage will love your idle cash sitting around which they will use to invest and earn them, and not you, money. Every bank, brokerage, and fund wants to hold your money, pay you very little interest, and then go make money off of your money.

I generally hold very little cash because inflation quickly eats into its value. I'd rather put that money to better use. This brings me to the next point: putting capital to its best use.

Efficient use of capital

One of the most important things I've come to realize is that you have to make efficient use of your capital. Tom Sosnoff and Tastytrade have some good videos on this:

• Tom Sosnoff a Strategic Finance for the Practical Investor
• 6 Steps To Build An Options Portfolio From Scratch
• Breaking Down Futures with Tom Sosnoff

The main question to ask yourself is are you using your capital the best way possible? In many cases your brokerage is giving you access to tools and methods to make better use of that capital. They will not tell you all of these methods, which one is best, or hold your hand through the process, unless you pay them.

Capital efficiency example

Let's say you wanted to invest in the S&P 500 in a buy and hold fashion. The following are some examples and costs associated:

1. 50 shares of SPY @ $590. This might cost $30k, give you $30k exposure in SPY, and provide no leverage.
2. 1 90-delta deep in the money LEAPS SPY call option. This might cost $19k, give you $60k exposure in SPY, and provide 2-3x leverage.
3. 1 synthetic LEAPS in SPY (long call option, short put option). This might cost $2k cash, $7k in buying power, give you $60k exposure in SPY, and provide 6x leverage.
4. 1 /MES future. This might require $2k deposit (it costs nothing), give you $30k exposure in SPY, and provide 15x leverage.

In all cases but the first, you are paying less to have a higher exposure in the same market. Each has a different risk profile. In all cases you can lose money.

In the 1st case there is no expiration of a contract, so no matter what happens you have shares and can wait until the market moves in your favor. All other cases have expirations.

In the 2nd case, you can lose up to your initial $19k at expiration, but you will likely end up with 100 shares. There is a 10% chance you will lose the full $19k and not end up with any shares at all.

In the 3rd case, you can lose your initial $2k at expiration, but you will end up with 100 shares.

In the 4th case, it doesn't cost anything, but you can lose up to $30k if SPY goes to 0 (very unlikely). More likely is SPY ends up lower at expiration than your trade price, and you pay that difference.

These are worst case scenarios, and I am simplifying a bit. Calculating the return is more complicated for anything other than the 1st case. If the market moves in your favor, the leveraged instruments will make you much more money than the 1st case. Even though they have expirations, you can continually roll them to future dates to simulate a buy and hold. This requires some active management that the 1st case does not require.

Leverage

Adding leverage increases your risk, but increased risk is one way to possibly gain better returns. There are many ways to gain leverage, from using loans, to options, to futures. I'll explain how to use all of these methods.

A fundamental question is how much leverage you want to use. Brokerages make it all too easy to over-leverage. I usually use a leverage ratio between 1.3 - 1.5. For example, if I have $100k cash, I may use that to invest a notional value of $130k in a diversified portfolio.

People use leverage all of the time for home loans, and it is not unheard of to use a 80% loan to value ratio for a mortgage, or a leverage ratio of 5. For a $500k home, you might put up $100k cash and take a $400k loan. You would likely do this at a reasonable interest rate, and your hope is the value of the home goes up faster than your interest charges. Your home value could fall, leaving you with a mortgage that is underwater, i.e. you owe more than the home is actually worth. All of this can apply to investing as well.

Books:

• Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio

Forum threads:

• Lifecycle Investing - Leveraging when young

Definition

We'll use the following for the definition of leverage ratio:

Notional Exposure includes:

• Total value of all equities
• Options notional exposure
• Futures notional exposure

Portfolio Equity includes:

• Total value of all equities
• Options value
• Cash
• Margin balance (negative)
• Futures profit (positive) or loss (negative)

Suppose I have $130k in equities. I borrowed $30k as a margin loan for that position. My leverage ratio comes out to:

Notional exposure vs value

Options

The numerator of the leverage ratio should include the notional exposures of options. There are different ways of calculating this. A simple way is to use the delta notional exposure:

The denominator should include only the market value of the option contract itself.

Futures

The numerator of the leverage ratio should include the notional exposures of futures. This is different depending on the contract type. For indexes it is usually:

Futures do not cost anything. The denominator should include only the gain or loss of the futures position.

Margin loan

When you have stocks, brokers will let you take a margin loan of at least 50% or more of your equity value. This gives you at least 1.5 leverage, at the cost of margin loan interest, which is usually terrible at most brokerages. For example, Schwab will charge you 13% interest as of today (June 2025). If you cannot make more than 13% on the investments you do with leverage, you won't even break even. Interactive Brokers will give you a much better rate, for example 5%. This is an easier number to beat on investment return.

This type of leverage is the simplest to use and understand. The broker will let you buy stocks without cash, making your cash balance negative, and charging daily interest on it. You can pay it back whenever you want, and your broker will prefer you pay it back later so they can keep charging you interest.

Forex margin loan

One way to reduce interest charges is using a forex margin loan (sometimes called a carry trade). Your broker may have a much lower interest rate for borrowing in another currency like CHF. Say that is 1.5%. You can take a CHF loan, convert that to USD, and use the funds to invest in US stocks. However, you must now beat both the 1.5% margin interest as well as any forex rate changes. For stable currencies like CHF, I've had good results for multi-year timeframes. However, if there is a big drop in USD value to the foreign currency, your loan repayment can be much bigger than you expected. Many people have done this with JPY due to its low interest rate.

You can use forex futures to lock in an interest rate for the loan. For example, buying a /6S future will offset any currency fluctuation with CHF. However, this adds some complexity.

Box spreads

A box spread is another way to take a loan, except it is not from your broker, but from the options market. This essentially gives you the best borrowing rate that your broker will never beat, but you will need to trade options which can be quite complicated if you are new to them. This blog post describes the process. I created this video and slides going into the mechanics.

Boxtrades is a good site for figuring out the trade to enter. You can even combine this with a forex carry trade to take the loan in another currency with lower interest rate, but you will need to be able to trade options in non-US markets (e.g. SMI index on Swiss exchange).

There are even some fintech companies such as SyntheticFi offering to do these loans for you.

Derivatives

Options and futures can be used for their inherent leverage. There are many strategies to trade these, however this only focuses on their use as leverage.

Forum threads:

• Futures vs. Options for broad-market leverage?

Options

One option contract represents 100 shares, and its cost is much less than actual shares. That should give you an idea of its leverage. In most cases you would only be trading the option, and not the actual shares. However, the profit/loss would be similar to as if you were actually trading 100 shares.

There are at least 2 ways to do this:

1. Buying deep in the money LEAPS calls.
2. Synthetic long stock.

DITM LEAPS Calls

Overview video:

• Buying Deep In The Money Call Options - Save 62% & Double Your Returns! (Better Than Stock Buying)

Synthetic long stock

This type of options trade allows you to do leveraged investing mostly using the buying power of your equities. Some cash is required to enter the trade, mainly due to the call being more expensive than the put. It is similar to using futures for leverage.

Overview video:

• Buying Stocks? Try This Instead - Synthetic Option Strategy

You will need to apply for undefined risk options trading ability at your brokerage to do this because it involves selling a put (i.e. naked put).

Example

Assume I have $100k invested in plain equities. I want to leverage up to 1.3 to invest in US large cap. I setup an ATM synthetic long 1 year out in SPLG (a lower cost version of SPY):

• 4 SPLG 2026-03-20 71 Call
• -4 SPLG 2026-03-20 71 Put

4 contracts would give a notional value of 71 * 400 = $28400. It might cost about $500 in cash. With portfolio margin, my buying power (coming from the value of current equities) might be reduced by $3k to hold this position. So in essence, I am allocating $3500 for this trade.

This gives me a notional exposure of $28.4k in the S&P 500 at the cost of $3500. That is 8x leverage. That would give an overall leveraged portfolio of (100-3.5+28.4)/100 = 1.25.

Futures

Example

Assume I have $100k invested in plain equities. I want to leverage up to 1.3 to invest in US large cap.

1 /MES futures contract has a notional value of 5 * index price. Currently that is $30k. To buy this contract, I am required to set aside $2500 as a good faith deposit for the contract.

This gives me a notional exposure of $30k in the S&P 500 with a deposit of $2500. The $2500 is only the bare minimum, and it is usually advised to keep 2-5x of cash to handle downswings (see Futures vs equities margin). So I set aside $10k as a safe amount of cash for this contract. That means I get a notional exposure of $30k at the cost of $10k. That is 3x leverage.

That $10k needs to come from somewhere. I could sell $10k of equities. That would give an overall leverage of (100-10+30)/100 = 1.2.

If I were to only keep the bare minumum of $2500 in cash, that would increase leverage to (100-2.5+30)/100 = 1.275.

Options

General

• The Hidden Logic of Options | Put-Call Parity Explained with Legos
• How To Trade Options in 2 Hours 12 Minutes and 4 Seconds | Live Bash Series

Futures

General

• How to Start Trading Futures l BEST Trading Tips For Beginners!

Futures vs equities margin

Futures margin is confusingly not the same as equities margin. When you buy or sell a futures contract, it costs nothing other than the commission. Instead, you put up in cash a good faith deposit. which is called its margin requirement. Every day, depending on whether the position moves for or against you, it is marked to market and funds are either deducted or added to your deposit. You get that deposit back, along with any profit or loss, when the contract closes.

Importantly, a futures contract requires actual cash. This is same for buying or selling a contract. The broker will let you borrow that cash from your equities account via a margin loan. This is different from an options trade which might only use your buying power and not require any cash or loan at all.

The main point is for futures you need to have cash in your account to cover the margin requirement plus any possible losses in the futures contract. Typically people hold 3 to 5 times margin requirement in cash for the contract just to be on the safe side.

Explanation from a Schwab rep:

I see you have been trading /MES so let's say you buy 1 /MES. First you will need to put up the house requirement needed to enter into the trade which will come out of your option BP (buying power), for /MES this is currently 2,550 per contract.

If you hold onto the /MES position through the futures market close, then there will be two different sweeps. The first is M2M (mark to market). M2M accounts for profits and losses during that day using the futures settlement price. Initially M2M will compare your trade price to the futures settlement price. If a profit is made, then we will move the excess profit from the futures cash balance to your cash & sweep vehicle. If it's a loss, then we will take cash from your cash & sweep vehicle and sweep it to the futures cash. If you were to hold /MES through more than one day, then it will compare today's settlement vs yesterday's settlement price.

The second cash sweep that will happen actually happens overnight. You will see this listed as "Cash Sweep" in ThinkorSwim. This overnight sweep is used to get the futures cash balance high enough to cover the exchange's initial requirement which is posted by the CME. As of today, for /MES the exchange initial requirement is 2,412.3 per contract for longs, however this does change every day. The overnight sweep moves the cash, so the futures cash balance equals the exchange initial requirement.

Forum threads:

• How do rolling and margin on futures trading work?
• Trading Futures, Should I Use All Cash Balance to Buy a Money Market Fund?
• How can I invest my maintenance margin (for futures)?

Futures instead of stock

Futures let you buy (or sell) into indexes like the S&P 500 and Russell 2000. A long /ES or /MES futures position should be equivalent to holding SPY shares. It is essentially an ETF without fees, however the longer-dated future price will be higher than the current index. There is an inherent loan when you long a future, and that interest is baked in.

For example, US small cap can be replaced with /RTY or /M2K. Using futures allows me to leverage easily without needing any margin loan. If my rebalancing requires I put $10k into US small cap, instead of buying the SCHA ETF, I might instead buy 1 /M2K future, which is currently the same notional value, but costs much less.

Forum threads:

• [Non-US] S&P e-mini futures vs ETFs

Representing bonds with futures

The /10Y futures represents the current 10-year treasury yield. From what I understand about bonds, if the current yield is rising, it means newer bonds are worth more than older bonds. i.e. the return on newly issued bonds are greater than older issued bonds. The inverse should also be true.

ETFs like BND contain a mix of different types of bonds, but should be mostly older issued bonds. So what we should see is an inverse correlation of the /10Y future with the BND price. This indeed looks true based on a graph of BND with /10Y:

Buying BND might be equivalent to shorting (selling) /10Y futures. From a portfolio standpoint, bonds are usually included to reduce volatility. They also give some income, so I'm not yet sure if the short futures position can be considered equivalent. It is something to test long term.

See Understanding Treasury Futures from the CME.