In 2022, I highlighted Ian Ayres and Barry Nalebuff’s proposal that young people should borrow to invest in the stock market. Why? Most people invest gradually, which leads to a concentration of stock holdings late in life. By borrowing early, young investors can spread market risk more evenly across their lifetime, much like diversifying across assets. Put differently, a young person’s biggest asset is their future labor income. Borrowing to invest reduces overexposure to that single asset, effectively diversifying their portfolio away from specific human capital and toward financial capital.
I supported the idea writing that “I agree with Ayres and Nalebuff that young people should be [at least] 100% in equities” but I didn’t expect people to go beyond this until the idea became standardized in a similar way to home mortgages. I wrote, “It could be standardized, however, with retirement planning products.”
Well, we now have our first product in this category, Basic Capital. Basic Capital is a mortgage for investing in stocks and bonds. You put in $1 and you get $5 of investment. Moreover, you cannot lose more than you put in. How is that possible? The investments are constrained–85% of it goes to bonds and 15% to equity but remember that 15% is on $5 rather than $1 so instead of investing $1 in stocks you are investing $.75 in stocks and $.25 in bonds. The net result is broader exposure at lower individual risk. Whether it’s a compelling product depends on fees and execution, but the underlying idea is innovative, and I’m excited to see how products in this new category evolve.
Addendum: Matt Levine offers further commentary. On the general topic of innovative financial products, see also my previous post on Shiller’s Macro Markets.
Hat tip: Naveen.
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