Author Topic: Debt, Investing, Fixed income  (Read 674 times)

daverobev

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Debt, Investing, Fixed income
« on: June 07, 2018, 04:27:59 PM »
I find myself see-sawing when it comes to having any form of debt.

I have an Interactive Brokers account, so borrowing on margin is stupidly cheap. I am barely using this.

I'm struggling with having cash (GICs, I think you call them CDs in the US) and having any sort of borrowing at the same time. They seem to be counterproductive - do you 'silo' money so you say, I have $25k in cash because that's what I have in my asset allocation, but I also borrow $25k on margin (just say that is 5-10% of the amount in the account, ie little to no chance of a margin call)?

I know lots of people swear borrowing to invest is always a bad thing - I'm not sure I fall into that camp. However, I am generally against market timing, BUT I'm thinking a small amount of margin when there is next a recession (again, small enough vs the account value so that there is no chance of a call) might make sense. But - that is market timing.

Basically I feel like I'm not making the most of the cheap money available to me, but I don't want to take on more risk... and on the other hand I don't want to reduce my risk either. Does that make any sense at all?

What I am actually doing is buying a GIC every so often as cash comes in, though in theory the only cash from now on is from dividends. This is until I get a rolling two year ladder going.
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Le Barbu

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Re: Debt, Investing, Fixed income
« Reply #1 on: June 07, 2018, 06:37:25 PM »
Maybe what you are doing makes little sense for total return but keeps you very liquid. It’s better than no debt from my pov
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talltexan

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Re: Debt, Investing, Fixed income
« Reply #2 on: June 08, 2018, 01:25:17 PM »
How old are you? How close do you think you are to retirement? These questions affect your ability to take on risk.

How are you invested? something like the total market, or are you putting more focus on small/value?

I think the dangers of debt involve sudden downward shocks to income that squeeze your cash flow and the temptation to over-consumer when you make large purchases, such as vehicles. What other mechanism do you have in place to prevent over-spending on these?

daverobev

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Re: Debt, Investing, Fixed income
« Reply #3 on: June 08, 2018, 02:01:39 PM »
How old are you? How close do you think you are to retirement? These questions affect your ability to take on risk.

How are you invested? something like the total market, or are you putting more focus on small/value?

I think the dangers of debt involve sudden downward shocks to income that squeeze your cash flow and the temptation to over-consumer when you make large purchases, such as vehicles. What other mechanism do you have in place to prevent over-spending on these?

Early retired already. Or, stay at home dad.

Invested globally, diversified. My actual expenses are about 2% SWR at the moment. VERY low fixed income allocation, which I am somewhat ok with considering I'm at 2% SWR. I just can't get my head round buying bonds, hence the buying of GICs.

I'm fairly frugal. Just bought a new vehicle ~2 years ago, my first actual new... and it was about $22k CAD. Paid off the loan because I don't like debt. The expense that is coming is a new house at some point, because there are currently 4 of us in a 2 bedroom place. This will change from a 2% SWR, obviously, to more like... close to 3%? Maybe? Not sure. So there is still some room.

I kind've feel like the right thing is to 'do nothing' but I have the urge to 'do something'. My AA says more in cash/bonds so I'm moving that way, slowly.
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mintleaf

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Re: Debt, Investing, Fixed income
« Reply #4 on: June 08, 2018, 03:51:08 PM »
First of all, if your AA (or IPS) says to do something, you should do it. That's rule 1, and everything else flows from there.

Conceptually, I think 'silos' are fine, and can be a helpful way to structure your thinking. They also provide opportunities for rebalancing, if that's in your plan.

There's nothing inherently wrong with leverage, either. Anyone who has a mortgage is engaging in leveraged investing to some extent, it's just that most people consider a mortgage relatively 'safe'. But if you're thinking about including riskier strategies in your long term plan, establish and spell them out now to take emotion out of the equation. The last thing you want to do is make big money decisions when the market has just crashed 40% and everyone is freaking out.

daverobev

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Re: Debt, Investing, Fixed income
« Reply #5 on: June 08, 2018, 04:09:53 PM »
First of all, if your AA (or IPS) says to do something, you should do it. That's rule 1, and everything else flows from there.

Conceptually, I think 'silos' are fine, and can be a helpful way to structure your thinking. They also provide opportunities for rebalancing, if that's in your plan.

There's nothing inherently wrong with leverage, either. Anyone who has a mortgage is engaging in leveraged investing to some extent, it's just that most people consider a mortgage relatively 'safe'. But if you're thinking about including riskier strategies in your long term plan, establish and spell them out now to take emotion out of the equation. The last thing you want to do is make big money decisions when the market has just crashed 40% and everyone is freaking out.

I don't like the cashflow constraint of the mortgage, so I paid it off. I don't think I want to rebalance. I think I just want to live on dividends and, in a crunch, draw from the GICs while perhaps reinvesting dividends and possibly investing on margin.

I have a really hard time answering the AA/IPS stuff. My main thing is "do nothing" - which is why I'm not selling off chunks to buy lots of GICs. I can't even decide where I want to live - and I'm talking country, not region. I suspect the AA is mostly to HAVE a plan, not that the actual numbers matter. It is mostly just to stop you shooting yourself in the foot (by, as you say, doing something when the market crashes 40%) - I know well enough not to do that. I do look at my AA doc now and again, and stroke my beard thoughtfully and nod my head slightly. Sometimes I say "mmm".
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MustacheAndaHalf

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Re: Debt, Investing, Fixed income
« Reply #6 on: June 08, 2018, 08:16:44 PM »
If you are retired with a 2% SWR, why are you taking risk?
If you switch to 30-50% bonds or GICs, what do you lose by doing so?
You're already safely retired, so what do you gain with the added risk?

daverobev

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Re: Debt, Investing, Fixed income
« Reply #7 on: June 09, 2018, 06:52:43 AM »
If you are retired with a 2% SWR, why are you taking risk?
If you switch to 30-50% bonds or GICs, what do you lose by doing so?
You're already safely retired, so what do you gain with the added risk?

In theory I'm going to need more than I'm currently drawing to fund a house. And possibly later in retirement.. though who knows what the future will bring. I'm not expecting a large state pension, for example, so my feeling is that 30 years of margin investing will likely grow to replace what I'm not contributing to.

This is the conundrum though. Margin -> more gain over time, but if I'm to do that I'd want more in fixed as a safety net during downtimes. No margin -> little need for a significant increase in fixed.

Hence what I'm doing - converting the excess from the SWR into GICs. That's the plan going forward at the moment.
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MustacheAndaHalf

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Re: Debt, Investing, Fixed income
« Reply #8 on: June 09, 2018, 09:40:08 PM »
If you've allocated some of the retirement money to buying a house, you can't count that as part of your retirement money.  But after buying the house, you have a 3% withdrawal rate, that still sounds like something that doesn't need to be increased.

Your stock allocation matters, too.  Someone with 60% stocks and 40% bonds can "leverage 10%" by simply shifting to 70% stocks and 30% bonds.

daverobev

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Re: Debt, Investing, Fixed income
« Reply #9 on: June 10, 2018, 07:31:12 AM »
If you've allocated some of the retirement money to buying a house, you can't count that as part of your retirement money.  But after buying the house, you have a 3% withdrawal rate, that still sounds like something that doesn't need to be increased.

Your stock allocation matters, too.  Someone with 60% stocks and 40% bonds can "leverage 10%" by simply shifting to 70% stocks and 30% bonds.

Good thoughts, thanks.

Not sure WTF I'm doing. Maybe moving to fairly rural Alberta, maybe to England (and then get a job, get a mortgage, and not draw anything much from the retirement funds at all). The 'issue' is mostly me.
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