Author Topic: Idea for investing during a recession  (Read 5933 times)

xpauliber

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Idea for investing during a recession
« on: June 14, 2018, 12:29:17 PM »
I was talking with an attorney the other day about different investing strategies & different ideas for how to build wealth.  I explained my dislike for any debt and how I'm working to eliminate my mortgage and remain debt free.  He had a different opinion & told me that the majority of his net worth is from real-estate and that he has always carried a significant amount of debt in his life to invest in different real-estate projects.  He even made the comment that if you pay your house off, "you have this huge asset sitting there doing nothing for you."

That got me thinking that he is technically correct in that if you own your home, it's providing you a basic necessity but you're not necessarily using it in any way to generate/build wealth.  That also got me thinking about how most people lose money trying to time the market and even more people lose significant amounts of money by panicking & selling during a recession.  If however you stay in the market, you'll recover all your losses once it recovers.  Additionally, if you had a stack of cash sitting outside of the market, you could invest during a recession and make some excellent returns.  Obviously, having cash outside of the market is losing value though and so most people don't have a significant amount except for their emergency fund which wouldn't be smart to invest. 

But what about using the equity in your home to invest during a recession?  Let's say you have $50,000 in equity that you could pull in the form of a home equity loan with today's rate of 5.75% on a 20-year term would have payments of $351/month.

I did a quick review of the last 5 major recessions and found that the average decline was 40% and the average duration was 22 months:

1973-74 (48% - 645 days)
1976-78 (19% - 531 days)
1980-82 (27% - 622 days)
2000-02 (49% - 929 days)
2007-09 (57% - 517 days)

Let's say hypothetically in the future, you wait until the market declines 25%, and then you take out a home equity loan of $50,000.  You set a buy order to deploy $10,000 (20% of your total funds) when the market hits a 30% decline from its most recent peak.  Once that executes, you set another buy order to deploy another 20% of your funds if the market hits a 35% decline.  Again for a 40% decline. And again for a 45% decline. And lastly one for a 50% decline until all your money is deployed. If you take out the home equity loan and the market never drops to 30%, you simply pay off the home equity loan and move on.

Since the average duration of a recession is 22 months and let's say you took the loan out a quarter of the way though (month 6), you would have to pay roughly 16 months worth of P&I payments on your home equity loan ($5,616) but wouldn't the upside potential be tremendous??  Once the market fully recovers, you could sell everything, payoff the home equity loan, repay yourself the P&I that you've paid those 16 months, pay taxes and pocket the rest.  Or you could just sell enough shares to payoff the home equity loan, repay yourself the P&I that you've paid those 16 months, pay taxes and let the balance of the shares stay in the market since we would more than likely be at the start of a bull run.

There could be some risk if you only got to deploy one stage of capital though since a 30% gain on your first $10k wouldn't cover the cost of carrying the whole $50k home equity for 16 months.  Maybe it would be better to deploy 50% of your capital at the 30% decline mark and then dollar cost average the rest of the way down?  If the market didn't drop further, you would still have the balance of the home equity loan to sit on until the market recovered and then pay it off completely.  Maybe toss it in a money market account to earn a little bit of interest while you wait for the market to recover.

Two major factors before I'd even consider doing something like this:

1.  I'd only consider investing in a total stock market index fund and not ever any individual company stocks
2.  I'd only consider this if your free cash flow can more than adequately cover the cost of the home equity loan.  For instance, my personal budget has free cash flow every month of about $1,500 which is more than 5 times the cost of the home equity loan so there's very limited chance that the home equity loan would cause any stress on my monthly budget.

Any thoughts/comments on this hypothetical situation?

Update: Added chart illustrating what I proposed in this post using actual data from Great Recession.


« Last Edit: June 17, 2018, 05:56:40 AM by xpauliber »

Financial.Velociraptor

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Re: Idea for investing during a recession
« Reply #1 on: June 14, 2018, 12:40:54 PM »
Interactive Brokers offers margin loans for around 1.7%.  I've decided to go without an emergency fund and just borrow from my broker in the event of a cash need. 

Margin is always dangerous, whether its in the form of a HELOC or broker loan.  It can be done successfully but it is important to have reasonable position sizing and a hedge.

xpauliber

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Re: Idea for investing during a recession
« Reply #2 on: June 14, 2018, 12:46:52 PM »
What do the rates on margin loans look like during a recession?

grandep

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Re: Idea for investing during a recession
« Reply #3 on: June 14, 2018, 01:09:56 PM »
Interactive Brokers offers margin loans for around 1.7%.  I've decided to go without an emergency fund and just borrow from my broker in the event of a cash need.

Interesting, this is the first time I've heard of this strategy for an EF. What's the turnaround time between some hypothetical need for emergency funds and actually having cash in hand?

Also, wouldn't using the OP's strategy through a margin loan from a broker put you at risk of a margin call? I don't have any experience with buying on margin so maybe I'm off base here, but that wouldn't be a cause of concern with a HEL, right?
« Last Edit: June 14, 2018, 01:13:40 PM by grandep »

Financial.Velociraptor

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Re: Idea for investing during a recession
« Reply #4 on: June 14, 2018, 01:19:53 PM »
Interactive Brokers offers margin loans for around 1.7%.  I've decided to go without an emergency fund and just borrow from my broker in the event of a cash need.

Interesting, this is the first time I've heard of this strategy for an EF. What's the turnaround time between some hypothetical need for emergency funds and actually having cash in hand?

Also, wouldn't using the OP's strategy through a margin loan from a broker put you at risk of a margin call? I don't have any experience with buying on margin so maybe I'm off base here, but that wouldn't be a cause of concern with a HEL, right?

Immediate same day need is met by cc (2% cash back!), ACH from my broker to checking takes 2-3 business days.  Plenty of time to pay off the cc without paying interest. 

If you are borrowing to buy equity, you effectively have the threat of a margin call no matter what.  If you can't cover you loan with your broker, they may sell your securities.  If you can't cover your HELOC, your bank may foreclose. 

My main taxable account is valued a little over 300k.  In an emergency cash situation such as having to replace the a/c, washer and dryer, and water heater all at once, I'm looking at less than 10k.  I'm FIRE so EF doesn't need to cover 6 months salary.  Might be problematic if some reason I absolutely HAD to buy a new car for some unforeseen reason.

neil

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Re: Idea for investing during a recession
« Reply #5 on: June 14, 2018, 01:52:36 PM »
10 year treasury rates (not sure how this correlates to HELOC rates but I assume it's in the vicinity)

1973-74 (48% - 645 days) - 7%
1976-78 (19% - 531 days) - 8%
1980-82 (27% - 622 days) - 12%
2000-02 (49% - 929 days) - 6%
2007-09 (57% - 517 days) - 5%
Today - 3%

Is this plan conditional on rates also?  Or how bad CNBC says things really are? It's rough taking from cash flow to pay off the loan while most of your early investments suffer massive losses.  Even near the bottom, it found more crazy bottoms.  The news would salivate with messages of imminent doom if it went down 4% today.

https://web.archive.org/web/20090306090921/http://finance.yahoo.com:80/

It's not for me, but a system that involves leverage over time makes sense to me as a long term business or investing plan because you are not subject to short term whims ruining your plans.  If I did this in 2008, and then got laid off (or was retired in the first place) I might do too much damage to recover.  The idea is nice to throw around but the details always matter.  Always, the problem with higher risk plans is your ability to execute.

xpauliber

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Re: Idea for investing during a recession
« Reply #6 on: June 14, 2018, 02:30:08 PM »
10 year treasury rates (not sure how this correlates to HELOC rates but I assume it's in the vicinity)

1973-74 (48% - 645 days) - 7%
1976-78 (19% - 531 days) - 8%
1980-82 (27% - 622 days) - 12%
2000-02 (49% - 929 days) - 6%
2007-09 (57% - 517 days) - 5%
Today - 3%

Is this plan conditional on rates also?  Or how bad CNBC says things really are? It's rough taking from cash flow to pay off the loan while most of your early investments suffer massive losses.  Even near the bottom, it found more crazy bottoms.  The news would salivate with messages of imminent doom if it went down 4% today.

https://web.archive.org/web/20090306090921/http://finance.yahoo.com:80/

It's not for me, but a system that involves leverage over time makes sense to me as a long term business or investing plan because you are not subject to short term whims ruining your plans.  If I did this in 2008, and then got laid off (or was retired in the first place) I might do too much damage to recover.  The idea is nice to throw around but the details always matter.  Always, the problem with higher risk plans is your ability to execute.

Absolutely, itís conditional on rates because the more youíre paying the bank for access to those funds, the more return youíre going to need from your investments to make it worth it.

Another factor which has the potential to change your ultimate return is the duration of the recession.  If the mArket recovers much faster, then youíll pay less in interest on your HEL.

Iíve never considered buying on margin and only have contemplated a home equity loan with a fixed rate so it eliminates any variables relating to the cost of accessing that capital.  If I ever execute this plan, I think I would take the longest term that was available with a fixed rate to minimize the impact on my monthly cash flow.  But perhaps if a shorter term offered a significant reduction in the interest rate, it may be worth running some calcs to see how big of an impact it would have on your overall return and then of course making 99% sure youíre cash flow can support the payments.

Nate79

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Re: Idea for investing during a recession
« Reply #7 on: June 14, 2018, 07:43:02 PM »
HELOCs were killed in the Great Recession. I wouldn't relying on borrowing to try and time the markets during a downturn. This is a horrible idea.

Your house is working for you even when paid off. A paid off home has some capital appreciation but it also gives you cash flow return by having a reduced housing expense which allows you to invest the extra in the market --> your previous mortgage payment can now be invested.

Edited to add: one of the dangers of a margin loan is that it is callable by the lender at any time ( and they certainly will if the asset vue decreases). HELOCs are also callable. This is the major advantage of a mortgage, which is not callable.

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« Last Edit: June 14, 2018, 07:45:59 PM by Nate79 »

xpauliber

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Re: Idea for investing during a recession
« Reply #8 on: June 14, 2018, 09:16:39 PM »
HELOCs were killed in the Great Recession. I wouldn't relying on borrowing to try and time the markets during a downturn. This is a horrible idea.

Your house is working for you even when paid off. A paid off home has some capital appreciation but it also gives you cash flow return by having a reduced housing expense which allows you to invest the extra in the market --> your previous mortgage payment can now be invested.

Edited to add: one of the dangers of a margin loan is that it is callable by the lender at any time ( and they certainly will if the asset vue decreases). HELOCs are also callable. This is the major advantage of a mortgage, which is not callable.

Sent from my SM-G950U using Tapatalk

I never advocated for using a HELOC.  My thinking was to use a Home Equity Loan which provides the capital in a lump sum payment with a fixed, defined set of repayment terms.  This eliminates any variables with accessing capital to invest.

Furthermore, is it timing the market?  Absolutely, but in a way that only has upside to it.  You use the most recent market high as your fixed point and only invest if/when the market drops 30% or more. If it doesnít drop that far, then you simply donít invest and pay off the HEL. 

If you believe that ďthe market always goes upĒ, then how are you going to lose by investing with this approach?

Nate79

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Re: Idea for investing during a recession
« Reply #9 on: June 14, 2018, 11:23:24 PM »
HELOCs were killed in the Great Recession. I wouldn't relying on borrowing to try and time the markets during a downturn. This is a horrible idea.

Your house is working for you even when paid off. A paid off home has some capital appreciation but it also gives you cash flow return by having a reduced housing expense which allows you to invest the extra in the market --> your previous mortgage payment can now be invested.

Edited to add: one of the dangers of a margin loan is that it is callable by the lender at any time ( and they certainly will if the asset vue decreases). HELOCs are also callable. This is the major advantage of a mortgage, which is not callable.

Sent from my SM-G950U using Tapatalk

I never advocated for using a HELOC.  My thinking was to use a Home Equity Loan which provides the capital in a lump sum payment with a fixed, defined set of repayment terms.  This eliminates any variables with accessing capital to invest.

Furthermore, is it timing the market?  Absolutely, but in a way that only has upside to it.  You use the most recent market high as your fixed point and only invest if/when the market drops 30% or more. If it doesn’t drop that far, then you simply don’t invest and pay off the HEL. 

If you believe that “the market always goes up”, then how are you going to lose by investing with this approach?
And if you invested in a false bottom and it takes 10 years for the market to recover are you ok with that as you have to pay back the loan?

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Dicey

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Re: Idea for investing during a recession
« Reply #10 on: June 15, 2018, 12:31:13 AM »
How do you plan to guarantee your home will have enough equity to borrow against in a recession? How do know now what interest rates will be then?

It happened to thousands of homeowners during the Great Recession. Tens of thousands, perhaps even hundreds of thousands of homes or more were under water. They had no equity as far as the banks were concerned.

Having a mortgage and plenty of money in investments with varying degrees of liquidity is the key to survival in a prolonged downturn. Houses will always need supplemental funds for taxes, insurance and upkeep, even the paid off ones.

And if you think you can "make up" the savings by starting to invest after you pay off your mortgage, please know that is a losing proposition every time. Compound interest is literally money for no work. The sooner you have money compounding on your behalf, the faster and easier you're going to get to FIRE.

I agree in principle with your attorney. I love that you are thinking deeply about the lessons s/he is trying to teach you. However, you seem to be missing the point. Talk to them some more and really, really listen. Ask questions until you understand. Your future self will be so grateful to now you.

PS - All of the above assumes you are discussing property in the United States. If not, this message will self-destruct in sixty seconds ;-)

GrayGhost

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Re: Idea for investing during a recession
« Reply #11 on: June 15, 2018, 03:34:05 AM »
The basic principle being discussed here is a leveraged investment... should you borrow against your house to buy into a risky, fluctuating stock market?

For me, the answer is pretty clearly no, not unless I can afford the risk... like if I had a recession-proof job with enough money to pay off the loan, or a spouse, or if I had was already FIRE. But even then, I don't know if I'd take on that risk and headache, just to have a bigger number in the bank.

I'd say, steady as she goes. Personally I am building up a cash buffer to dump into the market when I feel like it has dropped enough, however I would not consider taking on debt to buy stocks. It's just too risky when dollar-cost averaging and asset allocation give you 7% ROI each year and no headaches.

boarder42

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Re: Idea for investing during a recession
« Reply #12 on: June 15, 2018, 04:22:25 AM »
How do you plan to guarantee your home will have enough equity to borrow against in a recession? How do know now what interest rates will be then?

It happened to thousands of homeowners during the Great Recession. Tens of thousands, perhaps even hundreds of thousands of homes or more were under water. They had no equity as far as the banks were concerned.

Having a mortgage and plenty of money in investments with varying degrees of liquidity is the key to survival in a prolonged downturn. Houses will always need supplemental funds for taxes, insurance and upkeep, even the paid off ones.

And if you think you can "make up" the savings by starting to invest after you pay off your mortgage, please know that is a losing proposition every time. Compound interest is literally money for no work. The sooner you have money compounding on your behalf, the faster and easier you're going to get to FIRE.

I agree in principle with your attorney. I love that you are thinking deeply about the lessons s/he is trying to teach you. However, you seem to be missing the point. Talk to them some more and really, really listen. Ask questions until you understand. Your future self will be so grateful to now you.

PS - All of the above assumes you are discussing property in the United States. If not, this message will self-destruct in sixty seconds ;-)

You may not know any of the above. But if it happens. And I'd say it's likely. If a recession happens in the next few years. Money will flock to bonds as it always has and yields will drop.  We don't have to have a housing recession like 2008. Sure prices will drop some in a recession. But this is one way you can market time with an HEL that makes perfect sense. I wouldn't be too fixated on the amount the market falls more looking for the drop in interest rates.  If you can pull money out of an asset that appreciates typically at 3% and put it in an asset that's depreciated even 10-15% and typically grows at 10% annually. An HEL or second mortgage can be fixed for 30 years and if this perfect storm happens why not jump in.

shinn497

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Re: Idea for investing during a recession
« Reply #13 on: June 15, 2018, 04:43:30 AM »
Yeah taking a risky practice (market timing), layering on a risky way of investing (leveraging), and using a poor financial product to do it (Heloc loan) seems not worth it.

You know. No shade OP but  I think I understand why credit cycles happen. People look at the performance of a bull market and think using debt to get rich is a good idea. Almost every economist and financial expert I've read so far (Shiller, Dalio, Buffet, etc. etc.) specifically points to this behavior as the precursor of a recession.
« Last Edit: June 15, 2018, 06:22:00 AM by shinn497 »

boarder42

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Re: Idea for investing during a recession
« Reply #14 on: June 15, 2018, 05:45:17 AM »
Yeah taking a risky practice (market timing), layering on a risky way of investing (leveraging), and using a poor financial product to do it (Heloc loan) seems not worth it.

You know. No shade OP but  I think I understand why credit cycles happen. People look at the performance of a bull market and think using debt to get rich is a good idea. Almost every economist and financial expert I've read so far (Shiller, Dalio, Buffet, etc. etc.) specifically point to this behavior as the precursor of a recession.

1. a mortgage for leverage is not risky
2. the OP corrected themselves and switched to an HEL which isnt risky its the same as a mortgage if you set it up properly.
3. Its not really market timing - it is to some level but you have calculated controlled variables and a future assumption (which we all plan to live on th 4% rule) that if that fails forever doesnt matter whether you had the mortgage or not. 

if the events the OP describes as happening happen this is no different than what everyone taking out a mortgage right now and holding it to term is doing - all we're doing here is just refinancing or extending the term of our mortgage at another opportune time in the market to do so.  same logic applies - why keep little green soldiers tied up in an asset when the could be working for you. 

you yourself had a thread about 100% stocks and using a 4% SWR but you cant wrap your head around taking out some fixed interest debt for 30 year at 5% or less to invest in the market.  As i stated in the other thread you have a severe lack of actual knowledge of how all of this has worked in the past and why the 4% SWR works and need some education or you're likely doomed to failure no matter what plan you choose to follow.

xpauliber

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Re: Idea for investing during a recession
« Reply #15 on: June 15, 2018, 08:08:23 AM »
Yeah taking a risky practice (market timing), layering on a risky way of investing (leveraging), and using a poor financial product to do it (Heloc loan) seems not worth it.

You know. No shade OP but  I think I understand why credit cycles happen. People look at the performance of a bull market and think using debt to get rich is a good idea. Almost every economist and financial expert I've read so far (Shiller, Dalio, Buffet, etc. etc.) specifically point to this behavior as the precursor of a recession.

1. a mortgage for leverage is not risky
2. the OP corrected themselves and switched to an HEL which isnt risky its the same as a mortgage if you set it up properly.
3. Its not really market timing - it is to some level but you have calculated controlled variables and a future assumption (which we all plan to live on th 4% rule) that if that fails forever doesnt matter whether you had the mortgage or not. 

if the events the OP describes as happening happen this is no different than what everyone taking out a mortgage right now and holding it to term is doing - all we're doing here is just refinancing or extending the term of our mortgage at another opportune time in the market to do so.  same logic applies - why keep little green soldiers tied up in an asset when the could be working for you. 

you yourself had a thread about 100% stocks and using a 4% SWR but you cant wrap your head around taking out some fixed interest debt for 30 year at 5% or less to invest in the market.  As i stated in the other thread you have a severe lack of actual knowledge of how all of this has worked in the past and why the 4% SWR works and need some education or you're likely doomed to failure no matter what plan you choose to follow.

Boarder42, you completely understand the concept.

xpauliber

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Re: Idea for investing during a recession
« Reply #16 on: June 15, 2018, 08:45:09 AM »
Yeah taking a risky practice (market timing), layering on a risky way of investing (leveraging), and using a poor financial product to do it (Heloc loan) seems not worth it.

You know. No shade OP but  I think I understand why credit cycles happen. People look at the performance of a bull market and think using debt to get rich is a good idea. Almost every economist and financial expert I've read so far (Shiller, Dalio, Buffet, etc. etc.) specifically points to this behavior as the precursor of a recession.

You are waaaaay off.  Did you even read my original post??? I'm talking about recognizing a terrific opportunity to enter the market (when the market is CURRENTLY in a recession and down 30%+) and leveraging an asset to capitalize on that opportunity.

 I'm not at all advocating for using debt to invest in the market PRIOR to a recession.  I agree with you that people that are currently using leverage to enter the market today are in for a rude awakening when the market recedes.  Also, as for credit cycles, they happen because people use credit far beyond their ability to repay those in worst case scenarios.  If you read my original post, you'll see that I have $1,500/month in free cash flow and hypothesized about utilizing $50,000 leverage with payments that would be less than 25% of my available cash flow which makes me very capable of making the payments and not defaulting.  What if I told you I had $150,000 in equity available in my home but am only considering utilizing $50,000 of it?  Someone taking the whole $150,000 and not having the cash flow to support those payments if the market turns is the reason credit cycles happen.....you have to know your limitations & make smart decisions.

The whole reason I made the original post was to see if there was a fundamental flaw that I may be missing.  So far, I haven't had one brought up that has dissuaded me.  Some of the comments seem like people aren't understanding the concept.

« Last Edit: June 15, 2018, 09:41:23 AM by xpauliber »

Spitfire

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Re: Idea for investing during a recession
« Reply #17 on: June 15, 2018, 09:34:10 AM »
I have kicked this idea around myself and would probably do it in a 30% recession. I have a heloc available and can lock the rate on any draw over a 5-20 year period, effectively making it a HEL. To me this is just buying up front, at a discount, something that I would be buying incrementally anyway in the future. Instead of small investments for 5 or 10 years, it would be a large chunk now and using that same money to pay the loan back. 

ETA: This assumes a low interest rate is available and the heloc is available during the recession.
« Last Edit: June 15, 2018, 09:40:29 AM by Spitfire »

boarder42

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Re: Idea for investing during a recession
« Reply #18 on: June 15, 2018, 09:50:37 AM »
to me the two biggest variables here are amount of home equity and what the new interest rates are - at that point anything over a 10% drop is likely worth the arbitrage even if it continues down.  and if it continues down rates will contine down so you can refi maybe everything.  if you're waiting for 30% it may never come and you may miss the boat to cash out some equity and buy stocks on sale at a low fixed rate. 

and really a drop isnt necessary if there is enough equity in the home that it makes sense to pull money out at whatever the current rate is to cover the costs of the change this is no different than just carrying a mortgage to term. or creating a perpetual mortgage.
« Last Edit: June 15, 2018, 10:03:08 AM by boarder42 »

runbikerun

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Re: Idea for investing during a recession
« Reply #19 on: June 15, 2018, 10:32:16 AM »
What would have to happen for your plan to be a disaster? How likely are those events? Are they tied to each other?

A recession, a house price collapse and a wave of redundancies are not independent events: the presence of one makes it a reasonable bet that the others will also be present. If you lose your job and need to move in a recession, just as your equity is being vapourised, then you are fucked with a capital F. What if you buy in at a 30% drop only to see it continue down to 50% and remain stagnant during a Japanese-style lost decade? What if you have to move states to find work, and crystallise your equity losses? What if a house price collapse drives your equity from 40% to 20% and your bank adds a percentage point to your interest rate as market returns freeze up?

People aren't wary of leveraged investment because it's trendy to be wary of leveraged investment; they're wary of leveraged investment because it can turn a disappointment into a catastrophe. There's a thread elsewhere on the net (I can't for the life of me remember where), in which an extremely intelligent person devised an extremely carefully backtested plan for leveraged martingale-style investment, and lost absolutely everything - we're talking mid six figures gone up in smoke and reduced to zero over the course of a year or so.

If you think you've devised a safe way to multiply your returns with no additional risk, there are two possibilities: one is that you are smarter than the market, and the other is that you haven't properly accounted for the risks.

boarder42

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Re: Idea for investing during a recession
« Reply #20 on: June 15, 2018, 10:46:06 AM »
What would have to happen for your plan to be a disaster? How likely are those events? Are they tied to each other?

A recession, a house price collapse and a wave of redundancies are not independent events: the presence of one makes it a reasonable bet that the others will also be present. If you lose your job and need to move in a recession, just as your equity is being vapourised, then you are fucked with a capital F. What if you buy in at a 30% drop only to see it continue down to 50% and remain stagnant during a Japanese-style lost decade? What if you have to move states to find work, and crystallise your equity losses? What if a house price collapse drives your equity from 40% to 20% and your bank adds a percentage point to your interest rate as market returns freeze up?

People aren't wary of leveraged investment because it's trendy to be wary of leveraged investment; they're wary of leveraged investment because it can turn a disappointment into a catastrophe. There's a thread elsewhere on the net (I can't for the life of me remember where), in which an extremely intelligent person devised an extremely carefully backtested plan for leveraged martingale-style investment, and lost absolutely everything - we're talking mid six figures gone up in smoke and reduced to zero over the course of a year or so.

If you think you've devised a safe way to multiply your returns with no additional risk, there are two possibilities: one is that you are smarter than the market, and the other is that you haven't properly accounted for the risks.

if you plan to hold a mortgage to term this plan is not substatially different.  and mortgage leverage is not even remotely the same as marginal leverage. 

did you actually read the idea and understand it?

xpauliber

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Re: Idea for investing during a recession
« Reply #21 on: June 15, 2018, 11:12:41 AM »
What would have to happen for your plan to be a disaster? How likely are those events? Are they tied to each other?

A recession, a house price collapse and a wave of redundancies are not independent events: the presence of one makes it a reasonable bet that the others will also be present. If you lose your job and need to move in a recession, just as your equity is being vapourised, then you are fucked with a capital F. What if you buy in at a 30% drop only to see it continue down to 50% and remain stagnant during a Japanese-style lost decade? What if you have to move states to find work, and crystallise your equity losses? What if a house price collapse drives your equity from 40% to 20% and your bank adds a percentage point to your interest rate as market returns freeze up?

People aren't wary of leveraged investment because it's trendy to be wary of leveraged investment; they're wary of leveraged investment because it can turn a disappointment into a catastrophe. There's a thread elsewhere on the net (I can't for the life of me remember where), in which an extremely intelligent person devised an extremely carefully backtested plan for leveraged martingale-style investment, and lost absolutely everything - we're talking mid six figures gone up in smoke and reduced to zero over the course of a year or so.

If you think you've devised a safe way to multiply your returns with no additional risk, there are two possibilities: one is that you are smarter than the market, and the other is that you haven't properly accounted for the risks.

This is exactly why I posted the idea on here; to find out if there are risks that I haven't accounted for.

I'm not going to counter all of the "what-if" scenarios that you've brought up but I appreciate your contributions to this thought experiment and I'll take those into consideration.  I will bring up the point you made though about the potential for a bank to increase the interest rate; you DO NOT use any type of variable rate Home Equity Loan.  You only utilize leverage that has a FIXED interest rate.  The whole concept of this approach is limiting risk by locking in various normally fluctuating variables.

The one thing that I did think of and does give me pause somewhat is the point you made about the Japanese economy and how they have struggled to recover for at least a decade.  With the US economy being so much larger, I'm not sure we can compare the Japanese economy to the American economy though. 

One other risk that I'm considering is how the US national debt may factor into the next/a future recession.  That may be a wildcard that bucks historical norms?

Dicey

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Re: Idea for investing during a recession
« Reply #22 on: June 15, 2018, 11:26:26 AM »
You don't consider rising interest rates to be a wild card?

I remember being thrilled to get a mortgage (with excellent credit) at "only" 7% in 1996. How does a rate like that skew this proposed plan?


xpauliber

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Re: Idea for investing during a recession
« Reply #23 on: June 15, 2018, 12:04:09 PM »
You don't consider rising interest rates to be a wild card?

I remember being thrilled to get a mortgage (with excellent credit) at "only" 7% in 1996. How does a rate like that skew this proposed plan?

All of my modeling has been done using 5.75% fixed rate.  I wouldn't consider it if rates were higher than that.  As another member posted however, during a recession, the rates tend to fall so if it's 5.75% or less, then it isn't a risk.

xpauliber

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Re: Idea for investing during a recession
« Reply #24 on: June 15, 2018, 12:19:25 PM »
So this may help visualize what my original post is talking about.  I went back and looked at historical stock prices for VTI and used actual data from the Great Recession to see what would have happened if I had executed this plan back in 2008-2009.  You can see the results below.  Even using $50,000 and starting to deploy capital at a 30% decline, I still missed the bottom since it hit 55% on March 9, 2009 but waiting until at least a 30% drop provides enough of an upside in my opinion.

Some of the things that would positively change the ultimate rate of return is:

-Waiting to deploy capital until a bigger percentage drop (start deploying at 40% instead of 30%).  But then you run the risk of maybe the market only dropping 40 or 45% and you never get your capital fully deployed.

-A quicker recovery from the recession (I would have made 27 payments on the HEL during the Great Recession.  If the market recovers in 12 months instead, I would have paid way less in interest on the HEL).

-Lower interest rate on the HEL would improve returns.

Of course, it's easy to look back and see when you should have deployed capital but I still think there's opportunity during future recessions.

Looking at Scenario number 2 again, I think I may have calculated the capital gains tax wrong and actually paid it twice which would actually result in the net profit being higher in that scenario.  Plus, in both scenarios, I subtracted the P&I payments that you would have made on the HEL just to see what you truly would net once being made whole.  If your cash flow can support the HEL payments, when you go to cash out in the future, you may just consider the total amount profit.







« Last Edit: June 15, 2018, 05:55:35 PM by xpauliber »

xpauliber

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Re: Idea for investing during a recession
« Reply #25 on: June 15, 2018, 01:11:56 PM »
So out of curiosity, I decided to model if instead of making the payment on the HEL, I instead just used that $351 and bought VTI on the first of the month for the duration of when I would have had the HEL. 

Here are the results but to compare apples to apples, I probably should have subtracted the original capital invested to see what the actual gains would be ($23,465) to compare to the first model.
« Last Edit: June 15, 2018, 05:58:32 PM by xpauliber »

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Re: Idea for investing during a recession
« Reply #26 on: June 15, 2018, 03:14:16 PM »
Interactive Brokers offers margin loans for around 1.7%.  I've decided to go without an emergency fund and just borrow from my broker in the event of a cash need. 

Margin is always dangerous, whether its in the form of a HELOC or broker loan.  It can be done successfully but it is important to have reasonable position sizing and a hedge.

1.5% if you borrow in EUR or CHF, 3.4% for USD now. Still cheap.

shinn497

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Re: Idea for investing during a recession
« Reply #27 on: June 15, 2018, 03:46:44 PM »
Yeah taking a risky practice (market timing), layering on a risky way of investing (leveraging), and using a poor financial product to do it (Heloc loan) seems not worth it.

You know. No shade OP but  I think I understand why credit cycles happen. People look at the performance of a bull market and think using debt to get rich is a good idea. Almost every economist and financial expert I've read so far (Shiller, Dalio, Buffet, etc. etc.) specifically points to this behavior as the precursor of a recession.

You are waaaaay off.  Did you even read my original post??? I'm talking about recognizing a terrific opportunity to enter the market (when the market is CURRENTLY in a recession and down 30%+) and leveraging an asset to capitalize on that opportunity.

 I'm not at all advocating for using debt to invest in the market PRIOR to a recession.  I agree with you that people that are currently using leverage to enter the market today are in for a rude awakening when the market recedes.  Also, as for credit cycles, they happen because people use credit far beyond their ability to repay those in worst case scenarios.  If you read my original post, you'll see that I have $1,500/month in free cash flow and hypothesized about utilizing $50,000 leverage with payments that would be less than 25% of my available cash flow which makes me very capable of making the payments and not defaulting.  What if I told you I had $150,000 in equity available in my home but am only considering utilizing $50,000 of it?  Someone taking the whole $150,000 and not having the cash flow to support those payments if the market turns is the reason credit cycles happen.....you have to know your limitations & make smart decisions.

The whole reason I made the original post was to see if there was a fundamental flaw that I may be missing.  So far, I haven't had one brought up that has dissuaded me.  Some of the comments seem like people aren't understanding the concept.

Except you don't know that this isn't a recession with perfect certainty, and the model you are proposing is simple.

I'm not saying it can't work, its just risky.

To time the market, you will need a very very powerful model. What makes you think that performing a simple average of market dips such such ? And what justifies the confidence you have that this can be done with enough accuracy to make it worthwile.

I mean if you could make proper models that do such a thing, just be a quant, triple your income, and then throw money in reasonable investments. 

xpauliber

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Re: Idea for investing during a recession
« Reply #28 on: June 15, 2018, 06:14:55 PM »
Yeah taking a risky practice (market timing), layering on a risky way of investing (leveraging), and using a poor financial product to do it (Heloc loan) seems not worth it.

You know. No shade OP but  I think I understand why credit cycles happen. People look at the performance of a bull market and think using debt to get rich is a good idea. Almost every economist and financial expert I've read so far (Shiller, Dalio, Buffet, etc. etc.) specifically points to this behavior as the precursor of a recession.

You are waaaaay off.  Did you even read my original post??? I'm talking about recognizing a terrific opportunity to enter the market (when the market is CURRENTLY in a recession and down 30%+) and leveraging an asset to capitalize on that opportunity.

 I'm not at all advocating for using debt to invest in the market PRIOR to a recession.  I agree with you that people that are currently using leverage to enter the market today are in for a rude awakening when the market recedes.  Also, as for credit cycles, they happen because people use credit far beyond their ability to repay those in worst case scenarios.  If you read my original post, you'll see that I have $1,500/month in free cash flow and hypothesized about utilizing $50,000 leverage with payments that would be less than 25% of my available cash flow which makes me very capable of making the payments and not defaulting.  What if I told you I had $150,000 in equity available in my home but am only considering utilizing $50,000 of it?  Someone taking the whole $150,000 and not having the cash flow to support those payments if the market turns is the reason credit cycles happen.....you have to know your limitations & make smart decisions.

The whole reason I made the original post was to see if there was a fundamental flaw that I may be missing.  So far, I haven't had one brought up that has dissuaded me.  Some of the comments seem like people aren't understanding the concept.

Except you don't know that this isn't a recession with perfect certainty, and the model you are proposing is simple.

I'm not saying it can't work, its just risky.

To time the market, you will need a very very powerful model. What makes you think that performing a simple average of market dips such such ? And what justifies the confidence you have that this can be done with enough accuracy to make it worthwile.

I mean if you could make proper models that do such a thing, just be a quant, triple your income, and then throw money in reasonable investments.

How do you define a recession?  All I care about is if the market is dipping a significant percentage.  If you believe that "the market always goes up", then when the market dips significantly, it presents an opportunity to buy in (with money outside of the market) and wait for it to recover and take your new capital along with it.

The confidence that I have that it can be done with accuracy IS simple.  When the news starts reporting that the market is down 5% or 10% or 15%, then I'll start paying attention much more closely.  When the market starts declining, you look back to its most recent high and that gives you your concrete starting point to base all of your calculations off of. 

For instance, let's say hypothetically at some point in the future, the market hit an all-time high of 31,284 on Nov. 4, 2020 and then for the next couple of weeks, the market does what it does (up, down, up, down) but never goes higher than the 31,284.  Suddenly, you hear that the market is tanking and closed down 8%.  Is this just a correction or a recession?  Who knows?  It could go down a couple more percent or it could hit new highs.  When you look back a couple weeks, you see the highest it hit was 31,284 and you use that number as your benchmark.  Now, you simply calculate what a 30% (or whatever number you want to invest at) drop in the market would be from that all-time high and you come up with 21,899.  If over the next couple weeks, the market continues to go up and down but more downward towards that 21,899, I would be thinking about getting my HEL and ready to deploy.  I'm not going to sit and watch the market constantly, so I'll check out what the price of VTI was on Nov. 4, 2020, use that number as my benchmark and set up a limit order to fill $10,000 worth if it goes down to the 30% decline number that I calculated.  If that order fills, I'll immediately set up another limit order to fill $10,000 more if it goes down to 35% from the market high.  Etc. Etc.

If the market goes down 30% and then never goes down to fill my limit order at 35% then I'm sitting on $40,000 in my savings from the HEL and I have $10,000 that will at the very least return 30% when the market recovers (because remember, we believe that the market always goes up) and when it does, I cash out my original $10,000, add it to the $40,000 sitting in my savings and pay off the HEL.

boarder42

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Re: Idea for investing during a recession
« Reply #29 on: June 15, 2018, 06:18:21 PM »
It doesn't matter if it's a recession the proposed idea here works regardless of a market drop or not historically. If you can get a low fixed rate on your home equity and cash out refi or get an HEL. This is no different than holding a mortgage. If you can couple that with ANY double digits decrease in the markets even better. 

You don't need models you don't need some advanced predictive data. And depending on how far the market has fallen a higher rate may make sense. All of which you have data for. The markets will recover. 

It likely can't be done consistently. It's taking advantage of a low interest rate environment.  Like most smart people have been doing the last 8 years.

There is little risk here just like holding a mortgage. Your only risk is sorr in FIRE
« Last Edit: June 15, 2018, 06:24:07 PM by boarder42 »

shinn497

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Re: Idea for investing during a recession
« Reply #30 on: June 15, 2018, 07:45:30 PM »
Yeah taking a risky practice (market timing), layering on a risky way of investing (leveraging), and using a poor financial product to do it (Heloc loan) seems not worth it.

You know. No shade OP but  I think I understand why credit cycles happen. People look at the performance of a bull market and think using debt to get rich is a good idea. Almost every economist and financial expert I've read so far (Shiller, Dalio, Buffet, etc. etc.) specifically points to this behavior as the precursor of a recession.

You are waaaaay off.  Did you even read my original post??? I'm talking about recognizing a terrific opportunity to enter the market (when the market is CURRENTLY in a recession and down 30%+) and leveraging an asset to capitalize on that opportunity.

 I'm not at all advocating for using debt to invest in the market PRIOR to a recession.  I agree with you that people that are currently using leverage to enter the market today are in for a rude awakening when the market recedes.  Also, as for credit cycles, they happen because people use credit far beyond their ability to repay those in worst case scenarios.  If you read my original post, you'll see that I have $1,500/month in free cash flow and hypothesized about utilizing $50,000 leverage with payments that would be less than 25% of my available cash flow which makes me very capable of making the payments and not defaulting.  What if I told you I had $150,000 in equity available in my home but am only considering utilizing $50,000 of it?  Someone taking the whole $150,000 and not having the cash flow to support those payments if the market turns is the reason credit cycles happen.....you have to know your limitations & make smart decisions.

The whole reason I made the original post was to see if there was a fundamental flaw that I may be missing.  So far, I haven't had one brought up that has dissuaded me.  Some of the comments seem like people aren't understanding the concept.

Except you don't know that this isn't a recession with perfect certainty, and the model you are proposing is simple.

I'm not saying it can't work, its just risky.

To time the market, you will need a very very powerful model. What makes you think that performing a simple average of market dips such such ? And what justifies the confidence you have that this can be done with enough accuracy to make it worthwile.

I mean if you could make proper models that do such a thing, just be a quant, triple your income, and then throw money in reasonable investments.

How do you define a recession?  All I care about is if the market is dipping a significant percentage.  If you believe that "the market always goes up", then when the market dips significantly, it presents an opportunity to buy in (with money outside of the market) and wait for it to recover and take your new capital along with it.

The confidence that I have that it can be done with accuracy IS simple.  When the news starts reporting that the market is down 5% or 10% or 15%, then I'll start paying attention much more closely.  When the market starts declining, you look back to its most recent high and that gives you your concrete starting point to base all of your calculations off of. 

For instance, let's say hypothetically at some point in the future, the market hit an all-time high of 31,284 on Nov. 4, 2020 and then for the next couple of weeks, the market does what it does (up, down, up, down) but never goes higher than the 31,284.  Suddenly, you hear that the market is tanking and closed down 8%.  Is this just a correction or a recession?  Who knows?  It could go down a couple more percent or it could hit new highs.  When you look back a couple weeks, you see the highest it hit was 31,284 and you use that number as your benchmark.  Now, you simply calculate what a 30% (or whatever number you want to invest at) drop in the market would be from that all-time high and you come up with 21,899.  If over the next couple weeks, the market continues to go up and down but more downward towards that 21,899, I would be thinking about getting my HEL and ready to deploy.  I'm not going to sit and watch the market constantly, so I'll check out what the price of VTI was on Nov. 4, 2020, use that number as my benchmark and set up a limit order to fill $10,000 worth if it goes down to the 30% decline number that I calculated.  If that order fills, I'll immediately set up another limit order to fill $10,000 more if it goes down to 35% from the market high.  Etc. Etc.

If the market goes down 30% and then never goes down to fill my limit order at 35% then I'm sitting on $40,000 in my savings from the HEL and I have $10,000 that will at the very least return 30% when the market recovers (because remember, we believe that the market always goes up) and when it does, I cash out my original $10,000, add it to the $40,000 sitting in my savings and pay off the HEL.

Except you don't know when, exactly, the market will return. And all of this time you are paying for the money you have borrowed. IF the market stays down long enough, then the amount you have paid on the credit adds up and doesn't make it as worth it had you just simply invested in the market in the first place (or some other commodity like gold). Remember you have to make enough to cover both the amount you borrowed, any interest, and the amount you would have made had you not done this and invested your money normally or in an inflation hedge.

This is just market timing. Except the dips and peaks are worse. Which means you need to be more accurate with your level of timing to make it work. Given that you don't have any kind of method of doing this accurately. I don't see why you think it is possible. Or rather, any more possible than any other person that has the opportunity to do it.

Remember there are a lot of smart people in the stock market, with a lot more education, and a lot more access to data that you don't have. And strategies like this are not novel. IT is not a zero sum game (since the economy creates value over time), but you are playing against people that are way better than you. Bear that in mind.

You essentially believe you can exploit a market inefficiency that you haven't properly researched, and you want to do it with money that is not yours. So good luck with that.

xpauliber

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Re: Idea for investing during a recession
« Reply #31 on: June 15, 2018, 07:55:46 PM »
Yeah taking a risky practice (market timing), layering on a risky way of investing (leveraging), and using a poor financial product to do it (Heloc loan) seems not worth it.

You know. No shade OP but  I think I understand why credit cycles happen. People look at the performance of a bull market and think using debt to get rich is a good idea. Almost every economist and financial expert I've read so far (Shiller, Dalio, Buffet, etc. etc.) specifically points to this behavior as the precursor of a recession.

You are waaaaay off.  Did you even read my original post??? I'm talking about recognizing a terrific opportunity to enter the market (when the market is CURRENTLY in a recession and down 30%+) and leveraging an asset to capitalize on that opportunity.

 I'm not at all advocating for using debt to invest in the market PRIOR to a recession.  I agree with you that people that are currently using leverage to enter the market today are in for a rude awakening when the market recedes.  Also, as for credit cycles, they happen because people use credit far beyond their ability to repay those in worst case scenarios.  If you read my original post, you'll see that I have $1,500/month in free cash flow and hypothesized about utilizing $50,000 leverage with payments that would be less than 25% of my available cash flow which makes me very capable of making the payments and not defaulting.  What if I told you I had $150,000 in equity available in my home but am only considering utilizing $50,000 of it?  Someone taking the whole $150,000 and not having the cash flow to support those payments if the market turns is the reason credit cycles happen.....you have to know your limitations & make smart decisions.

The whole reason I made the original post was to see if there was a fundamental flaw that I may be missing.  So far, I haven't had one brought up that has dissuaded me.  Some of the comments seem like people aren't understanding the concept.

Except you don't know that this isn't a recession with perfect certainty, and the model you are proposing is simple.

I'm not saying it can't work, its just risky.

To time the market, you will need a very very powerful model. What makes you think that performing a simple average of market dips such such ? And what justifies the confidence you have that this can be done with enough accuracy to make it worthwile.

I mean if you could make proper models that do such a thing, just be a quant, triple your income, and then throw money in reasonable investments.

How do you define a recession?  All I care about is if the market is dipping a significant percentage.  If you believe that "the market always goes up", then when the market dips significantly, it presents an opportunity to buy in (with money outside of the market) and wait for it to recover and take your new capital along with it.

The confidence that I have that it can be done with accuracy IS simple.  When the news starts reporting that the market is down 5% or 10% or 15%, then I'll start paying attention much more closely.  When the market starts declining, you look back to its most recent high and that gives you your concrete starting point to base all of your calculations off of. 

For instance, let's say hypothetically at some point in the future, the market hit an all-time high of 31,284 on Nov. 4, 2020 and then for the next couple of weeks, the market does what it does (up, down, up, down) but never goes higher than the 31,284.  Suddenly, you hear that the market is tanking and closed down 8%.  Is this just a correction or a recession?  Who knows?  It could go down a couple more percent or it could hit new highs.  When you look back a couple weeks, you see the highest it hit was 31,284 and you use that number as your benchmark.  Now, you simply calculate what a 30% (or whatever number you want to invest at) drop in the market would be from that all-time high and you come up with 21,899.  If over the next couple weeks, the market continues to go up and down but more downward towards that 21,899, I would be thinking about getting my HEL and ready to deploy.  I'm not going to sit and watch the market constantly, so I'll check out what the price of VTI was on Nov. 4, 2020, use that number as my benchmark and set up a limit order to fill $10,000 worth if it goes down to the 30% decline number that I calculated.  If that order fills, I'll immediately set up another limit order to fill $10,000 more if it goes down to 35% from the market high.  Etc. Etc.

If the market goes down 30% and then never goes down to fill my limit order at 35% then I'm sitting on $40,000 in my savings from the HEL and I have $10,000 that will at the very least return 30% when the market recovers (because remember, we believe that the market always goes up) and when it does, I cash out my original $10,000, add it to the $40,000 sitting in my savings and pay off the HEL.

Except you don't know when, exactly, the market will return. And all of this time you are paying for the money you have borrowed. IF the market stays down long enough, then the amount you have paid on the credit adds up and doesn't make it as worth it had you just simply invested in the market in the first place (or some other commodity like gold). Remember you have to make enough to cover both the amount you borrowed, any interest, and the amount you would have made had you not done this and invested your money normally or in an inflation hedge.

This is just market timing. Except the dips and peaks are worse. Which means you need to be more accurate with your level of timing to make it work. Given that you don't have any kind of method of doing this accurately. I don't see why you think it is possible. Or rather, any more possible than any other person that has the opportunity to do it.

Remember there are a lot of smart people in the stock market, with a lot more education, and a lot more access to data that you don't have. And strategies like this are not novel. IT is not a zero sum game (since the economy creates value over time), but you are playing against people that are way better than you. Bear that in mind.

You essentially believe you can exploit a market inefficiency that you haven't properly researched, and you want to do it with money that is not yours. So good luck with that.

Listen, Iím all for educated debate but this response CLEARLY illustrates that you either donít read my replies or you donít understand them since Iíve addressed many of your points in prior posts.  So with that, I wish you the best in your investing future but will no longer be responding to your comments.

shinn497

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Re: Idea for investing during a recession
« Reply #32 on: June 15, 2018, 08:08:12 PM »
Simply put. The extra money you have is paying the interest on the loan and could have otherwise been used to go into the stock market itself. You are paying an opportunity cost. And the longer the market is down, the more you pay, and the more you lose.

Add in that, if the market goes DOWN, during the term of the loan, Any additional payment you have made is effectively to have bought shares at teh cost basis of whenever you took the loan out. So you also have the opportunity cost of buying cheaper shares.

What you ideally want is for the market to go down and immediately go back up. And your ability to predict when this happens is as good as anyone's.
« Last Edit: June 15, 2018, 08:14:25 PM by shinn497 »

Radagast

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Re: Idea for investing during a recession
« Reply #33 on: June 15, 2018, 09:33:11 PM »
There's a thread elsewhere on the net (I can't for the life of me remember where), in which an extremely intelligent person devised an extremely carefully backtested plan for leveraged martingale-style investment, and lost absolutely everything - we're talking mid six figures gone up in smoke and reduced to zero over the course of a year or so.
https://www.bogleheads.org/forum/viewtopic.php?t=5934
This one. One of the best investing threads, like a Greek tragedy or a horror movie, where countless sages prophesied the future, and all the observers can see what is about to happen, but the hapless OP walks into it and is slaughtered (but shortly after discovered the FI community and achieved a happy ending with an unsurprising if remarkably low stock exposure).

Missy B

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Re: Idea for investing during a recession
« Reply #34 on: June 15, 2018, 11:09:21 PM »
There's a thread elsewhere on the net (I can't for the life of me remember where), in which an extremely intelligent person devised an extremely carefully backtested plan for leveraged martingale-style investment, and lost absolutely everything - we're talking mid six figures gone up in smoke and reduced to zero over the course of a year or so.
https://www.bogleheads.org/forum/viewtopic.php?t=5934
This one. One of the best investing threads, like a Greek tragedy or a horror movie, where countless sages prophesied the future, and all the observers can see what is about to happen, but the hapless OP walks into it and is slaughtered (but shortly after discovered the FI community and achieved a happy ending with an unsurprising if remarkably low stock exposure).
Doesn't take long to see that this guy invested a lot of money late in a bull market. I didn't bother to read his cunning plan. Investing on margin in a mature bull market is highly risky and the opposite of what the OP is suggesting.

runbikerun

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Re: Idea for investing during a recession
« Reply #35 on: June 16, 2018, 04:20:55 AM »
Interactive Brokers offers margin loans for around 1.7%.  I've decided to go without an emergency fund and just borrow from my broker in the event of a cash need. 

Margin is always dangerous, whether its in the form of a HELOC or broker loan.  It can be done successfully but it is important to have reasonable position sizing and a hedge.

1.5% if you borrow in EUR or CHF, 3.4% for USD now. Still cheap.

Borrowing in a separate currency is very, very risky. I knew people who switched euro mortgages to Swiss francs years ago, to avail of lower interest rates: one morning the outstanding balance on their loans jumped 33%, as the Swiss government gave up on maintaining parity. Currency risk should never be ignored; it can have a serious long-term effect, even before considering unexpected large movements.

On the broader question of whether this is effectively the same as mortgage borrowing: it isn't, not by a long shot. While they might be the same basic class of decision, the risk profiles are wildly different, and the risk profile is exactly why people are arguing that this could be a bad idea. This is deliberately reducing the amount of equity you hold in your home right as the market squeezes the exact same number and the chances of you needing to sell are maximised.

boarder42

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Re: Idea for investing during a recession
« Reply #36 on: June 16, 2018, 04:50:56 AM »
Simply put. The extra money you have is paying the interest on the loan and could have otherwise been used to go into the stock market itself. You are paying an opportunity cost. And the longer the market is down, the more you pay, and the more you lose.

Add in that, if the market goes DOWN, during the term of the loan, Any additional payment you have made is effectively to have bought shares at teh cost basis of whenever you took the loan out. So you also have the opportunity cost of buying cheaper shares.

What you ideally want is for the market to go down and immediately go back up. And your ability to predict when this happens is as good as anyone's.

Nope you still don't get it

shinn497

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Re: Idea for investing during a recession
« Reply #37 on: June 16, 2018, 05:12:44 AM »
There's a thread elsewhere on the net (I can't for the life of me remember where), in which an extremely intelligent person devised an extremely carefully backtested plan for leveraged martingale-style investment, and lost absolutely everything - we're talking mid six figures gone up in smoke and reduced to zero over the course of a year or so.
https://www.bogleheads.org/forum/viewtopic.php?t=5934
This one. One of the best investing threads, like a Greek tragedy or a horror movie, where countless sages prophesied the future, and all the observers can see what is about to happen, but the hapless OP walks into it and is slaughtered (but shortly after discovered the FI community and achieved a happy ending with an unsurprising if remarkably low stock exposure).
Doesn't take long to see that this guy invested a lot of money late in a bull market. I didn't bother to read his cunning plan. Investing on margin in a mature bull market is highly risky and the opposite of what the OP is suggesting.

Hindsite is 20/20. We have a bias to think we could have know what would have happen had we been in this situation at this time, but we don't. Similiarly we don't truly know what will happen in todays market. Remember even top hedge funds like bridgewater and berkshire make 5% over what the market does in the long term. And that is with access to tons of money, phds, and resources (and could also just be survivorship bias). Thinking you have a similiar level of insight into the behaviour of the market involves a tremendous amount of hubris.

xpauliber

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Re: Idea for investing during a recession
« Reply #38 on: June 16, 2018, 07:29:59 AM »
I have kicked this idea around myself and would probably do it in a 30% recession. I have a heloc available and can lock the rate on any draw over a 5-20 year period, effectively making it a HEL. To me this is just buying up front, at a discount, something that I would be buying incrementally anyway in the future. Instead of small investments for 5 or 10 years, it would be a large chunk now and using that same money to pay the loan back. 

ETA: This assumes a low interest rate is available and the heloc is available during the recession.

Do you know at what rate you could lock in your HELOC?  I may investigate if my bank offers a similar product.

xpauliber

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Re: Idea for investing during a recession
« Reply #39 on: June 16, 2018, 07:49:30 AM »
Interactive Brokers offers margin loans for around 1.7%.  I've decided to go without an emergency fund and just borrow from my broker in the event of a cash need. 

Margin is always dangerous, whether its in the form of a HELOC or broker loan.  It can be done successfully but it is important to have reasonable position sizing and a hedge.

1.5% if you borrow in EUR or CHF, 3.4% for USD now. Still cheap.

Borrowing in a separate currency is very, very risky. I knew people who switched euro mortgages to Swiss francs years ago, to avail of lower interest rates: one morning the outstanding balance on their loans jumped 33%, as the Swiss government gave up on maintaining parity. Currency risk should never be ignored; it can have a serious long-term effect, even before considering unexpected large movements.

On the broader question of whether this is effectively the same as mortgage borrowing: it isn't, not by a long shot. While they might be the same basic class of decision, the risk profiles are wildly different, and the risk profile is exactly why people are arguing that this could be a bad idea. This is deliberately reducing the amount of equity you hold in your home right as the market squeezes the exact same number and the chances of you needing to sell are maximised.

Why are the chances of needing to sell maximized just because the equity in your home goes down?

runbikerun

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Re: Idea for investing during a recession
« Reply #40 on: June 16, 2018, 08:08:16 AM »
Because housing price collapses and job losses are both pretty positively correlated with recessions. If your equity has dive-bombed, there's a very decent chance that your employer is in serious trouble, particularly if you live close to your employer (as Mustachians often do).

pecunia

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Re: Idea for investing during a recession
« Reply #41 on: June 16, 2018, 08:34:09 AM »
I like the idea.  Use the equity in your house to help you.  It's an under utilized resource.

I've read of people starting businesses who took loans against their houses.  Some lost their houses.  Some became successful. 

I wonder about the market.  Will it go up and pay off your home loan?  will it go down and you'll be paying longer?

One of the problems of the great depression was people buying on margin.  They'd get their loans to and go buy RCA stock.  It didn't work out well.

I am not a business man.  Until quite recently, I didn't understand that the world works from debt.  I didn't know that there is no backing for currencies and it all depends on hope and trust.

Seems like with the big tax cut, the big boys will be buying back stock and the price will go up.  Why not throw the home equity money in and go along for the ride up?

boarder42

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Re: Idea for investing during a recession
« Reply #42 on: June 16, 2018, 09:28:35 AM »
There's a thread elsewhere on the net (I can't for the life of me remember where), in which an extremely intelligent person devised an extremely carefully backtested plan for leveraged martingale-style investment, and lost absolutely everything - we're talking mid six figures gone up in smoke and reduced to zero over the course of a year or so.
https://www.bogleheads.org/forum/viewtopic.php?t=5934
This one. One of the best investing threads, like a Greek tragedy or a horror movie, where countless sages prophesied the future, and all the observers can see what is about to happen, but the hapless OP walks into it and is slaughtered (but shortly after discovered the FI community and achieved a happy ending with an unsurprising if remarkably low stock exposure).
Doesn't take long to see that this guy invested a lot of money late in a bull market. I didn't bother to read his cunning plan. Investing on margin in a mature bull market is highly risky and the opposite of what the OP is suggesting.

Hindsite is 20/20. We have a bias to think we could have know what would have happen had we been in this situation at this time, but we don't. Similiarly we don't truly know what will happen in todays market. Remember even top hedge funds like bridgewater and berkshire make 5% over what the market does in the long term. And that is with access to tons of money, phds, and resources (and could also just be survivorship bias). Thinking you have a similiar level of insight into the behaviour of the market involves a tremendous amount of hubris.

You have no foundational data to show they do this consistently the market actually shows the opposite is true. Are you just a troll or do you really just pull shit out of your ass and think it's true.

xpauliber

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Re: Idea for investing during a recession
« Reply #43 on: June 16, 2018, 10:45:51 AM »


One of the problems of the great depression was people buying on margin.  They'd get their loans to and go buy RCA stock.  It didn't work out well.


I totally get that buying on margin (beyond your reasonable ability to repay)  in the midst of or at the top of a bull market is a fools game.  That was a major cause of the Great Depression as well as the major reason the genius from the Bogleheads link went broke. 

If we look at the history of corrections/recessions, we can make an educated guess based on the past about 1.) how low the market can go 2.) approximately how long until the market corrects.

Do you understand the concept of how waiting until the market drops a certain percentage, you limit the potential downside of the market falling further?  You absolutely can calculate and time that part. 

Another thing that people seem to forget is that if you wait and invest at a 30% decline and the market drops another 20%, you technically only need the market to recover 20% tonessentially eliminate your risk since you would be back to par.  Even if the market drops and stays there for quite some time and you just canít take it and have to sell your position, you still have 80% of the value of your original investment.  The people that bought at the top of the market on margin and sell after a 50% decline are the big losers and if you donít completely understand the concept and have confidence in it, I wouldnít recommend trying it since itís absolutely crucial to hold your investment until complete market recovery or I guess until the market recovers at least back to where you bought in at and you can sell and basically break even if things arenít going like you planned.
« Last Edit: June 16, 2018, 10:51:48 AM by xpauliber »

xpauliber

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Re: Idea for investing during a recession
« Reply #44 on: June 16, 2018, 10:55:17 AM »
The other absolutely critical component to this, at least in my opinion, is that when you enter the market, you are buying into a total stock market index fund so that whatever the market does, your investment does. 

I would not consider ever buying into one companyís stock no matter how strong they are on paper.  I donít have the stomach for that level of risk.

pecunia

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Re: Idea for investing during a recession
« Reply #45 on: June 16, 2018, 12:03:54 PM »
Xcaliber:
Quote
https:/Do you understand the concept of how waiting until the market drops a certain percentage, you limit the potential downside of the market falling further?  You absolutely can calculate and time that part.  /

I understand about waiting until it drops.  I understand that if it has dropped, you invest and it drops further that I would eliminated the loss of the first drop.  I guess I don't know about timing the market and in particular calculating when it will drop.  It seems somewhat unpredictable.

Xpauliber:
Quote
I would not consider ever buying into one companyís stock no matter how strong they are on paper.  I donít have the stomach for that level of risk.

People on this website consistently tell you to go for Index Funds.  Right now, some companies are doing much better than the aggregate market, but blink and it will change. 

daverobev

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Re: Idea for investing during a recession
« Reply #46 on: June 16, 2018, 02:03:25 PM »
Another thing that people seem to forget is that if you wait and invest at a 30% decline and the market drops another 20%, you technically only need the market to recover 20% tonessentially eliminate your risk since you would be back to par.

That's not how percentages work.

$100k invested drops 20% -> $80k. To get back to $100k, you need the market to rise 25%.

xpauliber

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Re: Idea for investing during a recession
« Reply #47 on: June 16, 2018, 02:49:18 PM »
Another thing that people seem to forget is that if you wait and invest at a 30% decline and the market drops another 20%, you technically only need the market to recover 20% tonessentially eliminate your risk since you would be back to par.

That's not how percentages work.

$100k invested drops 20% -> $80k. To get back to $100k, you need the market to rise 25%.

My mistake.  You are correct.  Still though, you wouldnít need a complete market recovery to get back to even and cash out if a total market recovery took longer than you had anticipated.

xpauliber

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Re: Idea for investing during a recession
« Reply #48 on: June 16, 2018, 03:00:07 PM »
Xcaliber:
Quote
https:/Do you understand the concept of how waiting until the market drops a certain percentage, you limit the potential downside of the market falling further?  You absolutely can calculate and time that part.  /

I understand about waiting until it drops.  I understand that if it has dropped, you invest and it drops further that I would eliminated the loss of the first drop.  I guess I don't know about timing the market and in particular calculating when it will drop.  It seems somewhat unpredictable.

Xpauliber:
Quote
I would not consider ever buying into one companyís stock no matter how strong they are on paper.  I donít have the stomach for that level of risk.

People on this website consistently tell you to go for Index Funds.  Right now, some companies are doing much better than the aggregate market, but blink and it will change.

Read my post above where I replied to Shinn and explained a hypothetical situation in the future and how you use the most recent market high as a benchmark to calculate when you should buy.  Youíre using a fixed number and so itís absolutely possible to calculate when you should invest.  Then you use limit orders to execute the purchase and not have to babysit the market.  Now if you set a limit order, Iím not saying that I can tell you whether that will fill tomorrow, next month, or 5 years from now. 

As for Index funds over individual stocks, Iím not trying to outperform the market with this strategy, Iím actually trying to mimic the market and it completely eliminates the risk of an individual company going bankrupt and then you lose everything.  If the entire market goes bankrupt, we are all in trouble.  Lol

One

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Re: Idea for investing during a recession
« Reply #49 on: June 16, 2018, 09:10:01 PM »
I was talking with an attorney the other day about different investing strategies & different ideas for how to build wealth.  I explained my dislike for any debt and how I'm working to eliminate my mortgage and remain debt free.  He had a different opinion & told me that the majority of his net worth is from real-estate and that he has always carried a significant amount of debt in his life to invest in different real-estate projects.  He even made the comment that if you pay your house off, "you have this huge asset sitting there doing nothing for you."

That got me thinking that he is technically correct in that if you own your home, it's providing you a basic necessity but you're not necessarily using it in any way to generate/build wealth.  That also got me thinking about how most people lose money trying to time the market and even more people lose significant amounts of money by panicking & selling during a recession.  If however you stay in the market, you'll recover all your losses once it recovers.  Additionally, if you had a stack of cash sitting outside of the market, you could invest during a recession and make some excellent returns.  Obviously, having cash outside of the market is losing value though and so most people don't have a significant amount except for their emergency fund which wouldn't be smart to invest. 

But what about using the equity in your home to invest during a recession?  Let's say you have $50,000 in equity that you could pull in the form of a home equity loan with today's rate of 5.75% on a 20-year term would have payments of $351/month.

I did a quick review of the last 5 major recessions and found that the average decline was 40% and the average duration was 22 months:

1973-74 (48% - 645 days)
1976-78 (19% - 531 days)
1980-82 (27% - 622 days)
2000-02 (49% - 929 days)
2007-09 (57% - 517 days)

Let's say hypothetically in the future, you wait until the market declines 25%, and then you take out a home equity loan of $50,000.  You set a buy order to deploy $10,000 (20% of your total funds) when the market hits a 30% decline from its most recent peak.  Once that executes, you set another buy order to deploy another 20% of your funds if the market hits a 35% decline.  Again for a 40% decline. And again for a 45% decline. And lastly one for a 50% decline until all your money is deployed. If you take out the home equity loan and the market never drops to 30%, you simply pay off the home equity loan and move on.

Since the average duration of a recession is 22 months and let's say you took the loan out a quarter of the way though (month 6), you would have to pay roughly 16 months worth of P&I payments on your home equity loan ($5,616) but wouldn't the upside potential be tremendous??  Once the market fully recovers, you could sell everything, payoff the home equity loan, repay yourself the P&I that you've paid those 16 months, pay taxes and pocket the rest.  Or you could just sell enough shares to payoff the home equity loan, repay yourself the P&I that you've paid those 16 months, pay taxes and let the balance of the shares stay in the market since we would more than likely be at the start of a bull run.

There could be some risk if you only got to deploy one stage of capital though since a 30% gain on your first $10k wouldn't cover the cost of carrying the whole $50k home equity for 16 months.  Maybe it would be better to deploy 50% of your capital at the 30% decline mark and then dollar cost average the rest of the way down?  If the market didn't drop further, you would still have the balance of the home equity loan to sit on until the market recovered and then pay it off completely.  Maybe toss it in a money market account to earn a little bit of interest while you wait for the market to recover.

Two major factors before I'd even consider doing something like this:

1.  I'd only consider investing in a total stock market index fund and not ever any individual company stocks
2.  I'd only consider this if your free cash flow can more than adequately cover the cost of the home equity loan.  For instance, my personal budget has free cash flow every month of about $1,500 which is more than 5 times the cost of the home equity loan so there's very limited chance that the home equity loan would cause any stress on my monthly budget.

Any thoughts/comments on this hypothetical situation?

Didn't read all the posts, I like your idea if you have the guts and can get the money.  Why don't you save cash now and when the crash happens, housing prices drop, interest rates drop, buy an investment property at a low rate, low cost.  Now you are leveraged with only a small amount of your cash down payment but a large amount going up when things recover. You can rent it or even sit on it if you can afford.