Author Topic: Does anyone use margin?  (Read 14133 times)

Kalergie

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Re: Does anyone use margin?
« Reply #50 on: January 18, 2017, 11:37:09 PM »
This is what I found on IB website.
"Margin Call: When the balance in a margin account falls below the maintenance requirement, the broker can issue a margin call requiring the investor to deposit more cash, or the broker can liquidate the position. There are no margin calls at IB."
https://www.interactivebrokers.com/en/?f=%2Fen%2Fgeneral%2Feducation%2Fpdfnotes%2FWN-UnderstandingMargin.php

I also remember that when I opened my account, I had to sign off on this specific warning acknowledging that I understand the risk of using margin at IB. So yeah, I think in light of possible flash crashes, it is save to say IB is not really the right choice to hold a large loan for an indefinite period.

So I think, based on this discussion, I'm going to stay the course, invest only the money I own and won't monkey around with debt!

gerardc

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Re: Does anyone use margin?
« Reply #51 on: January 19, 2017, 12:35:40 AM »
If they auto-sell, they may have protections against flash crashes, e.g. sudden/abrupt decreases in value are waited out.

dragoncar

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Re: Does anyone use margin?
« Reply #52 on: January 19, 2017, 02:54:38 AM »
Yes, for the past couple years I've kept a margin balance (with IB) equal to what I save every 12 months.  The idea was simply to get my cash into the market 1 year early. 

At this point, my assets are large enough compared to my savings that the effective leverage was small -- very little risk of margin call.

Having a margin account is also IMO one of the best forms of "springy debt" - instead of selling securities to cover an expense, you can get a low interest loan (tax deductible if you do it right).

Now that I'm about to stop working, I'm winding down my balance (basically paying off the loan).

I was really happy with the interest rate before.... in 2017 I expect much less so.

Question for people who use margin: Do you still invest in bonds which have a lower return than the interest rate you are paying on your margin loan? If so, why?

No, but I have bonds with a higher interest rate in my AA.  I was actually happy that the bond interest and dividends were more than covering the margin interest.  I could deduct the margin interest against the bond interest, so the effective marginal rate was way below 1%.

Kalergie

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Re: Does anyone use margin?
« Reply #53 on: January 19, 2017, 03:47:48 AM »
@Dragoncar: thanks for sharing your experience. Do you know what happens during a flash crash? Does IB liquidate? I think I'll contact them and simply ask.

dragoncar

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Re: Does anyone use margin?
« Reply #54 on: January 19, 2017, 05:00:49 AM »
@Dragoncar: thanks for sharing your experience. Do you know what happens during a flash crash? Does IB liquidate? I think I'll contact them and simply ask.

I operate under the assumption that they do, and factor in trading halt trigger levels into the amount of leverage that I'm comfortable with.

I'd try to find anecdotes from the flash crash, but something like this is a very common story with IB: https://www.elitetrader.com/et/threads/interactive-brokers-liquidate-with-1-minute-notice-while-wire-is-on-the-way.224694/


financialfreedomsloth

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Re: Does anyone use margin?
« Reply #55 on: January 19, 2017, 06:51:52 AM »
I use margin as well.

First off, my mortgage is not payed off. I could pay it in full but prefer to keep that money in the market; My mortgage rate is low, gives me a tax benefit and we are legally obligated to have an insurance on it so it service as a life insurance as well (the cost for this insurance also gives you a tax write off). I do pay off principal each month (not a bullet loan, those are for houses very hard to get in Belgium) so each month the loans gets a bit smaller and it will be gone in 14 years.

I also use margin at interactive brokers. I do it via a local reseller of theirs so my rate is a bit higher than you Americans but on the plus side I can trade in CfDs which allow for some nice leverage.

My advise: use leverage only after you had some years experience in the markt and if you know what you are doing. This is not something to 'play around' with and yes, also get the portfolio margin at interactive brokers since it lowers the possibility of having a margin call.

I modified this post and removed the part where I described my strategy in a broad description as it reall is something that I do not feel comfortable discussing on a public forum. I did explain it in detail to Mrspendy and will also reply Kalergie on his mail but I really do not want to be responsible if somebody would implement this strategy wrong and lose his investments.
« Last Edit: January 23, 2017, 01:43:21 AM by financialfreedomsloth »

Kalergie

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Re: Does anyone use margin?
« Reply #56 on: January 19, 2017, 08:41:48 AM »
@financialfreedomsloth: what you are describing doesn't sound sloth like at all. :D

Kalergie

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Re: Does anyone use margin?
« Reply #57 on: January 19, 2017, 10:54:13 PM »
Here is the answer from IB regarding margin calls during a flash crash:

"Dear customer,
If price movements caused the account to be in a margin deficit then a Liquidation would occur. IB uses real time margining and does not wait to see if the market will come back later before deciding to close positions. Please re-read the information regarding real time margining in the IB User Agreement that can be found at :

IB Customer Service Agreement

https://gdcdyn.interactivebrokers.com/Universal/servlet/Registration.formSampleView?file=registration_1/us_customer_agreement.html

Sincerely, Jim
Trade Group"

Yep, pretty clear what will happen. So use margin carefully if at all!

financialfreedomsloth

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Re: Does anyone use margin?
« Reply #58 on: January 20, 2017, 01:38:56 AM »
@financialfreedomsloth: what you are describing doesn't sound sloth like at all. :D
It's a lot of thinking but not a lot of doing. So very sloth like! What do you think they do up in the tree all day? Figuring this shit out man!

My total trading activity is 4 trades, all done on the same day and I am done for the year. Just did them this week (today was expiration date for my calls so I closed them on tuesday and sold new ones with experiation january 2018) for both my own portfolio and my dads (so just had a busy week, is it almost weekend? This sloth is tired!). In march I'll have my girlfriends portfolio to do but I'll write a 9 month call in hers so next year all three investment accounts can be adjusted in January (a busy week in January AND March, hell no!).
Jim Ferris wrote the 4 hour work week book but if the investment account keeps growing like this I'll have a 4 hour work year.

Kalergie

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Re: Does anyone use margin?
« Reply #59 on: January 20, 2017, 04:54:37 AM »
@Sloth: While what you're describing is way over my head, I'd love to learn more about it. I reviewed your blog but couldn't find any more info on your strategy. Do you mind going more into detail? Also some book/blog/website recommendations?

Cheers.

691175002

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Re: Does anyone use margin?
« Reply #60 on: January 20, 2017, 09:29:37 AM »
The ideal way to leverage your portfolio is to purchase a house via mortgage while simultaneously building savings in an investment account.

Say you have a 400k mortgage and 200k in savings.  You could pay off half the mortgage, but instead you hope that the market return will be higher than your mortgage interest rate.  This is a good bet because it is likely to be true over long periods of time, and a mortgage is non-callable so the bank cannot force you to liquidate your investment account without warning.

Leverage is attractive but there are edge cases that can turn long-term winning strategies into a loss.  You can increase your risk/return exposure in other ways, such as with a higher equity exposure or riskier small cap stocks as well.

Goldielocks

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Re: Does anyone use margin?
« Reply #61 on: January 22, 2017, 01:51:56 AM »
Yes, you are right, of course. I oversimplified... But Heloc's can be called, too.  Just rarely (like in 2009) but they are somewhat unlinked from the stockmarket performance as they are based on real estate.

I still waiting for a first person account of  Heloc that was called in 2000/09. If anyone actually had one that was called post about.

I had one... called in by CIBC.   They trimmed it to 25% of the original amount, in 2009, to reduce their outstanding loan assets.    mainly called because I hadn't used it in a year, scary to think that they were calling in other people's that DID carry a balance though!.

I need to check, but it might have been my one and only non Home-tied line of credit.

Retire-Canada

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Re: Does anyone use margin?
« Reply #62 on: January 22, 2017, 07:19:28 AM »
I had one... called in by CIBC.   They trimmed it to 25% of the original amount, in 2009, to reduce their outstanding loan assets.    mainly called because I hadn't used it in a year, scary to think that they were calling in other people's that DID carry a balance though!.

I need to check, but it might have been my one and only non Home-tied line of credit.

Thanks for sharing. So this was a LOC not a HELOC? If you don't mind my asking what was the starting credit limit?

financialfreedomsloth

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Re: Does anyone use margin?
« Reply #63 on: January 22, 2017, 10:48:36 AM »
@Sloth: While what you're describing is way over my head, I'd love to learn more about it. I reviewed your blog but couldn't find any more info on your strategy. Do you mind going more into detail? Also some book/blog/website recommendations?

Cheers.
Hey Kalergie. Can you trade in CfD's (contract for difference) in your country? I think this is not allowed for US citizens, even if they live in another country. So, if you are a US citizen, check because otherwise it is a no go.
Do you have a stash above 110.000 USD?
Have you got some decent experience with stock picking, option writing?
Can you become a client at interactive brokers (or a local reseller of them)?
Message me if the answer is positive on all four and I will go into more detail on my general approach. I do not want to discuss this in public as the devil is in the detail and do not want to be responsible for somebody blowing up his portfolio by following this strategy.

NathanDrake

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Re: Does anyone use margin?
« Reply #64 on: January 22, 2017, 06:24:58 PM »
Sloth,

I'm interested in your strategy. Even if you lay out disclaimers, I think it would be valuable to discuss for the community. I'm not as knowledgeable as others here on leverage -- I just want to avoid any chance of margin calls but be able to use a bit of leverage intelligently to amplify returns like you're able to do in real estate, but without the downsides of real estate (tenants, lack of diversification, high transaction costs, etc).

Let's use an example:

Say one earns 100K, has portfolio of 200K tax advantaged accounts and 300K taxable accounts split (500K total), and are able to save around 20-25K per year in taxable accounts (1500-2000 per month) in addition to maxing out all other tax sheltered accounts (18K + employer match, 5.5K Roth, and ~3.35K HSA).

Allocation is approximately 60% international stocks and 40% US stocks

How would you structure a relatively safe amount of leverage? How does your interest rate with interactive brokers work? -- you mention that it's variable, which I'd be concerned with in a rising interest rate environment. Is there any way to get a fixed rate and lock in fees?

Those are the big risks to me that stand out which would perhaps not make it worth the hassle.

PizzaSteve

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Re: Does anyone use margin?
« Reply #65 on: January 22, 2017, 08:57:47 PM »
I have sworn to never loose my capital I have worked and toiled so hard for as an employee.

Even in a rare 50% market crash you only lose capital if you sell. As long as you hold your shares they will recover. Looking at a lower brokerage account is only a virtual paper loss.
Unless you were a Japanese investor in the 90s.

If something seems too good to be true, it probably is.
« Last Edit: January 22, 2017, 08:59:58 PM by PizzaSteve »

financialfreedomsloth

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Re: Does anyone use margin?
« Reply #66 on: January 23, 2017, 01:32:20 AM »
Sloth,

I'm interested in your strategy. Even if you lay out disclaimers, I think it would be valuable to discuss for the community. I'm not as knowledgeable as others here on leverage -- I just want to avoid any chance of margin calls but be able to use a bit of leverage intelligently to amplify returns like you're able to do in real estate, but without the downsides of real estate (tenants, lack of diversification, high transaction costs, etc).

Let's use an example:

Say one earns 100K, has portfolio of 200K tax advantaged accounts and 300K taxable accounts split (500K total), and are able to save around 20-25K per year in taxable accounts (1500-2000 per month) in addition to maxing out all other tax sheltered accounts (18K + employer match, 5.5K Roth, and ~3.35K HSA).

Allocation is approximately 60% international stocks and 40% US stocks

How would you structure a relatively safe amount of leverage? How does your interest rate with interactive brokers work? -- you mention that it's variable, which I'd be concerned with in a rising interest rate environment. Is there any way to get a fixed rate and lock in fees?

Those are the big risks to me that stand out which would perhaps not make it worth the hassle.
Nathan, you are taking about tax advantage accounts which has me thinking you are a US citizen. My strategie relies heavy on CfD's (contract for difference) which US citizens are not allowed to trade in. Velociraptor is pretty knowledgable and I think no stranger to using a bit of leverage now and then. Have a look at his site.

ChpBstrd

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Re: Does anyone use margin?
« Reply #67 on: January 23, 2017, 02:26:19 PM »
Can you apply a leverage strategy for less than 1 - 1.5% per year? Because that's the extra expense ratio you would pay compared to a Vanguard ETF to have a closed end fund manage 10-20% leverage for you.

If you can't borrow that cheaply in the money markets, you'll never do as well as the pros. See CEFconnect.com to filter by margin. Not even a HELOC is as cheap as just buying a leveraged fund.

There are also funds that earn extra yield selling covered calls, which is worth looking into in today's high valuation market.

dragoncar

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Re: Does anyone use margin?
« Reply #68 on: January 23, 2017, 10:41:26 PM »
Can you apply a leverage strategy for less than 1 - 1.5% per year? Because that's the extra expense ratio you would pay compared to a Vanguard ETF to have a closed end fund manage 10-20% leverage for you.

If you can't borrow that cheaply in the money markets, you'll never do as well as the pros. See CEFconnect.com to filter by margin. Not even a HELOC is as cheap as just buying a leveraged fund.

There are also funds that earn extra yield selling covered calls, which is worth looking into in today's high valuation market.

I'm torn, because the fact that you asked the first question makes me wonder how you know so much about the etfs

PizzaSteve

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Re: Does anyone use margin?
« Reply #69 on: January 23, 2017, 10:50:02 PM »
Removed comment that duplicates prior points.
« Last Edit: January 29, 2017, 03:48:55 PM by PizzaSteve »

Kalergie

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Re: Does anyone use margin?
« Reply #70 on: January 24, 2017, 01:00:41 AM »
I want to thank everyone for their contribution. I have been wary about using leverage before and after hearing your stories (positive and negative), I am very confident not to use it. It will work with some of you but not with me. I have caught myself, planning to time the market using leverage. I thought "Hey, let's wait until after the inauguration and invest with leverage then". Big No No!

And the chance, even a small one, of a margin call is definitely not worth the extra return to me.



« Last Edit: January 24, 2017, 01:03:06 AM by Kalergie »

Goldielocks

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Re: Does anyone use margin?
« Reply #71 on: January 24, 2017, 10:36:16 PM »
I had one... called in by CIBC.   They trimmed it to 25% of the original amount, in 2009, to reduce their outstanding loan assets.    mainly called because I hadn't used it in a year, scary to think that they were calling in other people's that DID carry a balance though!.

I need to check, but it might have been my one and only non Home-tied line of credit.

Thanks for sharing. So this was a LOC not a HELOC? If you don't mind my asking what was the starting credit limit?

$20k,  I think...?   I had a HELOC and a LOC at the same time, can't remember what this one was.

ChpBstrd

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Re: Does anyone use margin?
« Reply #72 on: January 27, 2017, 06:51:27 AM »
Can you apply a leverage strategy for less than 1 - 1.5% per year? Because that's the extra expense ratio you would pay compared to a Vanguard ETF to have a closed end fund manage 10-20% leverage for you.

If you can't borrow that cheaply in the money markets, you'll never do as well as the pros. See CEFconnect.com to filter by margin. Not even a HELOC is as cheap as just buying a leveraged fund.

There are also funds that earn extra yield selling covered calls, which is worth looking into in today's high valuation market.

I'm torn, because the fact that you asked the first question makes me wonder how you know so much about the etfs

Doh! Meant to type CEF. Maybe an autocorrect...

MrGreg

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Re: Does anyone use margin?
« Reply #73 on: February 20, 2017, 11:03:35 PM »
I frequently use margin at IB in a manner similar to one of the posters above (MrSpendy), which is to say that my living expenses come out of my margin account, and nearly all of my income goes into my margin account, either to pay off loans or to purchase more securities.

Although I do a fair bit of buy-and-hold investing with margin, I think it's most useful as a tool for liquidity.  Most people think of margin as a way to buy securities or other instruments with money borrowed from the brokerage using those instruments as collateral, and that is indeed how many people use it.  But, you can also use margin the other way around:  by first having a sufficiently large amount of securities in your account, and then withdrawing cash (so long as that withdrawal does not jeopardize the amount of equity in your account).  I frequently use this feature, for instance, to shuffle around large amounts of cash among my accounts whenever it makes sense. 

But, before using margin, it's really important to understand the type of margin (portfolio margin, Reg T, or any applicable house margin rules).  It's also important to note the taxable implications of having margined instead of fully paid for shares -- e.g. for starters, you may receive payments in lieu of dividends on margined shares, which are generally taxed at OID rather than cap gains rates.

dragoncar

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Re: Does anyone use margin?
« Reply #74 on: February 20, 2017, 11:44:58 PM »
Technically if you withdraw cash for living expenses then the interest would not be deductible (as I understand)

Another downside to marginable securities (even if not actually using margin) is IB lends out your stocks and you get payments in lieu of dividends which are unfavorably taxed compared to qualified dovidends

MrSpendy

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Re: Does anyone use margin?
« Reply #75 on: February 21, 2017, 06:47:44 AM »
Technically if you withdraw cash for living expenses then the interest would not be deductible (as I understand)

Another downside to marginable securities (even if not actually using margin) is IB lends out your stocks and you get payments in lieu of dividends which are unfavorably taxed compared to qualified dovidends

correct on both points. If you are borrowing at 2% and at a 25% marginal tax rate, the lack of tax benefit is worth 50bps on amount borrowed which will add up over time. But at a leverage level of 30%, it is actually 15 bps on the whole portfolio, which is palatable. I have chosen to not optimize this in the interest of flexibility and ease of operation.

dragoncar

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Re: Does anyone use margin?
« Reply #76 on: February 21, 2017, 11:20:05 AM »
Technically if you withdraw cash for living expenses then the interest would not be deductible (as I understand)

Another downside to marginable securities (even if not actually using margin) is IB lends out your stocks and you get payments in lieu of dividends which are unfavorably taxed compared to qualified dovidends

correct on both points. If you are borrowing at 2% and at a 25% marginal tax rate, the lack of tax benefit is worth 50bps on amount borrowed which will add up over time. But at a leverage level of 30%, it is actually 15 bps on the whole portfolio, which is palatable. I have chosen to not optimize this in the interest of flexibility and ease of operation.

I haven't hit the yet, but I've considered obtaining cash by selling securities, cashing out the proceeds, then rebuying similar securities on margin.  I believe this will get deductible treatment but may not be worth the transaction costs or capital gains (bonus if I have a capital loss, though)

It's also a letter of the law vs intent problem that's can be tricky with the IRS.  I'm not a tax expert so definitely don't take my word for it