Author Topic: Getting a large loan to buy index funds?  (Read 20579 times)

zephyr911

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Re: Getting a large loan to buy index funds?
« Reply #50 on: September 07, 2016, 12:44:27 PM »
Comparing the mortgage -vs- borrowing to invest in the market is an apples to oranges comparison. 

If you divert money from paying your mortgage or refinance to get equity out of your home and use that money to invest it's just another loan. A home equity based loan just has better rates and can't be called compared to a margin loan or other type of loan.

If you decide to get a loan to invest money in the market one of the obvious places to look is the equity tied up in a home.
It's almost like you're trying to say money is fungible....

NESailor

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Re: Getting a large loan to buy index funds?
« Reply #51 on: September 08, 2016, 12:26:08 PM »
I've read THE ENTIRE THING.  Amazing story.  Surprisingly, it's pushed me towards the "leveraged investor" camp.  Though nowhere near the same type as poor "market timer".  I'm just not going to pre-pay my mortgage before maxing out ALL tax advantaged retirement accounts.  Once I've hit the 58K federal max I'll start pre-paying the mortgage again :).

Seppia

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Re: Getting a large loan to buy index funds?
« Reply #52 on: September 10, 2016, 12:23:30 AM »

I cyberstalked the author of that thread a little, and he's currently (as of June 2016 and age 36) at $1.3M net worth with an income of $300-500K, so he's doing ok:
https://www.bogleheads.org/forum/viewtopic.php?f=2&t=194305&p=2961148#p2961148

He's obviously a very intelligent individual

Are we sure about this?
I mean, with his type of salary he could have been worth much more if he just saved/invested normally.

Let's not make the assumption all wealthy people are smart.

Plus, if he is still employing a very high risk high reward strategy, it's virtually certain that he will go broke again.

Also in his old story there's many parts where the math doesn't make sense, he seemed to be able to come up with money inexplicably, multiple times.

I'm not sure I would trust his numbers 100%.

Investing with leverage is INCREDIBLY stupid, as sooner or later a bear market that will wipe you out will happen with 100% certainty (well, nobody can predict the future, but very close to 100%).

Do
Not
Do
This


Retire-Canada

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Re: Getting a large loan to buy index funds?
« Reply #53 on: September 10, 2016, 07:19:04 AM »
Investing with leverage is INCREDIBLY stupid, as sooner or later a bear market that will wipe you out will happen with 100% certainty (well, nobody can predict the future, but very close to 100%).

Do
Not
Do
This

If you don't take a margin loan a bear market will not wipe you out. Leverage does not exclusively = margin loan.

Bicycle_B

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Re: Getting a large loan to buy index funds?
« Reply #54 on: September 10, 2016, 09:39:34 AM »
One way to lever is to do it with cash flow.  You invest money that could have gone to a loan paydown.  A lot of people do this.  I currently chose not to pay off my house, though I easily could if I sold part of my taxable investments.  And I've created that situation one paycheck at a time.  Here I did not "take a mortgage" to invest, but the math and the risk is the same.  I'm also looking at cars and will take a loan if the rate is cheap/subsidized, so I can stay invested. 

I's one thing to say you have a high risk tolerance, but yet another to demonstrate it in a severe bear market.  You can lose big money or be ruined, due to your emotions or due to forced selling.  Buying when the market is down doesn't protect you from downside risk.  The market may be a falling knife. Look at the wild swings during the financial crisis, for example.   Realize you wouldn't have picked the bottom to do your buying. 

Look for low cost ways to lever.  S&P 500 emini futures, margin loans at IB, 0% credit card offers, and cheap secured debt are available to a lot of people.  Good luck.

The bolded part is soooo true!  Leverage of this type multiplied the impact of my errors in the last financial crisis.  I saw lots of signs of the last financial crisis before it happened, acted on them thinking I was smart, and botched the timing.  Plus I lost more money by simple technical mistakes along the way.  Be very cautious about this kind of thing.

I recognized in 2007 that "cash is really cheap right now" and "it's super easy to borrow on my house" and thought "maybe I should get cash now, so I have it when it's tough to get."  I had lots of equity in my home and did a cash-out mortgage in summer 2007 right when the media started discussing what they then called the credit crunch (which we now know as the early tremors that led to the financial crisis).  Essentially the intent was to invest. 

Immediately the question seemed to be "Stocks look high but they're better in the long run.  Invest in them or not?"  I decided by procrastination, inefficiently leaving the money in a freaking savings account.  Market timing by indecision, not recommended.  I wasn't even under fire yet and I froze.  It was the following year before a 10% drop in the stock market or so prompted me to boldly invest a third of the money.  Then I finally decided to back down from the scary stock plan by using a third of the money to pay off my remaining student loans.  (Inefficient for sure...by then I'd lost nearly a year of interest difference...but at least it locked in some savings going forward.)  Months later, after another 15 percent drop or something like that, I told myself "Bulls make money, bears make money, pigs get slaughtered.  If I wait for it to go down farther, it may never drop and I'll never invest."  So I put the rest into stocks. 

That was maybe a month or two before Lehman Brothers.  The account that I invested in (a Vanguard one, thank God) went down from 45k to 27k in a few short months.  The only good news was discovering that as the market kept going down, I was clear that it was better and better to invest, even though there was no way to be sure of what would happen next.  Since my job was stable, I kept my expenses low (by my pre-Mustache standards) and invested all of my discretionary funds, about 1k per month.  The peak investments eventually recovered, of course, and the trough investments have been great.  But as the previous poster pointed out, when the market is falling, it's still hard to know whether to pull the trigger or wait, so market timing is far harder than it looks.  Your odds of just investing at the bottom are very low because you can easily put in all your chips too early.  Leverage can multiply your problems, so if you're going to borrow against your house, be darn sure you can make the payments - in the future, at the moment when times are tough, not just right now. 

I strongly agree with everyone who cautioned against high risk borrowing such as margin accounts.  Home equity is enough, either don't borrow at all or do just a manageable home loan.  Also bear in mind that the home loan in turn only makes sense if your situation is very stable and the terms are favorable, such as a fixed rate.

Seppia

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Re: Getting a large loan to buy index funds?
« Reply #55 on: September 11, 2016, 12:33:04 AM »
Investing with leverage is INCREDIBLY stupid, as sooner or later a bear market that will wipe you out will happen with 100% certainty (well, nobody can predict the future, but very close to 100%).

Do
Not
Do
This

If you don't take a margin loan a bear market will not wipe you out. Leverage does not exclusively = margin loan.


Yes correct.
But I think it's a slippery slope.
Aside from the "I could pay down bigger chunks of my mortgage but instead I invest", any borrowing to invest in one shot exposes you to the risk associated with the volatility of stocks.
If you take the loan before a bull market you will come out great, before a bear? Not so much.

I don't understand why people want to take shortcuts.
There is a practically bombproof way of getting very rich: saving a lot and constantly investing said savings.
It takes some time, but by going through some ups and downs of the market you are almost assured to get the average market returns.
Stick to that.

Retire-Canada

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Re: Getting a large loan to buy index funds?
« Reply #56 on: September 11, 2016, 08:13:47 AM »
I don't understand why people want to take shortcuts.

People want to retire sooner rather than later. If you are the kind of person that has optimized your spending and your earning it's not a stretch to want to use the cheap credit available to accelerate your investment performance. If you are not using margin loans and can't be subject to a margin call then the same mechanism that will make you very rich the way you suggest will make you very rich faster with some leverage.

I'm not suggesting everyone should run out and invest on credit, but I do think a rational analysis makes sense not just some fearful "one time I read a thread on Boggleheads and it was bad VERY BAD" reactionary trope.

If we aren't going be rational about our investment decisions than stock picking and market timing have some compelling "stories" behind them.

Personally I've got a house worth $400K-$500K on a sub 2% mortgage. If had sufficient equity I'd pull out $200K and deploy it into the market. Until I pay off the house I still have to make the same payments each month. Whether it's $100K left to go or $300K is irrelevant. I might as well have that money working for me during my accumulation phase where I don't need investment $$ to live off of.

One of the "approved" roads to MMM-esque FIRE on these forums is to get a portfolio of rental RE with mortgages. This is just a form of leveraged investing. One that you could argue is more risky due to lack of diversification than investing your borrowed money in the stock market. It's not like we haven't had a house crisis recently yet this is considered a rationale path to FIRE.

« Last Edit: September 11, 2016, 08:17:36 AM by Retire-Canada »

Seppia

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Getting a large loan to buy index funds?
« Reply #57 on: September 11, 2016, 10:33:20 AM »
I don't understand why people want to take shortcuts.

People want to retire sooner rather than later. If you are the kind of person that has optimized your spending and your earning it's not a stretch to want to use the cheap credit available to accelerate your investment performance. If you are not using margin loans and can't be subject to a margin call then the same mechanism that will make you very rich the way you suggest will make you very rich faster with some leverage.

As I said before, the issue here is that by pulling out a loan and lump sum investing, you are subjecting yourself to more risk by going all-in in a specific time period.
Imagine one did this in 2001 or 2007.

The MMM/ERE crowd is already taking more risk vs a common "save 15% and dump it in index funds for 40 years" because of the much shorter working time, I don't find it wise at all to further augment this risk.


I'm not suggesting everyone should run out and invest on credit, but I do think a rational analysis makes sense not just some fearful "one time I read a thread on Boggleheads and it was bad VERY BAD" reactionary trope.

If we aren't going be rational about our investment decisions than stock picking and market timing have some compelling "stories" behind them.

I'm actually arguing about the "rational" part, as I believe it's not rational at all.

Personally I've got a house worth $400K-$500K on a sub 2% mortgage. If had sufficient equity I'd pull out $200K and deploy it into the market.

I hope you don't live in Toronto or Vancouver (or maybe even Montreal, not sure as I know nothing about real estate there) or it would be a spectacularly bad idea considering the real estate bubble you're experiencing there.

Until I pay off the house I still have to make the same payments each month. Whether it's $100K left to go or $300K is irrelevant. I might as well have that money working for me during my accumulation phase where I don't need investment $$ to live off of.

If $200k is irrelevant to you, then you are right.
Otherwise no, it's actually $200k relevant.

RedmondStash

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Re: Getting a large loan to buy index funds?
« Reply #58 on: September 11, 2016, 11:21:55 AM »
Yes. We did this. We took out a HELOC specifically to invest in index funds. So far, so good. At this moment, the HELOC rate is 2.4%, and we've so far seen a return of about 4% this year, including Friday's precipitous drop. Before Friday, it was more like a 7% return.

Our home equity was a large percentage of our total net worth, and it was just sitting there stagnating, not working for us. It made sense to us to take a gamble in order to leverage that money.

It is of course a risk. But a) we paid off a mortgage with a higher interest rate with the HELOC, so instant savings there already, and b) we don't blink when the market bounces around. We didn't change our investment strategy in 2008-2009 when we lost more than a third of our investment value. We won't sell if prices go down *unless* we need the money to live on at that moment. And for the next 10 years, we could borrow against the HELOC instead, so if there's another crash during that time, we can ride it out.

Could the market drop at an inopportune time, wipe out our gains, and cost us even more? Yes. But that's true whether the money is in home equity, index investments, or elsewhere. Investing is always a gamble. But because of inflation, the only sure way to lose money is to not invest at all.

The HELOC money isn't a huge proportion of our total investments, and we didn't borrow nearly as much as we could have. We determined our risk tolerance and borrowed a corresponding amount.

Our HELOC has a variable rate, and it will go up next year to at least 3.14%, after the introductory rate expires. If the rate rises too far, we are prepared to pay it down faster. It's all about the math.

I honestly don't see this as much different from renting instead of buying a house, and then investing what would have become home equity. We can always sell the house if we have to. So far, though, the HELOC is more than paying for itself.

Cycling Stache

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Re: Getting a large loan to buy index funds?
« Reply #59 on: September 11, 2016, 02:27:40 PM »
I don't understand why people want to take shortcuts.

People want to retire sooner rather than later. If you are the kind of person that has optimized your spending and your earning it's not a stretch to want to use the cheap credit available to accelerate your investment performance. If you are not using margin loans and can't be subject to a margin call then the same mechanism that will make you very rich the way you suggest will make you very rich faster with some leverage.

As I said before, the issue here is that by pulling out a loan and lump sum investing, you are subjecting yourself to more risk by going all-in in a specific time period.
Imagine one did this in 2001 or 2007.

The MMM/ERE crowd is already taking more risk vs a common "save 15% and dump it in index funds for 40 years" because of the much shorter working time, I don't find it wise at all to further augment this risk.


I'm not suggesting everyone should run out and invest on credit, but I do think a rational analysis makes sense not just some fearful "one time I read a thread on Boggleheads and it was bad VERY BAD" reactionary trope.

If we aren't going be rational about our investment decisions than stock picking and market timing have some compelling "stories" behind them.

I'm actually arguing about the "rational" part, as I believe it's not rational at all.

Personally I've got a house worth $400K-$500K on a sub 2% mortgage. If had sufficient equity I'd pull out $200K and deploy it into the market.

I hope you don't live in Toronto or Vancouver (or maybe even Montreal, not sure as I know nothing about real estate there) or it would be a spectacularly bad idea considering the real estate bubble you're experiencing there.

Until I pay off the house I still have to make the same payments each month. Whether it's $100K left to go or $300K is irrelevant. I might as well have that money working for me during my accumulation phase where I don't need investment $$ to live off of.

If $200k is irrelevant to you, then you are right.
Otherwise no, it's actually $200k relevant.

You all seem to be talking past each other.

Of course, putting all your money in at once is the most rational thing to do.  And assuming no margin calls, it is what people should rationally do.  The difficulty comes with imagining worst-case scenarios that are often smoothed out by what becomes the equivalent of dollar cost averaging (when people invest the extra money they have each pay period, etc.).

The easiest way to see this is the following.  Imagine rolling over $200k in a 401(k) from your old employer to a Vanguard IRA.  The previous investments are sold, they are transferred to Vanguard, and they await instructions.  Do you (1) immediately put them all in your Vanguard mutual funds, or do you (2) slowly dribble them in over time because you never know what the market is going to do.

Almost everyone here would say (1).  The money was already in the market, so just put it back there.  But that answer is exactly the same as borrowing the $200k, assuming you can carry the costs.  The market could tank the next day, but for the same reason you don't arbitrarily pull your $200k out of the market because of fear of a worst-case scenario (also known as market timing), you don't withhold putting your $200k back into the market after completing your roll over.

The margin example seems scarier because it's not "your" money yet.  But if it's money that you can afford to earn without getting a margin call, the analysis is the same.  Rationally, you should do it because you should always put money in at the first possible circumstance.

As a reminder, that's always the answer because (1) the market generally goes up, and (2) we don't know whether it's going to up or down at any particular time, so given that, you should always invest as early as possible.

The downside that people imagine is borrowing $200k, the market tanks, then you spend the next 5 years earning that money back.  But that's logically no different whatsoever than earning the $200k after 5 years of work, putting it in the market, and having it immediately tank.  Yes, but what if you put in the $200k along the way paycheck by paycheck?  In that case, you probably got the benefit of market growth along the way, but if so, you also would have been better investing the $200k on the first possible day (i.e., the loan situation).

While that Boglehead thread was fascinating for how badly it turned out, the approach was rationally correct.  Two things derailed it.  First, he ended up picking the worst possible time in the market to do it.  Second, he couldn't carry the costs of the loan, and thus got margin calls that forced him to sell.  If he had been able to avoid the latter, and keep the money in, he would have made money in the market (the growth since 2007 would have likely offset the cost of the margin loan).  And that's starting at one of the worst times in history.

So the next time someone asks when they should invest a windfall that they just received ($10K bonus, $20k from an inheritance, etc.), the answer should be--and almost invariably is--put it in right away.  Because you can't market time.  And that's true even if the market could be a day away from a massive collapse.  That's the risk that creates the premium that allows us all to make money in the market.

P.S.  Notwithstanding all of the above, I have a HELOC available at 3% interest that I won't invest in the market.  First, because I don't want to commit to working long enough to pay it back.  Second, and more importantly, because the fact that I don't have debt is what allows me to invest "rationally" in the market and not take action based on emotion.  I would be much more tempted to try to time the market and act irrationally if the money to pay my house were hanging in the balance, even though I know that it would be irrational to do so.  So I took the lower return of a paid off house and no debts as the cost of allowing me to make rational investment decisions going forward.  Human behavior is tough to overcome.

Seppia

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Getting a large loan to buy index funds?
« Reply #60 on: September 11, 2016, 04:27:29 PM »
Imagine rolling over $200k in a 401(k) from your old employer to a Vanguard IRA.  The previous investments are sold, they are transferred to Vanguard, and they await instructions.  Do you (1) immediately put them all in your Vanguard mutual funds, or do you (2) slowly dribble them in over time because you never know what the market is going to do.

Almost everyone here would say (1).  The money was already in the market, so just put it back there.  But that answer is exactly the same as borrowing the $200k, assuming you can carry the costs. 

Absolutely not.
The fact that you guys seem to see no difference between
1) investing money you actually posses
2) investing money you don't
Is very scary.

I feel stupid pointing this out, but the first HUGE difference is that you are freaking getting in big debt in one case.

The second HUGE difference:
At minimum, unless you have some sort of magical bargaining power that allows you to pay less interest than anybody else, you have to deduct interest payments from the yield of the "loan invested" funds, so comparing the two is.... Uhm... Unsound?

We scream about 0.1% difference in management fees on a mutual fund, but you disregard the 2% interest you pay on a loan?

Jesus
« Last Edit: September 11, 2016, 04:31:27 PM by Seppia »

Retire-Canada

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Re: Getting a large loan to buy index funds?
« Reply #61 on: September 11, 2016, 06:03:29 PM »
I feel stupid pointing this out, but the first HUGE difference is that you are freaking getting in big debt in one case.

Jesus

Just like you are getting in debt buying a house whether to live in or a bunch of houses to rent out to [hopefully] make money on. We deal with debt all the time. It's funny how in this one case there is a freak out, but in other cases it makes sense to leverage yourself to buy an asset you want that you do not [at present] have the money to buy.

That's not rational.

Mary.

Retire-Canada

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Re: Getting a large loan to buy index funds?
« Reply #62 on: September 11, 2016, 06:09:19 PM »
While that Boglehead thread was fascinating for how badly it turned out, the approach was rationally correct.  Two things derailed it.  First, he ended up picking the worst possible time in the market to do it.  Second, he couldn't carry the costs of the loan, and thus got margin calls that forced him to sell.  If he had been able to avoid the latter, and keep the money in, he would have made money in the market (the growth since 2007 would have likely offset the cost of the margin loan).  And that's starting at one of the worst times in history.

So the next time someone asks when they should invest a windfall that they just received ($10K bonus, $20k from an inheritance, etc.), the answer should be--and almost invariably is--put it in right away.  Because you can't market time.  And that's true even if the market could be a day away from a massive collapse.  That's the risk that creates the premium that allows us all to make money in the market.

Investing on leverage without being able to sustain a significant market drop is a flawed plan. Had the guy in that BH thread not used a margin loan the outcome would have been quite different.

To your other point you could DCA a HELOC or other loan mechanism into the market. You don't have to do a lump sum purchase if you don't want to. The idea of a lump sum is not inherently part of a leveraged investment strategy.

Retire-Canada

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Re: Getting a large loan to buy index funds?
« Reply #63 on: September 11, 2016, 06:12:36 PM »
Until I pay off the house I still have to make the same payments each month. Whether it's $100K left to go or $300K is irrelevant. I might as well have that money working for me during my accumulation phase where I don't need investment $$ to live off of.

If $200k is irrelevant to you, then you are right.
Otherwise no, it's actually $200k relevant.

You need to give this ^^^ a bit more thought. It's at the core of the paying off a mortgage faster vs. using the money to invest instead argument. The idea of leveraged investing against home equity has been discussed many times on this forum in the form of paying the mortgage slowly and investing your excess savings.

The argument is not whether $200K of value matters to you...it's whether you'd rather have it locked into a house or liquid.
« Last Edit: September 11, 2016, 06:17:40 PM by Retire-Canada »

Cycling Stache

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Re: Getting a large loan to buy index funds?
« Reply #64 on: September 11, 2016, 06:44:04 PM »
Absolutely not.
The fact that you guys seem to see no difference between
1) investing money you actually posses
2) investing money you don't
Is very scary.

I feel stupid pointing this out, but the first HUGE difference is that you are freaking getting in big debt in one case.

The second HUGE difference:
At minimum, unless you have some sort of magical bargaining power that allows you to pay less interest than anybody else, you have to deduct interest payments from the yield of the "loan invested" funds, so comparing the two is.... Uhm... Unsound?

We scream about 0.1% difference in management fees on a mutual fund, but you disregard the 2% interest you pay on a loan?

Jesus

Dude, calm down.  Both your points are wrong.  First, nobody is ignoring the 2% interest on the loan.  The question is whether a 7% expected return (the market average) is worth paying that 2%.  If both are guaranteed, the answer is obviously yes, and that's why there are so many of the don't pay down your mortgage threads--because over a 30-year period, the odds of beating the 2% (or 3% or 4%) you're paying on the loan is incredibly high.  Every dollar that you can borrow at 2% and earn 7% on, you should.  The question here is how to assess the risk when the likelihood of the 7% return is more uncertain over a shorter time period.

Second, people "borrow" money all the time to invest in the market.  Indeed, I bet the vast majority of people on this site do.  Every penny you invest in the market when you carry a mortgage is a dollar you're borrowing in order to invest.  Every penny that you could put towards a down payment but don't and instead invest in the market is the exact same "bet" we're discussing here.    The only difference is that we're discussing larger amounts. 

The analysis here assumes that you would continue to work to earn the money that you ultimately borrow, although it really doesn't have to.  If so, then we're not discussing margin calls.  We're discussing when to invest the money that you expect to earn.  And like all windfalls, the rational decision is to invest in the market at the earliest possible time.  It's the same reason that once you invest, you should never "un-invest" until you need to sell.   Because the expectation is always that the market will go up over time. 

The question here just comes down to whether you can absorb the downside risk, because statistically--rationally--it's always going to be a good decision to borrow money at a rate that's lower than the expected return of the market.  Somebody close to retirement, who has a short-term need for money, or someone who doesn't have an expectation of earning back what they borrowed might chose not to.  But for everyone else, it's a rational consideration.

Btw, this entire discussion captures one of the central irrationalities of market analysis on this forum (and probably everywhere else).  There's an incredibly high number of posts recommending that one should never pre-pay a low rate mortgage and should instead invest in the market.  Indeed, it's almost received wisdom, with the only counter being that "yes, but I prefer peace of mind, etc."

But the number of posts about people actually taking out HELOCs at approximately the same interest rates to invest?  Much, much fewer, even though they are conceptually and mathematically identical situations (assuming you get the mortgage interest deduction for both).  The only difference is that the first group often feels like they are forever away from paying off the mortgage, so they're able to focus on the long-term returns of the market.  The second group feels much closer to paying off the house, and now don't want to risk the loss.  That's not rational, so long as both groups can afford to bear the loss, but there you have it.  Behavioral economics in action. 

erutio

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Re: Getting a large loan to buy index funds?
« Reply #65 on: September 11, 2016, 08:31:33 PM »
...First, nobody is ignoring the 2% interest on the loan.  The question is whether a 7% expected return (the market average) is worth paying that 2%.  ...

Where can I find these 2% HELOCs  these days?

Goldy

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Re: Getting a large loan to buy index funds?
« Reply #66 on: September 12, 2016, 08:17:36 AM »
After moving for work I had enough equity to buy my new house outright but opted to put 25% down and invest the remaining 200k while taking a 5/1 loan at 2.5%.  My effective interest rate is sub 2 so I'm comfortable rolling the dice to beat that rate however I would not do it with a callable note or a rate above 3.5%.

Jack

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Re: Getting a large loan to buy index funds?
« Reply #67 on: September 12, 2016, 11:50:46 AM »
Home equity is enough, either don't borrow at all or do just a manageable home loan.  Also bear in mind that the home loan in turn only makes sense if your situation is very stable and the terms are favorable, such as a fixed rate.

That's a good point. I suppose one reason I'm so comfortable levering my mortgage is the fact that the payment is less than $700/month (including taxes and insurance), so I could still afford it even on unemployment or minimum wage.

One of the "approved" roads to MMM-esque FIRE on these forums is to get a portfolio of rental RE with mortgages. This is just a form of leveraged investing. One that you could argue is more risky due to lack of diversification than investing your borrowed money in the stock market. It's not like we haven't had a house crisis recently yet this is considered a rationale path to FIRE.

IMO it's less risky than margin investing because there are no margin calls, but more risky than leveraging a mortgage to buy index funds because of diversification. On the other hand, many forms of real estate investing aren't very "passive" either, so it's hard to compare: how much of the return is from "investment" and how much is income from what is essentially a job?

Absolutely not.
The fact that you guys seem to see no difference between
1) investing money you actually posses
2) investing money you don't
Is very scary.

I feel stupid pointing this out, but the first HUGE difference is that you are freaking getting in big debt in one case.

The second HUGE difference:
At minimum, unless you have some sort of magical bargaining power that allows you to pay less interest than anybody else, you have to deduct interest payments from the yield of the "loan invested" funds, so comparing the two is.... Uhm... Unsound?

We scream about 0.1% difference in management fees on a mutual fund, but you disregard the 2% interest you pay on a loan?

Jesus

No, Cycling Stache is correct (despite your appeal to emotion). Debt isn't "scary;" it's just math.

Also, comparing to management fees is a red herring. With leverage, you're actually receiving a benefit in return for the extra expense you pay.

Btw, this entire discussion captures one of the central irrationalities of market analysis on this forum (and probably everywhere else).  There's an incredibly high number of posts recommending that one should never pre-pay a low rate mortgage and should instead invest in the market.  Indeed, it's almost received wisdom, with the only counter being that "yes, but I prefer peace of mind, etc."

But the number of posts about people actually taking out HELOCs at approximately the same interest rates to invest?  Much, much fewer, even though they are conceptually and mathematically identical situations (assuming you get the mortgage interest deduction for both).

I bought my house in December 2009, and I got down-payment assistance in the form of a second lien that gets forgiven after 10 years but until then prevents me from cashing out equity in any way (either via cash-out refi, HEL, or HELOC). In January 2020, if rates are still low enough for it to make sense, I fully intend to cash out as much equity as possible for the purpose of investment. (It might be for real-estate investment instead of stocks, though.) You heard it here first, folks!

Cycling Stache

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Re: Getting a large loan to buy index funds?
« Reply #68 on: September 12, 2016, 12:57:29 PM »
The tone on my response to Seppia was a little harsh, but I'm now genuinely interested to know what FIRECalc and cFIREsim say about the impact is of large loans to invest on retirement success rates so long as the loans are (1) at a fixed low rate of interest, are (2) of a 20-30 year duration, and (3) are not callable. 

E.g., Does a $250k loan at 3% for 20 years always produce a higher success rate for portfolio survival, regardless of the starting portfolio balance and the withdrawal amount?  If so, how can we rationally rely on market performance for the 4% rule but disregard something that (at least historically) would always produce a more successful outcome? 

Curious about the answers because I realized that even though I preach market rationality, I paid off my house and all debts for peace of mind, which is risk averse and therefore by definition irrational.  Can we use math to convince us to overcome that irrationality?   If I trust the 4% rule (more or less), what is the basis for me not to trust this if FIRECalc and cFIREsim give uniformly positive results.

I really hope someone who's good with those calculators can figure this out.  It would be nice to match the theory up to the historical data.

brooklynguy

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Re: Getting a large loan to buy index funds?
« Reply #69 on: September 12, 2016, 01:47:08 PM »
The tone on my response to Seppia was a little harsh, but I'm now genuinely interested to know what FIRECalc and cFIREsim say about the impact is of large loans to invest on retirement success rates so long as the loans are (1) at a fixed low rate of interest, are (2) of a 20-30 year duration, and (3) are not callable. 

We already have an 11-page thread dedicated to that topic:  "Paying Off Mortgage Early -- How Bad is it for Your FI Date?"

Reply # 439 may be of particular interest to you.

Seppia

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Re: Getting a large loan to buy index funds?
« Reply #70 on: September 12, 2016, 01:53:02 PM »
I'm cool, I just love a good discussion!

1- normally one decides to take a mortgage and keep his investments to keep diversification.
2- while doing this, you always DCA (continuously small lump sum invest actually). This smoothens risk of getting in the market at the wrong time.

While is true that statistically it's better to lump sum invest, by doing this with a BIG sum you are subjecting you to a wider array of results.

Average Joe investor DCAs (continuously small lump sum invest actually) for 30-40 years. He will get the average 7% real return in almost any possible past timeframe.

Average mustachian investor DCAs for 5-10 years. He will likely get the average 7%, but that's not guaranteed.

The mustachian investor who pulls out a loan and lump sum invests it will more frequently than not turn out better than the average mustachian investor, but his possible worst outcomes are worse than anybody's.

Again, imagine you do this in 2001.

The upside is minimal (because it's dragged down by the mortgage fees), but the downside is huge.

Let me hyperbole:

Door A brings you to be worth 1M or more 100% of the time after 10 years. 

Door B brings you to be worth 3M after 10 years 66% of the time, but below 300k the remaining 34%.

The expected value is higher in door B, but in my opinion anybody picking B over A is a lunatic.

You guys should not forget that the marginal utility of money is decreasing, ESPECIALLY so for mustachians. Given a decent income and 10 years working time, I definitely think it's more important to keep the floor high instead of reaching for a higher ceiling.

bacchi

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Re: Getting a large loan to buy index funds?
« Reply #71 on: September 12, 2016, 02:29:05 PM »
You guys should not forget that the marginal utility of money is decreasing, ESPECIALLY so for mustachians. Given a decent income and 10 years working time, I definitely think it's more important to keep the floor high instead of reaching for a higher ceiling.

Correct IF the 10-year mustachian absolutely, positively, must get out after 10 years.

Of course, if the market collapses at 9.5 years, and suddenly $500k is $300k, would anyone really ER? With or without leverage, most people would do OMY. Given that we can see what happened with a 2001 ER, it'd be a wise choice.


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Re: Getting a large loan to buy index funds?
« Reply #72 on: September 14, 2016, 06:17:15 AM »
If I trust the 4% rule (more or less), what is the basis for me not to trust this if FIRECalc and cFIREsim give uniformly positive results.

I did this to see the benefits of having a mortgage in retirement:

cFiresim, solving for Max Initial Spending, over a 40 year retirement, with and without a mortgage.

$1M Portfolio
$100K house
$75K mortgage 30 year fixed at 3.4%. $332.61/mo, $3991/yr. Proceeds from mortgage invested per asset allocation.

Asset allocation of stocks/bonds/cash: 75,20,5, cash at 0.5% interest.

95% success rate
No mortgage: Max Initial Spending $35,893
With mortgage: Max Initial Spending $36,401
With the mortgage the Max Initial Spending increases by 1.4%

85% success rate
No mortgage: Max Initial Spending $39,507
With mortgage: Max Initial Spending $40,185
With the mortgage the Max Initial Spending increases by 1.7%

If the ratio of house value to portfolio size is much larger then having a mortgage is going to be more advantageous.

In this example, which is about the same ratio as me, an increase in max spending of less than 2%, when I don't even need it anyway, well it just don't seem worth the bother. YMMV.


Cycling Stache

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Re: Getting a large loan to buy index funds?
« Reply #73 on: September 14, 2016, 07:30:47 AM »
If I trust the 4% rule (more or less), what is the basis for me not to trust this if FIRECalc and cFIREsim give uniformly positive results.

I did this to see the benefits of having a mortgage in retirement:

cFiresim, solving for Max Initial Spending, over a 40 year retirement, with and without a mortgage.

$1M Portfolio
$100K house
$75K mortgage 30 year fixed at 3.4%. $332.61/mo, $3991/yr. Proceeds from mortgage invested per asset allocation.

Asset allocation of stocks/bonds/cash: 75,20,5, cash at 0.5% interest.

95% success rate
No mortgage: Max Initial Spending $35,893
With mortgage: Max Initial Spending $36,401
With the mortgage the Max Initial Spending increases by 1.4%

85% success rate
No mortgage: Max Initial Spending $39,507
With mortgage: Max Initial Spending $40,185
With the mortgage the Max Initial Spending increases by 1.7%

If the ratio of house value to portfolio size is much larger then having a mortgage is going to be more advantageous.

In this example, which is about the same ratio as me, an increase in max spending of less than 2%, when I don't even need it anyway, well it just don't seem worth the bother. YMMV.

Interesting.  So the "With mortgage" calculation assumes a $1,075,000 portfolio, but how did you build in the additional annual spending required by the mortgage payments?  In other words, the portfolio size increases, and presumably then the "necessary" annual spending increases by $3,991 per year for 30 years (to account for the mortgage payments), then that spending increase falls away.  I would have guessed that the variable to solve for would be the success rate of such a portfolio, but you have success rate as one of your controls. 

Is the variation between your "with mortgage" and "without mortgage" just based on increasing the portfolio size?  If so, does that suggest that you'd actually be worse off with the mortgage because your max initial spending is effectively less given that your allowable annual spending increased by less than $1,000, but you have to allocate $3,991 of that annual spend to your mortgage for the first 30 years? 

brooklynguy

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Re: Getting a large loan to buy index funds?
« Reply #74 on: September 14, 2016, 07:51:49 AM »
but how did you build in the additional annual spending required by the mortgage payments?

Just add the payments as an addition spending item in the "Extra Spending" section at the bottom of the input page, and set it to recur for 30 years and not be adjusted for inflation.

Another perspective on the same data is that, using Adrian's same parameters, you would have come out ahead by carrying the mortgage 98.28% percent of the time historically, by a median amount of $97,525 (and an arithmetic average amount of $118,644) after 40 years (if you didn't increase spending as compared to the "no mortgage" scenario).  Increasing the aggressiveness of the leveraged investment allocation increases these figures substantially.  There is lots more discussion of these types of historical backtests in the thread I linked above, which is the forum's seminal thread on leveraged-investing-via-mortgage.

Cycling Stache

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Re: Getting a large loan to buy index funds?
« Reply #75 on: September 14, 2016, 10:25:05 AM »
but how did you build in the additional annual spending required by the mortgage payments?

Just add the payments as an addition spending item in the "Extra Spending" section at the bottom of the input page, and set it to recur for 30 years and not be adjusted for inflation.

Another perspective on the same data is that, using Adrian's same parameters, you would have come out ahead by carrying the mortgage 98.28% percent of the time historically, by a median amount of $97,525 (and an arithmetic average amount of $118,644) after 40 years (if you didn't increase spending as compared to the "no mortgage" scenario).  Increasing the aggressiveness of the leveraged investment allocation increases these figures substantially.  There is lots more discussion of these types of historical backtests in the thread I linked above, which is the forum's seminal thread on leveraged-investing-via-mortgage.

Yes, I'm going to go back through that one.

The reason that I'm thinking of this in a new light is that I always understood the mortgage question as I'll take a guaranteed 3% rate of return over an expected but volatile 7% return in the market, especially because I was in a position to pay off the mortgage quickly, which reduced the time frame and made the volatility of the market a more significant factor.  I also always liked the idea of knocking off my biggest expense so that if I had to live on minimal money for a while, I could (I never really considered the early retirement possibility).

The change now is considering the impact of taking a $250k HELOC (or home equity loan) out of house worth substantially more, when I also have a pretty good investment portfolio.  While I'm still tempted to think of it as incurring a large recurring expense that I now need to work for, I can step back and see that even if I had to pay off the HELOC immediately by selling stocks, I would be in a position to do so without putting my financial security at risk.  That allows me to try to be a little more neutral about the question of how it historically plays out to have a $750k portfolio with no $250k HELOC versus a $1 million portfolio with the 25-year or 30-year commitment to repay the $250k loan.  My gut reaction is to be afraid of the market collapsing and suddenly losing a bunch of money that I eventually have to pay back, but I understand that's irrational and no difference really than the rest of my portfolio taking a significant hit.  If I can see that the math works out consistently well, I might be able to overcome the risk aversion.

And someone citing that thread of it going historically bad made me realize that is no different than the 5% failure rate for 4% rule that I'm comfortable with, and even in that case, if there hadn't been forced liquidation, he would have come out ahead in the end.

So I'm not saying that I'm definitely going to do it (see risk aversion), but I'm intrigued that notwithstanding the general reaction to this thread not to do it, the math may actually show that it is almost always a good idea in the particular situation I'm in near the end and possibly able to push me over the FIRE threshold.

P.S.  The only reason I have such a large HELOC is because the lowest interest rate started at $250k, so I took that.  They were very confused when I told them I had no plans for the money, and intended never to use it.  I had just read the springy debt post by MMM (the first post I read!), and it sounded like a great idea, which freed me up to move the cash I had sitting in my savings account for emergency over to pay towards the mortgage since I now had an available emergency fund through the HELOC. 

brooklynguy

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Re: Getting a large loan to buy index funds?
« Reply #76 on: September 14, 2016, 11:38:02 AM »
And someone citing that thread of it going historically bad made me realize that is no different than the 5% failure rate for 4% rule that I'm comfortable with, and even in that case, if there hadn't been forced liquidation, he would have come out ahead in the end.

Yes, the apparent contradiction in being at once comfortable relying on the 4% rule and uncomfortable with leveraged investing using cheap, long-term, non-callable debt has been frequently observed.  To repeat one example:

It never ceases to amaze me that the same people on these boards who parade MMM through the town square for revealing the "shockingly simple math behind early retirement" and gleefully plan their own early retirements in reliance on the 4% rule reject the idea of investing in lieu of prepaying cheap, long-term, fixed rate debt as "overly risky," even though it relies on the very same underlying assumptions.  If you believe in the validity of a 4% SWR, then you should necessarily believe in the optimality of investing instead of prepaying mortgages with rates like those available today.

Of course, leveraged investing is, in effect, "doubling down" on one's bet that the market will perform no worse than expected, and not all of the safety margins inherent in a typical early retirement plan apply with equal force to a leveraged investing strategy.  Cutting back on spending, for example, is not an option with respect to the required debt service payments on a mortgage loan (or equivalent debt).

AdrianC

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Re: Getting a large loan to buy index funds?
« Reply #77 on: September 18, 2016, 07:20:41 AM »
Another perspective on the same data is that, using Adrian's same parameters, you would have come out ahead by carrying the mortgage 98.28% percent of the time historically, by a median amount of $97,525 (and an arithmetic average amount of $118,644) after 40 years (if you didn't increase spending as compared to the "no mortgage" scenario).

I ran it: Max Initial Spending $35,893

No mortgage
Success rate 93.33%
Ending Portfolio Average: $2,531,616 Median: $1,719,011
Highest: $12,852,314 Lowest: $-666,678

Mortgage
Success rate 95.24%
Ending Portfolio Average: $2,687,067 Median: $1,914,899
Highest:$13,480,520 Lowest: $-595,034

Mortgage gives a slightly better success rate with on average 6% extra after 40 years. I could go either way.

We slept better in 2008/2009 knowing we didn't have to make a mortgage payment when so many around us could not make theirs. We like being totally debt-free. That said, if I were a younger person working towards FI I would totally have a mortgage and invest the proceeds.

EDIT: On reflection I wonder if using cFIREsim in this way is a valid test. Fact is in most of the simulations the mortgage rate would have been very different, but then so was inflation. It may work out to be a wash.
« Last Edit: September 18, 2016, 07:29:51 PM by AdrianC »

brooklynguy

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Re: Getting a large loan to buy index funds?
« Reply #78 on: September 19, 2016, 07:55:37 AM »
On reflection I wonder if using cFIREsim in this way is a valid test.

It's a valid test of how a leveraged-investing-via-mortgage strategy would have fared historically using a mortgage loan having an interest rate corresponding to today's prevailing rates (which would, in fact, have been impossible during most of history, because such loans were not actually available, which is why it's therefore not a valid test of how a leveraged-investing-via-mortgage strategy would have actually fared historically using actually-then-available mortgage loans). 

Quote
Fact is in most of the simulations the mortgage rate would have been very different, but then so was inflation. It may work out to be a wash.

If you're trying to examine the latter (i.e., the actual historical performance of leveraged-investing-via-mortgage, using actual historical mortgage rates), the cFIREsim backtest understates the interest rate for virtually all historical periods but never adjusts the mortgage payments for inflation, so there is no wash, and the test dramatically overstates the performance (which is why the test is invalid for such purpose, per above).  But we're not trying to determine the historical success rate of actual historical leveraged-investing-via mortgage strategies; instead, we're trying to determine the historical success rate of leveraged-investing-via mortgage using the type of mortgage loan available today.  Of course, the current low interest rate environment that is giving rise to today's low prevailing mortgage rates could very well be a reason to believe that future performance will differ from historical performance (and that the extraordinarily high historical success rate is therefore not a good basis on which to engage in leveraged-investing-via-mortgage today), but prognostications about the future are beyond the scope of cFIREsim-style historical backtests.

There is extended discussion about this very point in the mortgage thread linked above.

Leisured

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Re: Getting a large loan to buy index funds?
« Reply #79 on: September 19, 2016, 08:21:39 AM »
A good point; that a mortgage and an investment loan both make sense. I borrowed A$30K against my paid off house in 1995 to invest in six blue chip Australian companies. Mutual funds, let alone index funds, were slow to come to Australia, and I was slow to see the point of them.

This investment is now worth about A$90k, and have paid dividends over that time.

Knowing what I know now, I would pay off most of my mortgage, then use perhaps a third of the value of the house to take out an investment loan against the value of the house. If the market falls – do not sell. In Australia the interest on investment loans are tax deductible.

One poster has pointed out that the risk here is the loss of your job, or worse, loss of health, both leading to loss of income. This is a serious matter.

In the late sixties I remember Bruce Shepherd, an investor in BHP, a huge, well run Australian diversified resources company, was interviewed on television. In the fifties, he had inherited 30,000 Australian pounds from his father, borrowed 50,000 pounds, and put the lot into BHP. BHP grew strongly and was good to him, as it was to me a few decades later. For a while, in the sixties and seventies, he was the largest individual investor in BHP, as opposed to investment companies. In the fifties, the average Australian income was about 900 pounds a year.

I do not know the circumstances of Alan Shepherd, but he was able to service the debt. I certainly do not recommend borrowing more than your initial capital, which is what he did, but he still did approximately the right thing. The value of the loan remained the same, but the stock and dividends kept rising.

When I was about 14 or 15, I met the widow of a local dentist who has retired and lived on the rent from several rental properties. Her late husband had, over time, bought several rental properties. I knew almost nothing about investment at the time, but I thought ‘Just like that’. Of course you have to save and invest.

talltexan

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Re: Getting a large loan to buy index funds?
« Reply #80 on: September 19, 2016, 02:14:38 PM »
Indeed, reviewing the Bogleheads post, there seems to be a safe amount of leverage somewhere around what Market-Timer calls "160/-60, i.e. where your total exposure is close to 2.5 times the amount you've borrowed.
The Shephard example is in excess of that, but it was a position taken before exceptional economic growth during a post-war boom.

pha999

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Re: Getting a large loan to buy index funds?
« Reply #81 on: September 19, 2016, 10:53:51 PM »
Not a great idea at all.

Like others said they may be already using leverage of some sort by not paying down a mortgage when they could, but instead invest etc.

The difference with margin loans from brokerage accounts is, you are no longer in control. Margin rates could increase at any time, the Margin loan could be called if the equities fall to a certain level. If you can not provide more cash, they will start selling your positions off without your permission, and in many cases you could be locked into losses by the brokers.

At least with mortgages, you probably should have a fixed interest rate for 15 to 30 years at a known monthly minimum amount regardless of the value of your home. Margin accounts not so much, a lot of control is given up to the brokerages.

GreenEggs

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Re: Getting a large loan to buy index funds?
« Reply #82 on: September 20, 2016, 08:52:43 PM »
I'm shopping for a HELOC and have been following this thread with interest.

While shopping for rates I found http://www.datatrac.net/ and found a local bank that has a rate of 2.00%.  I was surprised to see one that low. 

Their website wasn't very informative, but there's a branch nearby. 

RedmondStash

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Re: Getting a large loan to buy index funds?
« Reply #83 on: September 21, 2016, 08:42:57 AM »
I'm shopping for a HELOC and have been following this thread with interest.

While shopping for rates I found http://www.datatrac.net/ and found a local bank that has a rate of 2.00%.  I was surprised to see one that low. 

Their website wasn't very informative, but there's a branch nearby.

We got a 12-month 2.4% introductory rate from Bank of America, but after that, it becomes around 3.1%, and it's variable. So yeah, that 2.00% rate sounds great.

This_Is_My_Username

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« Reply #84 on: September 22, 2016, 10:46:51 AM »
https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Read this thread with a giant bowl of popcorn from beginning to end. It's outstanding.

Don't do this.

Holy shit I just realised I am doing a very similar thing to the guy in that bogleheads thread.   

I did this:
1.  Calculated my fire number and fire date.
2.  Discount that amount to the present day, with the growth rate being the expected returns on shares.  ( =$X)
3.  Get a 4x margin loan at 5.2%.  Buy %X of shares.

4. With no additional contributions, my shares will grow to my fire number bybmy fire date. 

5. In future: Pay down all the debt over many years.

It seems to be going well so far.


talltexan

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Re: Getting a large loan to buy index funds?
« Reply #85 on: September 22, 2016, 11:03:42 AM »
One of the commenters (around page 8) on the Bogleheads forum said he did something like this, TIMU, but with various debt products at interest rates like 2%. Your 5.2% is really cutting into your margin compared to hers. Usage of margin loans is also exposing you to having to sell when the loan is called in a way that amplifies the risk when compared with other debt products.

DrF

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Re: .
« Reply #86 on: September 22, 2016, 11:06:29 AM »
Holy shit I just realised I am doing a very similar thing to the guy in that bogleheads thread.   

I did this:
1.  Calculated my fire number and fire date.
2.  Discount that amount to the present day, with the growth rate being the expected returns on shares.  ( =$X)
3.  Get a 4x margin loan at 5.2%.  Buy %X of shares.

4. With no additional contributions, my shares will grow to my fire number bybmy fire date. 

5. In future: Pay down all the debt over many years.

It seems to be going well so far.

1. What's your asset allocation?
2. Can't you find a broker that offers lower margin rates? Try https://www.interactivebrokers.com/en/home.php
3. What % drop can your portfolio handle without a margin call?
4. What is the historical % drop for your entire portfolio?

Seppia

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Re: Getting a large loan to buy index funds?
« Reply #87 on: September 22, 2016, 02:14:28 PM »
It seems to be going well so far.

I see no possible way this could end badly. None at all.
Good luck

This_Is_My_Username

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« Reply #88 on: September 22, 2016, 07:54:06 PM »
1. My asset allocation is 330% shares, -230% fixed interest.(margin loan)
The shares are 75% Aus , 25% world.

2. IB are not available in Australia, after they got caught doing something by the regulator.

This is the lowest loan rate I could find - I looked fairly hard. The interest is tax deductible (40% discount). So, its technically only 3.12%

3. 20% drop. 

4. I'm not sure how to calculate that? The etf's are only a few years old.

I'm fairly confident that a margin call will be OK, if it happens.  My salary income provides more buffer every payday.

This_Is_My_Username

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Re: Getting a large loan to buy index funds?
« Reply #89 on: September 22, 2016, 09:38:03 PM »
One of the commenters (around page 8) on the Bogleheads forum said he did something like this, TIMU, but with various debt products at interest rates like 2%. Your 5.2% is really cutting into your margin compared to hers. Usage of margin loans is also exposing you to having to sell when the loan is called in a way that amplifies the risk when compared with other debt products.

"Vulture Dawg"?   

Yes, I am doing a similar thing,  but I have some of my own money. 

I also have 2 balance transfer credit cards at 0% , sitting in the mortgage offset account.   But I have not used them as capital to leverage from.

bigchrisb

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Re: .
« Reply #90 on: September 22, 2016, 10:40:38 PM »
https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Read this thread with a giant bowl of popcorn from beginning to end. It's outstanding.

Don't do this.

Holy shit I just realised I am doing a very similar thing to the guy in that bogleheads thread.   

I did this:
1.  Calculated my fire number and fire date.
2.  Discount that amount to the present day, with the growth rate being the expected returns on shares.  ( =$X)
3.  Get a 4x margin loan at 5.2%.  Buy %X of shares.

4. With no additional contributions, my shares will grow to my fire number bybmy fire date. 

5. In future: Pay down all the debt over many years.

It seems to be going well so far.

I've done the same in the Australian market.  I got margin called a few times which hurt. A lot. 
I had a similar attitude about my income being a buffer, which it was.  However, it meant that while I was able to mostly fend off the wolves, I was not able to buy when things were at their lowest.  In effect, ended up buying high, and excluded myself from buying low (opposite of dollar cost average.

However, I've stuck with it, and its worked out OK in the longer term.

TIMU - I've had accounts with IB (before their issues with the regulator - got almost a grand refunded from them after that), ANZ and NAB.   My current margin loan is 4.15% fixed ($500k balance).  Each year I need to get a written offer from someone else to re-fi it, and then use that to haggle down with my existing lender.  Its possible, but needs a little work.

Not sure if you are fixed or variable, but it might be worth a bit of work negotiating the rate.  I reckon you can do better than what you currently have.  PM me if you want more details of who I'm with etc. 

faramund

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Re: Getting a large loan to buy index funds?
« Reply #91 on: September 22, 2016, 11:24:37 PM »
I've said this in other threads - but I've also done this.

Say if my house is valued at $100, I keep a loan balance of $80, i.e. I use HELOCs to borrow up to 80% of the value of my house. I then use that money to buy shares.. Once the money's in shares, I leverage up to 50% of that with margin loans.

So I'm definitely in the borrow money to buy shares camp. But notice that while I'm happy to go up to 80% leverage with my house - its only 50% with margin loans (and I've got a .. if the market gets bubbly/starts growing fast - I'll stop borrowing to buy shares - but that topic's been done to death only a short while ago).

I've never had a margin call - I imagine it will be somewhat uncomfortable if and when it happens - but my shares are only about 20% of my net worth - which is probably why I have a high risk tolerance for this.

This_Is_My_Username

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Re: Getting a large loan to buy index funds?
« Reply #92 on: September 23, 2016, 03:03:35 AM »
Cheers Chris for the offer.   I am variable 5.2% with "Leveraged" (bendigo bank). 320k owing.

I found the same issue when attempting to buy low via DCA - the margin loan creates pressure , and disincentivises purchases.

Seppia

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Re: Getting a large loan to buy index funds?
« Reply #93 on: September 23, 2016, 06:27:32 AM »
I've done the same in the Australian market.  I got margin called a few times which hurt. A lot. 
I had a similar attitude about my income being a buffer, which it was.  However, it meant that while I was able to mostly fend off the wolves, I was not able to buy when things were at their lowest.  In effect, ended up buying high, and excluded myself from buying low (opposite of dollar cost average.

However, I've stuck with it, and its worked out OK in the longer term.


Did you try compare what the outcome would have been if you just DCAd without leverage?


talltexan

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Re: Getting a large loan to buy index funds?
« Reply #94 on: September 23, 2016, 02:09:20 PM »
Suppose I have a portfolio that's 70/30 stocks/bonds...with no leverage, if my stake in stocks goes up by half, I can just rebalance so that I now have 90/45. And there are more bonds now that form the basis of my income portfolio when I retire.

But if I'm leveraging, I would have maximal exposure in stocks (why leverage just to buy bonds, there's no spread). So something like 150/-50...if the stock portion gains, then I add on MORE DEBT to maintain the same mix, so--rather than stablizing back to some desired mix, I'm amplifying the risk when I gain and doubling down when I lose.

The way to break this cycle is to do something like what Mortgage Vulture describes, where I have a target exposure at which I start reducing the debt rather than adding to the principal.

Retire-Canada

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Re: Getting a large loan to buy index funds?
« Reply #95 on: September 23, 2016, 04:40:24 PM »
Thanks for the real world perspectives from folks that are actively using significant leverage in their investments. I appreciate you taking time to participate in this thread.