Author Topic: Margin loan through Interactive Brokers  (Read 2117 times)

Nounoon

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Age: 33
  • Location: Dubai - United Arab Emirates
  • French Project Manager living in the Middle East
Margin loan through Interactive Brokers
« on: July 22, 2019, 03:54:02 AM »
I have about 400k to invest in a relatively conservative portfolio, and would like your feedback on using Margins loan to invest an additional 100k and keep it long-term.

I am not new to investing, but I am new to Interactive Brokers and Margin accounts. Do the rates mentioned on their platform https://www.interactivebrokers.com/en/index.php?f=1595 are the actual ones being charged? If so, how easy are they to open, do I need to activate with them a 100k credit line? How are the interests charged, is it monthly taken on my cash balance or is it as a bullet and with a bullet payment when I close my credit line?

Thanks in advance!
« Last Edit: July 22, 2019, 04:31:29 AM by Nounoon »

Financial.Velociraptor

  • Handlebar Stache
  • *****
  • Posts: 1499
  • Age: 47
  • Location: Houston TX
  • Devour your prey raptors!
    • Financial Velociraptor
Re: Margin loan through Interactive Brokers
« Reply #1 on: July 22, 2019, 10:11:28 PM »
I eliminated my emergency fund in ER.  I use a margin loan from IB as needed for emergencies.  The rate published is really the rate.  It is though, a variable rate driven by the Fed. It is quite a lot higher today than a year ago.

Leverage kills.  Your gains will be magnified but so will your losses.  Also note that IB does  not issue "margin calls".  They have an algorithm that will automatically start liquidating your positions if you violate margin requirement.  Count on that being done in the least tax efficient manner possible. 

In the frame of "do as I say and not as I do", my initial retirement was made possible by 50% leverage.  In 2012 I felt pretty confident that the Fed would continue juicing the markets.  I levered up to buy high yield closed end funds. I let the distributions gradually reduce my margin loan and ultimately sold out all the positions for a leveraged gain.  I wouldn't do it again today with an overpriced market and a Fed that is keen to end the QE experiment. 

Best of luck. I'm available by private message if you want to explore deeper.

Nounoon

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Age: 33
  • Location: Dubai - United Arab Emirates
  • French Project Manager living in the Middle East
Re: Margin loan through Interactive Brokers
« Reply #2 on: July 22, 2019, 10:32:21 PM »
Thank you for your reply.

Thanks for the warning about the gain and losses, this is why I am only comfortable with going with 25% leverage. My base currency in the Euro, and their rates are 1.5% up to 100k, which is super low, only very slightly above what I could get for a mortgage loan in France.

Can you tell me about the payment schedule for the leverage? Where the interest cumulated and paid in full with the capital when you closer the position?

Thanks again!
« Last Edit: July 23, 2019, 03:49:17 AM by Nounoon »

Kalergie

  • Stubble
  • **
  • Posts: 218
  • Location: European expat living almost everywhere
Re: Margin loan through Interactive Brokers
« Reply #3 on: July 23, 2019, 12:39:41 AM »
Since you live in Dubai, I'd suggest you check out this group: https://www.facebook.com/groups/SimplyFI

As for the leverage question. The way you worded your follow up questions indicate to me that you have no idea what you're getting into. Which means you should not use margin loans on IB. Margin calls are no joke. IB is (correctly) ruthless and will liquidate your holdings if you dip below the margin requirement.


Nounoon

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Age: 33
  • Location: Dubai - United Arab Emirates
  • French Project Manager living in the Middle East
Re: Margin loan through Interactive Brokers
« Reply #4 on: July 23, 2019, 02:40:17 AM »
Since you live in Dubai, I'd suggest you check out this group: https://www.facebook.com/groups/SimplyFI

 Thank you for the link. Edit: I'm in now, however the content quality is not very good and quite basic compared to what is here and on some Financial planning sub-Reddits.

I am quite familiar with the concept of leveraging and margin calls, I am financially relatively well versed (not an expert though), but I am not familiar with the cash-flow of margin loans interests, thus my question. I'm guessing it's accumulating but would like a confirmation. I'm not planning on initiating anything before having the full context of cash-flow requirements, I am learning by asking with no intention of going over my head.

I believe my approach would comfortably make me stay well above the minimum margin requirements, my portfolio largest non-leveraged drawdown was 16% in 2008, should a crisis happen the next day after leveraging with a 30% drawdown pre-leverage, with 400k+100k leveraged, I would still be far above the minimum margin requirements. Also over time, my leverage would decrease, 400k is my starting point but with a monthly contribution of 10k, the leveraged risk will be mitigated quite rapidly.
« Last Edit: July 23, 2019, 06:49:05 AM by Nounoon »

A Fella from Stella

  • Pencil Stache
  • ****
  • Posts: 524
Re: Margin loan through Interactive Brokers
« Reply #5 on: July 23, 2019, 12:08:08 PM »
Please don't. If we crash instead of cycle down, you're $400k can end up being $0.00 or even negative.

Listen to the Tim Ferriss interview of Tony Robbins regarding his book "Money: Master the Game." He talks about a guy who did something similar in 2007 and turned $50,000,000 into negative $5,000,000.

Leverage carries huge potential downside. A former employer was heavy into real estate in 2006, and bought (borrowed) into the Vegas Trump Tower. During construction prices were going up and up, and he was feeling richer and richer, so rather than get his money back, he brought in friends to buy into more units! One friend lent his credit (a mortgage was in his name) and ended up with a foreclosure on his record. Everyone else lost what they put in as they were feeding it for a few years.
« Last Edit: July 23, 2019, 12:10:35 PM by A Fella from Stella »

Nounoon

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Age: 33
  • Location: Dubai - United Arab Emirates
  • French Project Manager living in the Middle East
Re: Margin loan through Interactive Brokers
« Reply #6 on: July 23, 2019, 12:30:16 PM »
Iím sorry, but no it will not go down to zero. This would happen only if my very conservative portfolio (with 10% cash), goes -80%, which by any means would kind of be the end of finance for everyone, my small leverage wonít really change a thing in this case.

I get that people want to warn me and everything, but again, Iím planning on having 20% leverage on a conservative portfolio, not betting everything on Red 4 times in a row. You canít go negative with such a small leverage, worst worst case scenario the position is liquidated, the example you assume Iím following has nothing to do with my plan. Iím not planning on borrowing money from my friends, damn I am missing something or what?

Will anyone help me with answering my question or by asking I am not worthy of knowing? I have a simple question, that may seem basic. Iím very familiar with investing, but as I have not done margin investing on IB, so I am just asking for a confirmation that my assumption on how interests are accrued in the loan, thatís it! Iím sorry but itís a bit annoying to be judged like that when taking a small calculated risk, Iím new to the forum, but that doesnít mean I know nothing about investing. I am told that there are no stupid question, itís only stupid not to ask, but apparently this is wrong...

There are multiple way to pay back a loan and its interest, I believe asking on how a certain loan is structured is a fair question before deciding on taking it or not.
« Last Edit: July 23, 2019, 12:48:16 PM by Nounoon »

EvenSteven

  • Bristles
  • ***
  • Posts: 373
  • Location: St. Louis
Re: Margin loan through Interactive Brokers
« Reply #7 on: July 23, 2019, 12:51:35 PM »
You seem to be getting frustrated. Is it possible for you to just ask IB directly? Might be easier, and you should have more confidence in their answer.

Nounoon

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Age: 33
  • Location: Dubai - United Arab Emirates
  • French Project Manager living in the Middle East
Re: Margin loan through Interactive Brokers
« Reply #8 on: July 23, 2019, 12:54:24 PM »
You seem to be getting frustrated. Is it possible for you to just ask IB directly? Might be easier, and you should have more confidence in their answer.

Haha yes indeed I am. Thanks for your answer. I believe I will follow your advice, I was hoping to get a quick answer but you are right, by asking IB directly I will have a good confidence in the answer.

I hope I didnít appear too rude for my first post!

secondcor521

  • Magnum Stache
  • ******
  • Posts: 2743
  • Age: 50
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Margin loan through Interactive Brokers
« Reply #9 on: July 23, 2019, 12:56:54 PM »
Will anyone help me with answering my question or by asking I am not worthy of knowing? I have a simple question, that may seem basic. Iím very familiar with investing, but as I have not done margin investing on IB, so I am just asking for a confirmation that my assumption on how interests are accrued in the loan, thatís it! Iím sorry but itís a bit annoying to be judged like that when taking a small calculated risk, Iím new to the forum, but that doesnít mean I know nothing about investing. I am told that there are no stupid question, itís only stupid not to ask, but apparently this is wrong...

There are multiple way to pay back a loan and its interest, I believe asking on how a certain loan is structured is a fair question before deciding on taking it or not.

I understand what you are asking and why you are asking it, but I don't know the answer to your question.

What I would respectfully suggest is that you call IB and ask them.  They very likely have a phone number, and you very likely have a phone that can make international calls.  The answer you get will be authoritative, and in addition you may glean a little bit about how good their customer service is, which may be a useful bit of information.

Good luck / bon courage!

EvenSteven

  • Bristles
  • ***
  • Posts: 373
  • Location: St. Louis
Re: Margin loan through Interactive Brokers
« Reply #10 on: July 23, 2019, 01:00:03 PM »
You seem to be getting frustrated. Is it possible for you to just ask IB directly? Might be easier, and you should have more confidence in their answer.

Haha yes indeed I am. Thanks for your answer. I believe I will follow your advice, I was hoping to get a quick answer but you are right, by asking IB directly I will have a good confidence in the answer.

I hope I didnít appear too rude for my first post!

I didn't find you rude, but I think most posters here don't use margin accounts, so would not be able to give you the specifics you are looking for. I would also think that terms can change both over time and between the circumstances of the individual receiving the margin access, so information straight from the horses mouth is likely best in this case.

Nounoon

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Age: 33
  • Location: Dubai - United Arab Emirates
  • French Project Manager living in the Middle East
Re: Margin loan through Interactive Brokers
« Reply #11 on: July 23, 2019, 01:00:15 PM »
What I would respectfully suggest is that you call IB and ask them.  They very likely have a phone number, and you very likely have a phone that can make international calls.  The answer you get will be authoritative, and in addition you may glean a little bit about how good their customer service is, which may be a useful bit of information.

Thanks for your reply. Indeed, testing the customer service in addition to getting an answer is a very good piece of advice!

Merci :)

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 2214
Re: Margin loan through Interactive Brokers
« Reply #12 on: July 23, 2019, 07:32:00 PM »
You might want to look at historical performance data when P/E values are high.  Normally you'd expect the market to beat a ~4% loan, but stock market performance tends to be worse when starting at high valuations.  Looking at this white paper (put out by the Kansas City Fed), when P/E's exceed 20 the next 10 years of stock performance tends to be under 5%... at P/E 22 it even tends to be 0% to -5%.  That's not a guarantee, but lower performance is more likely based on how stocks perform.
https://kansascityfed.org/publicat/econrev/PDF/4q00shen.pdf

Your goal is to magnify returns... could you wait until a crash to start that loan?
The downside being that right after a crash, loans are harder to get and interest rates tend to be higher.

Nounoon

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Age: 33
  • Location: Dubai - United Arab Emirates
  • French Project Manager living in the Middle East
Re: Margin loan through Interactive Brokers
« Reply #13 on: July 23, 2019, 10:28:57 PM »
Your goal is to magnify returns... could you wait until a crash to start that loan?
The downside being that right after a crash, loans are harder to get and interest rates tend to be higher.

I see your point, but I am not a fan of trying to time the market, I am more concerned about opportunity losses. I have checked past performance, since 1972 the worst year-on-year of the portfolio is -4.2% (non-leveraged, before ETF Fees, this is based on asset class exposure, max drawdown <16%), itís only 40% stocks (20% large cap, 20% small value, 40% Long term treasury, 10% Gold and 10% cash, weighted average cost of ETF 0.13%). Even considering an interest rate double of what it is currently on IB, no portfolio reach margin call over any period of time in a 10k Monte Carlo simulations. So it is indeed a calculated risk.

Interests rates are negative in Euro, so even with IB margin the rate remains at 1.5% only, which is objectively low. If the rates were to triple from one day to the next and things went down, depending on how long I have been in the position (as I fund the account monthly by about 1/10th of the target loan value) I might lose a small part of the portfolio before making the decision to keep or close the leverage.

Overall, there is a risk involved with investing, no matter what is my portfolio allocation. If I donít take any risk, I am not even in the clear as I lose to inflation. So taking some risk per say is not a bad thing to do, the important part is about making an informed decision, and having a portfolio allocation and position that matches my risk tolerance. My baseline is to check if I could still sleep well at night if the portfolio falls by 1.5x what it did during the worst historical past results, itís pretty conservative, and with the same methodology considering the leverage I am still above my risk tolerance level with my allocation. I also consider for my long-term expected returns the 10th percentile of Monte-Carlo simulations.

The leverage Iím considering is also about only about 80% worth of one year of savings allocated to the brokerage account in my household (household income: 200k net, MCOL), and we both have very stable jobs and own our fully paid apartment so low expenses (73% savings rate), even with two kids and two cats. I literally know households that took 100k car loans with a similar incomes (not that I ever plan to make a car loan) to buy the latest full option Cayenne S (whilst you can find 10 years old ones for 1/10th of the price) so it won't be the stupidest financial decision of the decade for sure. There is always a better allocation or timing etc, but it is usually in hindsight which I canít rely on, and prefer to stick with a long-term defined strategy.
« Last Edit: July 24, 2019, 03:55:53 AM by Nounoon »

vand

  • Pencil Stache
  • ****
  • Posts: 672
  • Location: UK
Re: Margin loan through Interactive Brokers
« Reply #14 on: July 24, 2019, 03:57:13 AM »
This thread is both hilarious and terrifying.

At the top of every bull market you get the heroes who try to shortcut their way to prosperity with leverage. It rarely ends well because they have no respect for risk.

Nounoon

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Age: 33
  • Location: Dubai - United Arab Emirates
  • French Project Manager living in the Middle East
Re: Margin loan through Interactive Brokers
« Reply #15 on: July 24, 2019, 04:23:22 AM »
This thread is both hilarious and terrifying.

At the top of every bull market you get the heroes who try to shortcut their way to prosperity with leverage. It rarely ends well because they have no respect for risk.

Leverage & debt are an integral part of investing. Companies use it (corporate bonds), governments use it (treasury), individuals use it (mortgages) often committing 25%+ of their income over 20 years to pay back their leverage.

I've mentioned some of my research leading to this decision (including Monte-Carlo on all available data, expected returns based on 10th percentile, max drawdown + safety factor), my allocation (40% stocks), my leverage factor (1 with 4), margin requirements (25% before margin call), my monthly portfolio contribution (1/10th of loan amount) my income (the loan is 6 months of net income), and I have already close to that amount in emergency funds in a savings account that yields higher than the offered interest rate from IB (2% vs 1.5%). If after reading all this in my comments you still believe I have no respect for risk and that I am acting as a hero to shortcut my way into prosperity, I encourage you to open Excel and crunch the numbers to explain what I am missing.

I totally understand and respect your position of never using leverage for your investments (although most people do it for real estate asset classes), but it doesn't mean that people who do not follow a similar principle are by default "heroes who try to shortcut their way into prosperity", it is not all black or white.
« Last Edit: July 24, 2019, 05:24:34 AM by Nounoon »

ILikeDividends

  • Bristles
  • ***
  • Posts: 459
Re: Margin loan through Interactive Brokers
« Reply #16 on: July 24, 2019, 01:05:43 PM »
Leverage & debt are an integral part of investing. Companies use it (corporate bonds), governments use it (treasury), individuals use it (mortgages) often committing 25%+ of their income over 20 years to pay back their leverage.
All methods of leverage are not created equal.

If your mortgaged home value drops by 80% you will not lose your home.  You'll still have 20 years to pay back your mortgage and let the home recover its value.

If you margin 100K against a 400K portfolio, an 80% drop will wipe you out.  It won't matter what your 400K portfolio would have been 20 years from now.  You will still be wiped out long before that time.

I would tend to agree that an 80% drop is unlikely.  But you are still betting 400K, all or nothing, that it won't happen before you can pay back your margin debt.

If, as you say, you can pay back the margin loan with 6 months of earnings, I'm really struggling with whatever the appeal is of using margin to get a ~6 month head start on the position you would have achieved anyway without using margin.
« Last Edit: July 24, 2019, 01:47:58 PM by ILikeDividends »

Nounoon

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Age: 33
  • Location: Dubai - United Arab Emirates
  • French Project Manager living in the Middle East
Re: Margin loan through Interactive Brokers
« Reply #17 on: July 24, 2019, 01:29:45 PM »
If your mortgaged home value drops by 80% you will not lose your home.  You'll still have 20 years to pay back your mortgage and let the home recover its value.

If you margin 100K against a 400K portfolio, an 80% drop will wipe you out.  It won't matter what your 400K portfolio would have been 20 years from now.  You will still be wiped out long before that time.

I would tend to agree that an 80% drop is unlikely.  But you are still betting 400K, all or nothing, that it won't happen before you can pay back your margin debt.

Absolutely true, but an 80% drop with my portfolio allocation would mean a situation an order of magnitude worse than the 2008 crisis, a full default from the US on its long term debt, combined with the Euro falling to 0 while Gold not gaining at least some value. Itís for sure very unlikely yes, but leveraged or not this would kind of kill anyoneís finances. In this situation I would be more concerned about my life safety in the Middle East than my margin account on IB, and I got backup plans with a fully owned property in France and a fancy old car I could sell.

I may be betting my 400k that I am able to pay back that loan before things run to the ground, but itís an easy bet as I mentioned I have that cash on hands to pay back the full amount any day, but prefer to have it available on my savings account for other types of emergencies, with an interest rate higher than IB borrowing rate.

By investing for the long term, arenít we all ready to take a little bit of calculated risk, and betting on things improving at least slightly on the long run :)

The appeal of the 10 monthís head start (6 of earnings but 10 of investing) is that I donít know for how long our income are going to remain that high, it could be 10 years, 15... but this close to a year head start considering the super low risk involved is a risk worth taking (whilst keeping the equivalent cash on hands for emergency). With our target 18-years until FI, this could mean a couple hundred Euro more per month when deleveraging that 100k at retirement, using my target SWR at 3.2%. With our low spending habits that is not negligible, it could pay for the maintenance of my old car if I donít have to sell it by then, or for the utilities.
« Last Edit: July 24, 2019, 02:05:47 PM by Nounoon »

Financial.Velociraptor

  • Handlebar Stache
  • *****
  • Posts: 1499
  • Age: 47
  • Location: Houston TX
  • Devour your prey raptors!
    • Financial Velociraptor
Re: Margin loan through Interactive Brokers
« Reply #18 on: July 24, 2019, 02:31:12 PM »
Can you tell me about the payment schedule for the leverage? Where the interest cumulated and paid in full with the capital when you closer the position?

Your interest will be calculated and "paid" daily.  Your negative cash balance will be debited by the appropriate amount (and your "net liquidation value" will fall by a corresponding amount).  Your dash board keeps a running total of month to date interest debited.  Standard reports can be downloaded from the "support center" for more detailed reporting.  I've done this multiple times for amounts I could repay within 2-3 months.  It is a seamless process and you won't hear a word from IB or require any documentation.  In the US they offer a debit card that can be used at any point of sale to debit your cash balance with a predetermined loan rate.  Customer service can probably tell you if that option is available in your jurisdiction and currency.

But do be careful.  Leverage can burn you. 

Nounoon

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Age: 33
  • Location: Dubai - United Arab Emirates
  • French Project Manager living in the Middle East
Re: Margin loan through Interactive Brokers
« Reply #19 on: July 24, 2019, 02:56:08 PM »
Your interest will be calculated and "paid" daily.  Your negative cash balance will be debited by the appropriate amount (and your "net liquidation value" will fall by a corresponding amount).  Your dash board keeps a running total of month to date interest debited. 

Thanks a lot for the clear explanation!

ILikeDividends

  • Bristles
  • ***
  • Posts: 459
Re: Margin loan through Interactive Brokers
« Reply #20 on: July 24, 2019, 02:58:06 PM »
By investing for the long term, arenít we all ready to take a little bit of calculated risk, and betting on things improving at least slightly on the long run :)
Indeed we are.  But I think you are comparing apples to oranges when you introduce margin leverage into the comparison.

In an extreme volatility event, an unlevereged investor can, all things being equal, patiently wait out a volatility event, and will be holding the same (or more) assets when things do eventually improve over the long run.

With leverage, the same isn't necessarily true, depending on the extremity of the volatility event and the amount of leverage employed; you might be broke long before things start to improve.  In other words, leverage turns volatility into a very real risk, where volatility could, for most other investors, be simply dismissed as a risk; not to be concerned with at all.

And for investors who are still accumulating, volatility could rightly be considered an opportunity rather than a risk.  With leverage, your ability to exploit volatility is at least degraded, if it even exists at all.

Example: say you are leveraged 1 for 4, and there's a 50% correction.  You are now leveraged 1 for 1.5 (you now have 250K worth of assets with 100K margin debt; 150K of net equity).  Is your next contribution going towards reducing your leverage back to your planned ratio, or are you going to buy more stock with it, essentially abandoning your original planned leverage ratio?

While you are grappling with that difficult choice, the unleveraged investor is gleefully plowing as much new money into discounted stocks as they possibly can.
« Last Edit: July 24, 2019, 04:17:47 PM by ILikeDividends »

MrSpendy

  • Stubble
  • **
  • Posts: 133
Re: Margin loan through Interactive Brokers
« Reply #21 on: July 24, 2019, 05:55:05 PM »
From an investment standpoint, Nounoon, I think you clearly understand the risks and probabilities and are using margin  leverage as approproatwly as one could do so.

I use margin to manage cash flow, monetize appreciated positions without selling, and to pounce on stuff before I have the dough to pay for it.

The one thing that keeps me up at night is not actually a ďrealĒ decline in price of my holdings, but rather a ďtechnicalĒ issue with markets such as a flash crash or failure of interactive brokers risk systems. I worry that the markets ďtubesĒ or ďinfrastructureĒ may not be keeping up with changes in structure (increases algos and passives) and some type of market irregularity causing a couple minute crazy drop in stock price and triggering a forced liquidation.

I also worry about a failure of interactive brokers. Despite having seemingly better systems than everyone else they do occasionally lose large amounts of money when customers blow up.

For this reason, I am hesitant to use Interactive Brokers as my sole account. I keep unlevered accounts at Fidelity and my IRAís are obviously  unlevered as well. I keep my operating cash at a bank. I also use deep ITM long term call options where available to achieve similar leverage without using margin loans, though this has to be evaluated case by cas and can be very expensive relative to margin rates.

Just something to think about. There are remote risks that are amplified when taking on any kind of mark to market leverage.

Indexer

  • Handlebar Stache
  • *****
  • Posts: 1437
Re: Margin loan through Interactive Brokers
« Reply #22 on: July 24, 2019, 07:15:43 PM »
The way you are planning to use leverage is pretty responsible, at least relative to how others use leverage.

The one thing that would make me extra cautious about using leverage right now is Buffett's old quote, "be greedy when others are fearful and fearful when others are greedy."

Adding leverage when the market is hitting all time highs, up 20% YTD, and up 300% in this bull market is a textbook example of being greedy when others are greedy.

If I found myself doing this, I would question why I'm doing it. Yes it could speed up FIRE, or it could push it back too. If you really want to make your portfolio more aggressive, I would look at making the stock/bond allocation more aggressive before adding leverage.

Nounoon

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Age: 33
  • Location: Dubai - United Arab Emirates
  • French Project Manager living in the Middle East
Re: Margin loan through Interactive Brokers
« Reply #23 on: July 25, 2019, 12:29:23 AM »
The one thing that keeps me up at night is not actually a ďrealĒ decline in price of my holdings, but rather a ďtechnicalĒ issue with markets such as a flash crash or failure of interactive brokers risk systems. I worry that the markets ďtubesĒ or ďinfrastructureĒ may not be keeping up with changes in structure (increases algos and passives) and some type of market irregularity causing a couple minute crazy drop in stock price and triggering a forced liquidation.

I also worry about a failure of interactive brokers. Despite having seemingly better systems than everyone else they do occasionally lose large amounts of money when customers blow up.

This is a sensible piece of advice that I had not think of, it does have to be integrated in the risk evaluation. Thanks!

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 2214
Re: Margin loan through Interactive Brokers
« Reply #24 on: July 25, 2019, 02:48:56 PM »
Your goal is to magnify returns... could you wait until a crash to start that loan?
The downside being that right after a crash, loans are harder to get and interest rates tend to be higher.
I see your point, but I am not a fan of trying to time the market, I am more concerned about opportunity losses. I have checked past performance, since 1972 the worst year-on-year of the portfolio is -4.2% (non-leveraged, before ETF Fees, this is based on asset class exposure, max drawdown <16%), itís only 40% stocks (20% large cap, 20% small value, 40% Long term treasury, 10% Gold and 10% cash, weighted average cost of ETF 0.13%). Even considering an interest rate double of what it is currently on IB, no portfolio reach margin call over any period of time in a 10k Monte Carlo simulations. So it is indeed a calculated risk.
Oh, thanks for the additional information - that changes my answer.

Most long-term performance of a portfolio comes from equities, yet you only have 40% equities.  Leverage magnifies losses, but you can do that yourself without it: add more equities.  Just so you know, 60% equities/40% bonds is considered a very conventional retirement portfolio.

So what if you did that?
30% large cap
30% small/value
28% long-term bonds
06% gold
06% cash

One problem you won't find in back testing: long-term bonds got a significant boost from falling interest rates over the past 30+ years.  But interest rates are at historical lows.  It doesn't seem possible for long-term bonds to fall much further.  You might want to rethink that as the largest allocation in your portfolio.  Maybe go with the bond market (Vanguard Total Bond ETF, BND, for example).