Risks of Margin Account (VBS)

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SeaGSB
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Risks of Margin Account (VBS)

Postby SeaGSB » Mon Mar 20, 2017 2:04 am

When I opened my Vanguard brokerage account 15 years ago, I requested it be enabled for margin trading. Soon after, I decided that buying on margin / short selling was inappropriate for me. The account has been zero balance for approximately 10 years as I am now invested solely in mutual funds.

I am considering upgrading my account (combining mutual fund + brokerage) due to Vanguard's nagging and also am considering buying ETFs. My concern is that even if I don't use margin, there could be a downside to being margin-enabled. For example, could my securities be hypothecated and could I receive "Substitute Payments in Lieu of Dividends"?

Are these risks real? I guess I could ask for my brokerage account to be converted to a cash account, but you can't do that online and I've never had a positive experience talking to VBS customer support.

Thank you.

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nisiprius
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Re: Risks of Margin Account (VBS)

Postby nisiprius » Mon Mar 20, 2017 7:24 am

SeaGSB wrote:When I opened my Vanguard brokerage account 15 years ago, I requested it be enabled for margin trading. Soon after, I decided that buying on margin / short selling was inappropriate for me.
That, to me, is a good enough reason to get the margin capability disabled.
...I guess I could ask for my brokerage account to be converted to a cash account, but you can't do that online and I've never had a positive experience talking to VBS customer support...
Shrug. You've stated your low expectations of Vanguard. Why not give it a shot now and tell us what happens? Budget a certain number of minutes you are willing to spend on getting it resolved. If you want to treat it truly as a game, find an online stopwatch app and literally track minutes. Then call Vanguard and tell us what actually happened. If it's unsatisfactory, you'll have a nice story to tell here and I for one will say "looks like you predicted correctly, sorry you wasted your time." But, I dunno, I'm thinking there's at least a 25% chance it will be easy--although I suspect it will end by your having to mail them a piece of paper, hopefully not one that needs to be notarized.
Last edited by nisiprius on Mon Mar 20, 2017 7:29 am, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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nisiprius
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Re: Risks of Margin Account (VBS)

Postby nisiprius » Mon Mar 20, 2017 7:28 am

Here's a very old post in this forum, which might or might not still be relevant: Margin Account Dangers Today, by StoneReader, Mon Jul 14, 2008.
The safest thing to do is to convert your margin account to a cash account. You can not do this online or by phone. Vanguard requires a letter requesting the change and signed by the account principals to be sent to Vanguard by either FAX or regular mail.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Valuethinker
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Re: Risks of Margin Account (VBS)

Postby Valuethinker » Mon Mar 20, 2017 10:20 am

nisiprius wrote:Here's a very old post in this forum, which might or might not still be relevant: Margin Account Dangers Today, by StoneReader, Mon Jul 14, 2008.
The safest thing to do is to convert your margin account to a cash account. You can not do this online or by phone. Vanguard requires a letter requesting the change and signed by the account principals to be sent to Vanguard by either FAX or regular mail.


My own view is the major risk of a margin account is that we might change, cognitively:

- this could be as the result of dementia

- or it could be the result of a side effect of a new drug, or simply an indiagnosed illness

- or it could be gambling mania or the like, the potential for which has always been there, but finally surfaces

If you read accounts of middle aged or later drug addicts, gambling addicts, people who in some way lose large amounts of money, they don't read like people very different from the rest of us. However much there is this struggle to account for the excessive behaviour, to link it to some character "weakness" it seems to come back to the wrong combination of genes, life experiences & present circumstances, and no one can say how much of wish.

If I think of people I know who lost thousands, 10s of thousands, hundreds of thousands, millions, on speculation in stocks & shares, property, derivative vehicles etc, they were accountants, MBAs, even lawyers. Not unsophisticated people.

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jhfenton
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Re: Risks of Margin Account (VBS)

Postby jhfenton » Mon Mar 20, 2017 10:36 am

nisiprius wrote:Here's a very old post in this forum, which might or might not still be relevant: Margin Account Dangers Today, by StoneReader, Mon Jul 14, 2008.
The safest thing to do is to convert your margin account to a cash account. You can not do this online or by phone. Vanguard requires a letter requesting the change and signed by the account principals to be sent to Vanguard by either FAX or regular mail.

Vanguard converted our joint taxable margin account to cash based on a phone request from me (and effectively my wife, since I have full agent authorization). We did it to get around a Vanguard system bug that I cleverly discovered shortly after opening our 5 accounts in October 2015.

I have a thread on BH on the topic, but the short version is that the Vanguard system choked making a Retirement contribution from a margin account. For example, let's say on Monday that I exchanged $500 from VOHIX (OH Long-Term Tax Exempt) to VTMGX (Developed Markets) in my Roth IRA. The system would show a $500 sale of VOHIX, a $500 buy of VTMGX, and a $500 cash transfer from Taxable to Roth. So far, so good. The buy and sale would go through. At 5:00 AM on Tuesday morning, everything would look great, with the buy and sale complete and the cash exchange still pending. Sometime around 6 or 7, the cash transfer would disappear, leaving a $500 debit in the Roth IRA and $500 cash in Taxable. It took them a while to figure out what was happening.

Their solution, beyond saying they would try to fix the systems, was to margin the retirement accounts (limited margin) or de-margin the taxable account. We chose the latter.

The other practical disadvantage to a margin account is that you get dinged for two days of margin interest if you sell an ETF and buy a mutual fund. In a cash account, Vanguard eats the float.

bigred77
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Re: Risks of Margin Account (VBS)

Postby bigred77 » Mon Mar 20, 2017 10:54 am

If you want access to a margin enabled account, then Vanguard would not be my custodian of choice. I would probably use Interactive Brokers. They are much cheaper.

If you don't want or need margin, then Vanguard is the place to be if you want to use their mutual funds and/or ETFs. Just make sure the account is margin disabled.


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