New investor, regret minimization & leverage - recipe for disaster?

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Topic Author
todaysBob
Posts: 48
Joined: Mon Mar 02, 2020 6:39 pm

New investor, regret minimization & leverage - recipe for disaster?

Post by todaysBob »

Update
After thinking through this a little more, here is my updated plan-

1. I want to stay fully invested(100% equities) to maximize my return since I don't need this money hopefully for 30+ years.
2. I do want to make use of these big corrections though, i.e put more money in whenever market tanks. I won't have that option because of #1.
So alternatively, when I write my IPS I am thinking of saying something like -
"Use x% of margin in IB if market falls x% where x = 10, 20, 30, 40 or 50". i.e I won't start buying on margin until there is at-least a 10% correction and will keep buying all the way down to 50%.
3. I did end up using good amount of margin at IB already but plan to pay it all by the end of year(sooner possibly). So in future I will only be using margins as per #2.

Cost of margin as I said before is almost free because of the dividends. Doesn't look like interest rates will rise anytime soon either.

Re:margin call, IB's Portfolio margin requires only 15% equity. They might increase it during turbulent time and I would have to pivot based on that. Current plan is assuming it stays at 15% and interest rates stay low. Per my calculations in current scenario even if S&P goes to 1500, I shouldn't get a margin call.
[/Update]

Background
35 years old. Prior investing experience was mesh up of trials and failures with options/crypto/private equity etc! Realized what stupidity I was up to all these years after reading through posts here. You guys are amazing and have so much clarity in your answers! Looking some for myself.

Situation
I had been following bogleheads since October, wanting to learn investing and then make use of my savings and recent RSU vests with hopefully better results.
I felt I had got it and finally had the courage to go all in. Reading through previous posts for dca vs lump sum, decided to go lump sum with a purchase of $600k [vtsax:vtiax:vbtlax 60:30:10] on wonderful afternoon of 02/19 :oops: :D

On 03/11, I now have unrealized losses of $120k(and if futures are any indication, another $25k tomorrow) - all in sweet and short span of 3 weeks!

Not planning to sell a single stock though, hopefully for many years to come.

Problem
I do feel frustrated for missing out on an easy $100-150k gain if I had dcaed or just waited for couple of weeks. Specially after not being in market from 2013-2019.
(I know if won't matter in 30+ years when I retire but getting a head start of 20-25% gain in first month of investing would have been awesome!)

To minimize my regret of missing out, I am doing something dangerous which this forum has usually advised against, i.e using leverage to buy at these sale prices. I am moving half of my assets from VG->IB and then use them as collateral to buy more of VTSAX/VTIAX. I qualified for a Portfolio Margin account as well and interest rates are very low, like 2.2%. I feel like I do hit the goldilock conditions required to make it work.

My rational to give leverage a try is-
1) I am expecting reasonable cash flows for next 3 years. Should have extra ~$250k to invest in market every year at-least for next 3 years.
So, let's say if I move $250k of my money to IB and borrow another $250k, I should be able to pay it back pretty quickly.
2) These 20-25% discounts on S&P 500 don't come very often(I only see 2011 & 2018 in this bull market). So buying at these prices I can make up for not being in the market all these years. I didn't know much about investing and played with stupid stuff like options/crypto etc past 5 years.
3) I am on a work visa, so worst case if I do loose my job and don't have the funds to keep fueling these accounts, it won't matter as I will have to go back to my home country in 30 days anyways.
4) Cost of this leverage as per my understanding will be negligible, dividends from shares bought on loan should cover the interest part.

I do get this sinking feeling of I am doing something wrong, which has usually been right but still can't stop my greed to try it out.

Disaster in making?
Last edited by todaysBob on Sun Mar 15, 2020 9:12 pm, edited 1 time in total.
kareysue
Posts: 74
Joined: Fri Oct 10, 2008 10:07 pm

Re: New investor, regret minimization & leverage - recipe for disaster?

Post by kareysue »

I think you are young. So nothing to worry about. But just wait for the market to settle first. How do you know the market won't fall back to 2008 levels? With democratic president, low oil prices, and other possible black swan events, maybe you can look into buying ibonds or more conservative investments. Some bear markets last a long time.
Caduceus
Posts: 2862
Joined: Mon Sep 17, 2012 1:47 am

Re: New investor, regret minimization & leverage - recipe for disaster?

Post by Caduceus »

Hi, and welcome to the board.

I totally understand where you are coming from as I am partly in the same position. I was 100% allocated to cash (pure luck) at the beginning of the year but deployed 50% of my cash before the market experienced its most severe downturns, so the thought of "if i had just waited three more weeks" is very understandable.

But a couple of thoughts:

It's very tempting to try to make back your "losses" by doubling down. You need to ask yourself if that's rational or emotional. You should not be trying to make investment decisions with the goal of "recouping" losses. Look forward, not backwards, and ask yourself at any given moment what the right investment decision is.

Using leverage may or may not be risky - but if you're talking about posting collateral and borrowing on margin, that sounds very risky to me. I'm not going to say much more than that because I am personally going to buy some in the money call options on particular positions I like - but none of these are leveraged the way you are describing. The most I'll have to lose is the call option premium itself - and make no mistake, this is far from a sure thing. I'm using it more as a cash-flow tool than a bet on prices. I don't have the income right now to invest as much as I want to - even with the spare cash I haven't deployed yet, so I am happy to pay the option premium as the cost of locking in the price I want for the next two years. If the market hasn't gone up by then, I'll be able to invest all my savings in this stock at the price I want. If the market has gone up by then, I'll buy in at higher prices, but the option profits will essentially lower my cost basis. It's a leveraged position, but no margin, no collateral, and the maximum loss is known. I am only buying as many options to cover as many shares as I know I will be able to buy in two years, which is when the option expires.

What you are doing, however, sounds extremely risky. And, personally, I would not be employing such a strategy on the overall stock market, which doesn't even look that cheap to begin with, even after these drops.

I think the healthiest thing to do is accept that sometimes you get unlucky breaks. What's the chance you put in everything at a market top? Crap happens. You'll recover from it - but don't make the mistake of exposing yourself to further bad breaks because of something out of your control. Good luck!
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Tamarind
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Re: New investor, regret minimization & leverage - recipe for disaster?

Post by Tamarind »

Your experience is a great indication that the drop was not "obvious" in advance. You had all the info everyone else did, but only in hindsight do we organize it in our heads to point out what was about to happen.

So, remember that you don't know what will happen next - you've just had a great lesson on that topic.

What makes you think your "sale price" holdings won't drop another 20% next week?

I think leverage to reduce regret is a mistake. You would regret a margin call even more.
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Stef
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Joined: Thu Oct 10, 2019 10:13 am

Re: New investor, regret minimization & leverage - recipe for disaster?

Post by Stef »

I feel you OP. I'm 29 years old, learned everything I know about investing in the last 9 months and lump sum invested my life savings (18.5k) in December 2019 and another 8k (my bonus) on February 20th. I know it's not much, but starting my investment career with a 20% loss in 3 weeks is hard. Logic said I should lump sum everything I save, which I did. I got unlucky this time, but that's how it is. In the long run I'll be better off with this strategy than doing DCA or even waiting in cash for a correction.

I'm even thinking about buying UPRO when it feels like the bottom, but I want to stay the course and don't start gambling. I would suggest doing the same. Just keep investing and forget about your bad start.
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Ramjet
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Location: Cleveland

Re: New investor, regret minimization & leverage - recipe for disaster?

Post by Ramjet »

Stef wrote: Thu Mar 12, 2020 5:34 am I feel you OP. I'm 29 years old, learned everything I know about investing in the last 9 months and lump sum invested my life savings (18.5k) in December 2019 and another 8k (my bonus) on February 20th. I know it's not much, but starting my investment career with a 20% loss in 3 weeks is hard. Logic said I should lump sum everything I save, which I did. I got unlucky this time, but that's how it is. In the long run I'll be better off with this strategy than doing DCA or even waiting in cash for a correction.

I'm even thinking about buying UPRO when it feels like the bottom, but I want to stay the course and don't start gambling. I would suggest doing the same. Just keep investing and forget about your bad start.
Similar scenario for me in 2008
Caduceus
Posts: 2862
Joined: Mon Sep 17, 2012 1:47 am

Re: New investor, regret minimization & leverage - recipe for disaster?

Post by Caduceus »

Stef wrote: Thu Mar 12, 2020 5:34 am I feel you OP. I'm 29 years old, learned everything I know about investing in the last 9 months and lump sum invested my life savings (18.5k) in December 2019 and another 8k (my bonus) on February 20th. I know it's not much, but starting my investment career with a 20% loss in 3 weeks is hard. Logic said I should lump sum everything I save, which I did. I got unlucky this time, but that's how it is. In the long run I'll be better off with this strategy than doing DCA or even waiting in cash for a correction.

I'm even thinking about buying UPRO when it feels like the bottom, but I want to stay the course and don't start gambling. I would suggest doing the same. Just keep investing and forget about your bad start.
The price at which you entered in doesn't matter, if you have more money you intend to save. Warren Buffett's response is to say that if hamburgers go down in price the next day, he goesn't get unhappy that he bought hamburgers at a more expensive price yesterday. Instead, he's quite happy that hamburgers have gone down in price.

When you invested everything in Dec 2019, what was the rational thing to hope for the markets to do? To go down or up? If you'd said up you'd have been wrong. Since you are still buying, you want the markets to go down, and stay down. The interim fluctuations of your earlier investments don't matter unless you intend to sell them.

Yes, it would have been nice to lump sum everything three weeks later. But the basic point remains: as long as you are a net buyer of stocks, the rational thing for you to do is hope that stocks go down, not up. No one ever says "hey, i bought my first house for 1 million, and three weeks later, I want to buy a second identical house but I'm so upset the seller is now offering it to me for $800,000"

People do this with stocks because they don't see them as real assets but as numbers jumping down on a screen. When you look back later, 29 is such a young age - you'll realize that any money you can put in over the next months and years will do better if stock markets stay down.
Topic Author
todaysBob
Posts: 48
Joined: Mon Mar 02, 2020 6:39 pm

Re: New investor, regret minimization & leverage - recipe for disaster?

Post by todaysBob »

kareysue wrote: Thu Mar 12, 2020 4:35 am I think you are young. So nothing to worry about. But just wait for the market to settle first. How do you know the market won't fall back to 2008 levels? With democratic president, low oil prices, and other possible black swan events, maybe you can look into buying ibonds or more conservative investments. Some bear markets last a long time.
You are right, no way to know the bottom. So, I am buying for every 100 points fall in S&P 500 and have planned it out all the way till 1800 on S&P 500.
That way I won't be left out in case market suddenly shoots up. Even with market falling ~45%(3400->1800) looks like I will still be clear of margin calls.
kareysue
Posts: 74
Joined: Fri Oct 10, 2008 10:07 pm

Re: New investor, regret minimization & leverage - recipe for disaster?

Post by kareysue »

why till 1800?
Topic Author
todaysBob
Posts: 48
Joined: Mon Mar 02, 2020 6:39 pm

Re: New investor, regret minimization & leverage - recipe for disaster?

Post by todaysBob »

kareysue wrote: Thu Mar 12, 2020 2:57 pm why till 1800?
I would have to give up at some point! But yeah anything is possible.

Please note that monthly contributions($4.5k) will still be going into the market every month. The margin is reserved for minimizing my regret of missing out!
Topic Author
todaysBob
Posts: 48
Joined: Mon Mar 02, 2020 6:39 pm

Re: New investor, regret minimization & leverage - recipe for disaster?

Post by todaysBob »

Tamarind wrote: Thu Mar 12, 2020 4:58 am Your experience is a great indication that the drop was not "obvious" in advance. You had all the info everyone else did, but only in hindsight do we organize it in our heads to point out what was about to happen.

So, remember that you don't know what will happen next - you've just had a great lesson on that topic.

What makes you think your "sale price" holdings won't drop another 20% next week?

I think leverage to reduce regret is a mistake. You would regret a margin call even more.
Thanks much for the reply Tamarind and apologies for only responding now.
Sure nobody knows what happens next but we all believe(hope?) market will be back to ATHs - whether that takes 6 weeks, 6 months or 6 years is not known. [You can bring Japan here but I am ok taking that risk].

After thinking through this a little more, here is my plan-

1. I want to stay fully invested(100% equities) to maximize my return since I don't need this money hopefully for 30+ years.
2. I do want to make use of these big corrections though, i.e put more money in whenever market tanks. I won't have that option because of #1.
So alternatively, when I write my IPS I am thinking of saying something like -
"Use x% of margin in IB if market falls x% where x = 10, 20, 30, 40 or 50". i.e I won't start buying more until there is at-least a 10% correction and will keep buying all the way down to 50%.
3. I did end up using good amount of margin at IB already but plan to pay it all by the end of year(sooner possibly). So in future I will only be using margins as per #2.

Cost of margin as I said before is almost free because of the dividends. Doesn't look like interest rates will rise anytime soon either.

Re:margin call, IB's Portfolio margin requires only 15% equity. They might increase it during turbulent time and I would have to pivot based on that. Current plan is assuming it stays at 15% and interest rates stay low. Per my calculations in current scenario even if S&P goes to 1500, I shouldn't get a margin call.

I know its still risky but way I see it is this lets me buy stocks at 2017, 2018 and 2019 prices(maybe even 2013 soon?) and makes me feel like I have been investing since 2013 which I should have done in the first place!

Finally since I am doing it all on total stock market etfs(vti/spy) it makes it somewhat less risky than doing on TSLA or AMD?
Topic Author
todaysBob
Posts: 48
Joined: Mon Mar 02, 2020 6:39 pm

Re: New investor, regret minimization & leverage - recipe for disaster?

Post by todaysBob »

Caduceus wrote: Thu Mar 12, 2020 4:45 am Hi, and welcome to the board.

I totally understand where you are coming from as I am partly in the same position. I was 100% allocated to cash (pure luck) at the beginning of the year but deployed 50% of my cash before the market experienced its most severe downturns, so the thought of "if i had just waited three more weeks" is very understandable.

But a couple of thoughts:

It's very tempting to try to make back your "losses" by doubling down. You need to ask yourself if that's rational or emotional. You should not be trying to make investment decisions with the goal of "recouping" losses. Look forward, not backwards, and ask yourself at any given moment what the right investment decision is.

Using leverage may or may not be risky - but if you're talking about posting collateral and borrowing on margin, that sounds very risky to me. I'm not going to say much more than that because I am personally going to buy some in the money call options on particular positions I like - but none of these are leveraged the way you are describing. The most I'll have to lose is the call option premium itself - and make no mistake, this is far from a sure thing. I'm using it more as a cash-flow tool than a bet on prices. I don't have the income right now to invest as much as I want to - even with the spare cash I haven't deployed yet, so I am happy to pay the option premium as the cost of locking in the price I want for the next two years. If the market hasn't gone up by then, I'll be able to invest all my savings in this stock at the price I want. If the market has gone up by then, I'll buy in at higher prices, but the option profits will essentially lower my cost basis. It's a leveraged position, but no margin, no collateral, and the maximum loss is known. I am only buying as many options to cover as many shares as I know I will be able to buy in two years, which is when the option expires.

What you are doing, however, sounds extremely risky. And, personally, I would not be employing such a strategy on the overall stock market, which doesn't even look that cheap to begin with, even after these drops.

I think the healthiest thing to do is accept that sometimes you get unlucky breaks. What's the chance you put in everything at a market top? Crap happens. You'll recover from it - but don't make the mistake of exposing yourself to further bad breaks because of something out of your control. Good luck!
Thanks much for the perspective, good to hear from someone in the same situation and how you are going about it.
After thinking through this more, I now plan to use margin for sizable market corrections only. I posted the plan above replying to Tamarind. What are your thoughts on the new plan?
Topic Author
todaysBob
Posts: 48
Joined: Mon Mar 02, 2020 6:39 pm

Re: New investor, regret minimization & leverage - recipe for disaster?

Post by todaysBob »

Stef wrote: Thu Mar 12, 2020 5:34 am People do this with stocks because they don't see them as real assets but as numbers jumping down on a screen. When you look back later, 29 is such a young age - you'll realize that any money you can put in over the next months and years will do better if stock markets stay down.
Thanks much for the sage advice Caduceus!
I do understand stocks staying down is good for an accumulator and have actually been preaching that to all my friends!
Infact this meltdown and my company now allowing after tax contributions has made sure I will be maxing out $57k/year($4750/month) for my 401k.

But when you are a first time investor and see $175k evaporate in 3 weeks(although only on paper) you want to do something about. I know BH way is to not do anything but I atleast wanted to explore. I posted my plan above on how to intend to use margin going forward. Will be really happy to hear your thoughts on that!
Topic Author
todaysBob
Posts: 48
Joined: Mon Mar 02, 2020 6:39 pm

Re: New investor, regret minimization & leverage - recipe for disaster?

Post by todaysBob »

Updated the question with my modified plan. Will really appreciate everyone's thoughts!
Topic Author
todaysBob
Posts: 48
Joined: Mon Mar 02, 2020 6:39 pm

Re: New investor, regret minimization & leverage - recipe for disaster?

Post by todaysBob »

Stef wrote: Thu Mar 12, 2020 5:34 am I feel you OP. I'm 29 years old, learned everything I know about investing in the last 9 months and lump sum invested my life savings (18.5k) in December 2019 and another 8k (my bonus) on February 20th. I know it's not much, but starting my investment career with a 20% loss in 3 weeks is hard. Logic said I should lump sum everything I save, which I did. I got unlucky this time, but that's how it is. In the long run I'll be better off with this strategy than doing DCA or even waiting in cash for a correction.

I'm even thinking about buying UPRO when it feels like the bottom, but I want to stay the course and don't start gambling. I would suggest doing the same. Just keep investing and forget about your bad start.
Thanks much for sharing your story stef! Definitely helpful to hear from other who are going through similar thoughts.
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