Should I be worried about my <20% margin in IB?

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Topic Author
todaysBob
Posts: 69
Joined: Mon Mar 02, 2020 6:39 pm

Should I be worried about my <20% margin in IB?

Post by todaysBob »

I had a rough start to my bogleheads investing journey(after several other failures with options, crypto etc before I learned about this forum). viewtopic.php?f=1&t=307004 was my first post here!

Gist of that post is that I made a big lump sum contribution($600k) on 02/19/2020 and that day ofcourse was the peak of entire bull market from 2009-2020(which since 2013 I watched from the sidelines). Seeing my portfolio down by $120k in 3 weeks and no more money left to invest but quarterly RSU vests coming in rest of the year, I looked for alternatives to take advantage of the market being down so much. I convinced myself this is once in a lifetime opportunity and would help me remedy my previous mistakes of not investing properly. That led to Interactive Brokers, recommended for best margin rates on Bogleheads. I moved all my taxable holdings(~$450k of the original investment) from VG to IB, converted them to ETFs and started buying a lot on margin. Market kept going down though. By March 23rd, I was down about $250k just in IB and some more in VG. My equity was about $200k and margin was probably around $440k.

It was getting very dangerous but because of big losses I had already seen in my pre bogleheads life(although none came close to what was happening at that time) I was able to go through it w/o selling a single share. Then suddenly things turned around. Market started going up and never looked back!
I did a cash out refinance and new RSU vests coming in made sure I ran the Margin down to $0 in few months(If I remember correctly by end of August all the margin was paid off).

Then when market had ~10% corrections in Sept and October I established Margin again. This time I kept it to only 10% of my holdings. In Jan, I decided to pay off both my cars due to better interest rates in IB compared to car loans and now margin is close to 18% of my holdings.

So my current IB balance is around $1.375M(~$480k unrealized gains and $120k of TLH, so net $360k of gains), out of which ~210k is on Margin. I was convinced I want to always keep this margin around and maybe only get to $0 few years before retirement. I have goals of retiring around 50, 14 more years to go! Net worth is ~$2.5M. Rest is retirement account($650k) and home equity plus some other misc stuff.

Getting to my actual question: After seeing few threads suggesting a flash crash can wipe out the whole account, I am not so sure now about keeping this margin around. My holdings are all broad market index funds(ITOT/VTI/VXUS/VWO) and with < 20% margin it will take 80% market crash to wipe me out. I have IB portfolio margin and it only requires 15% equity.

So it feels like low probability but could still happen, right? Also I know there will be questions around "is the margin really needed in my case?" And I agree, I am fortunate enough to have this nest egg at 36 years and probably don't need to add more risk. But lure of 1% interest rates with very low chances of margin call are still hard to pass on.

PS1: Please note that other than the margin and my obsession to keep watching stock prices, I have been following boglehead principles pretty well. Haven't made any change to the portfolio in an year, have been maxing out all tax advantaged spaces(almost $100k/year in 401k/Roth IRA/Megaroth backdoor/HSA/ESPP etc), asset allocation is set to VTI:VXUS:VWO as 50:33:17 to get to 50:25:25 US:Developed:Emerging

PS2: viewtopic.php?f=2&t=333095&p=5675611#p5675611 for my other heroic acts!
sfmurph
Posts: 116
Joined: Mon Aug 12, 2019 8:15 pm

Re: Should I be worried about my <20% margin in IB?

Post by sfmurph »

todaysBob wrote: Wed Apr 07, 2021 8:09 pm Getting to my actual question: After seeing few threads suggesting a flash crash can wipe out the whole account, I am not so sure now about keeping this margin around. My holdings are all broad market index funds(ITOT/VTI/VXUS/VWO) and with < 20% margin it will take 80% market crash to wipe me out. I have IB portfolio margin and it only requires 15% equity.

So it feels like low probability but could still happen, right? Also I know there will be questions around "is the margin really needed in my case?" And I agree, I am fortunate enough to have this nest egg at 36 years and probably don't need to add more risk. But lure of 1% interest rates with very low chances of margin call are still hard to pass on.
In terms of risk/reward, you're very, very unlikely to get wiped out in a flash crash. All four of those ETFs are "Tier 1 NMS stocks" so have specific circuit breakers that apply to them, so a one-day flash crash "should be" impossible.

But.

You probably should add some bonds, mostly for the ballast (they mostly go up when stocks go down.

The problem would be a slow drawdown which would slowly push your margin level up.
AlohaJoe
Posts: 5847
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Should I be worried about my <20% margin in IB?

Post by AlohaJoe »

I have margin at IB (though these days it is down to ~5% thanks to market growth). I wouldn't worry much about anything under 25%, especially if your earnings allow you to pay reduce it by a decent amount over a reasonably short term.
Topic Author
todaysBob
Posts: 69
Joined: Mon Mar 02, 2020 6:39 pm

Re: Should I be worried about my <20% margin in IB?

Post by todaysBob »

sfmurph wrote: Wed Apr 07, 2021 10:59 pm
todaysBob wrote: Wed Apr 07, 2021 8:09 pm Getting to my actual question: After seeing few threads suggesting a flash crash can wipe out the whole account, I am not so sure now about keeping this margin around. My holdings are all broad market index funds(ITOT/VTI/VXUS/VWO) and with < 20% margin it will take 80% market crash to wipe me out. I have IB portfolio margin and it only requires 15% equity.

So it feels like low probability but could still happen, right? Also I know there will be questions around "is the margin really needed in my case?" And I agree, I am fortunate enough to have this nest egg at 36 years and probably don't need to add more risk. But lure of 1% interest rates with very low chances of margin call are still hard to pass on.
In terms of risk/reward, you're very, very unlikely to get wiped out in a flash crash. All four of those ETFs are "Tier 1 NMS stocks" so have specific circuit breakers that apply to them, so a one-day flash crash "should be" impossible.

But.

You probably should add some bonds, mostly for the ballast (they mostly go up when stocks go down.

The problem would be a slow drawdown which would slowly push your margin level up.
Thanks for the reassurance on flash crash sfmurph !

Regarding bonds, I do plan to add bonds but only slowly, like say 3%/year from age 40-50 and then stop there. That will give me 30% bonds that I will like in retirement. Doesn't having bonds and margin at the same time feel counterintuitive? Wouldn't I be 100% equity before considering margin?
Topic Author
todaysBob
Posts: 69
Joined: Mon Mar 02, 2020 6:39 pm

Re: Should I be worried about my <20% margin in IB?

Post by todaysBob »

AlohaJoe wrote: Wed Apr 07, 2021 11:09 pm I have margin at IB (though these days it is down to ~5% thanks to market growth). I wouldn't worry much about anything under 25%, especially if your earnings allow you to pay reduce it by a decent amount over a reasonably short term.
Thanks AlohaJoe! I feel better already.
Topic Author
todaysBob
Posts: 69
Joined: Mon Mar 02, 2020 6:39 pm

Re: Should I be worried about my <20% margin in IB?

Post by todaysBob »

I am surprised not many people want to laugh at my expense or ridicule my weird investing path so far :D
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