Which category to liquidate to cover a margin

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ddd
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Which category to liquidate to cover a margin

Post by ddd » Tue Jun 18, 2019 11:03 pm

For some reason, I need to provide a cash loan to a close relative on short notice. This leaves me with a large 8.325% margin at Fidelity. I think liquidating a portion of my portfolio is likely less expensive than paying the margin rate. My emergency cash reserve is intact, so are our day jobs.

My question is which category should I sell. The most matured holdings will give me the most gain but also the most tax liability. Whereas the losing equities or those with moderate gains are less impactful in tax but I will be selling them at their lows. For example, my international/bond holdings are at a 3% gain only. My other positions in large, mid, small caps are all at 30-90%.

After the liquidation, I can most likely recover those positions within 6-12 months. Is this a reasonable approach? Appreciate your opinions!

123
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Re: Which category to liquidate to cover a margin

Post by 123 » Wed Jun 19, 2019 12:05 am

I would liquidate positions that incur the lowest taxes in doing so. There is no reason to pay a larger tax earlier than necessary.
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ResearchMed
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Re: Which category to liquidate to cover a margin

Post by ResearchMed » Wed Jun 19, 2019 12:34 am

ddd wrote:
Tue Jun 18, 2019 11:03 pm
For some reason, I need to provide a cash loan to a close relative on short notice. This leaves me with a large 8.325% margin at Fidelity. I think liquidating a portion of my portfolio is likely less expensive than paying the margin rate. My emergency cash reserve is intact, so are our day jobs.

My question is which category should I sell. The most matured holdings will give me the most gain but also the most tax liability. Whereas the losing equities or those with moderate gains are less impactful in tax but I will be selling them at their lows. For example, my international/bond holdings are at a 3% gain only. My other positions in large, mid, small caps are all at 30-90%.

After the liquidation, I can most likely recover those positions within 6-12 months. Is this a reasonable approach? Appreciate your opinions!
Can you use some of your "intact" emergency fund? Then you might not ever need to sell anything. But the holdings would be there in case you didn't get paid back or paid back in time, etc.
You'd then have the 6-12 months to replenish the EF anyway.

GC
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kevinpet
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Re: Which category to liquidate to cover a margin

Post by kevinpet » Wed Jun 19, 2019 12:51 am

ddd wrote:
Tue Jun 18, 2019 11:03 pm
For some reason, I need to provide a cash loan to a close relative on short notice. This leaves me with a large 8.325% margin at Fidelity. I think liquidating a portion of my portfolio is likely less expensive than paying the margin rate. My emergency cash reserve is intact, so are our day jobs.

My question is which category should I sell. The most matured holdings will give me the most gain but also the most tax liability. Whereas the losing equities or those with moderate gains are less impactful in tax but I will be selling them at their lows. For example, my international/bond holdings are at a 3% gain only. My other positions in large, mid, small caps are all at 30-90%.

After the liquidation, I can most likely recover those positions within 6-12 months. Is this a reasonable approach? Appreciate your opinions!
That's a pretty high rate, and at 6-12 months, I think you'd come out ahead with almost any amount of taxes (considering that you will likely eventually liquidate even if in 10 years, and if you rebuy in 6-12 months, that may give you a reset of basis making TLH more effective).

As to what to sell, I would sell in such a proportion to bring my portfolio back to my desired target asset allocation. The recent history of what has gone up and what down isn't predictive of what will go up next.

Topic Author
ddd
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Re: Which category to liquidate to cover a margin

Post by ddd » Wed Jun 19, 2019 8:50 am

ResearchMed wrote:
Wed Jun 19, 2019 12:34 am
ddd wrote:
Tue Jun 18, 2019 11:03 pm
For some reason, I need to provide a cash loan to a close relative on short notice. This leaves me with a large 8.325% margin at Fidelity. I think liquidating a portion of my portfolio is likely less expensive than paying the margin rate. My emergency cash reserve is intact, so are our day jobs.

My question is which category should I sell. The most matured holdings will give me the most gain but also the most tax liability. Whereas the losing equities or those with moderate gains are less impactful in tax but I will be selling them at their lows. For example, my international/bond holdings are at a 3% gain only. My other positions in large, mid, small caps are all at 30-90%.

After the liquidation, I can most likely recover those positions within 6-12 months. Is this a reasonable approach? Appreciate your opinions!
Can you use some of your "intact" emergency fund? Then you might not ever need to sell anything. But the holdings would be there in case you didn't get paid back or paid back in time, etc.
You'd then have the 6-12 months to replenish the EF anyway.

GC
The loan is 8x of my emergency fund. Thanks!

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grabiner
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Re: Which category to liquidate to cover a margin

Post by grabiner » Wed Jun 19, 2019 10:33 pm

Do you have a 401(k) or IRA? If so, you may be able to adjust your overall allocation. For example, if you sell a bond fund to minimize taxes, but would prefer to sell stock, you can move an equal amount from stock to bonds in your 401(k).

This is how I view the issue of paying off my mortgage. If I decide to pay it off, I will have to sell stock because that is what I have in my taxable account, but I will move an equal amount from bonds to stock in my employer plan. (I won't do this now because I would have a large capital gain on the sale, but if the market drops to eliminate the capital gain, this would allow me to pay off my mortgage without decreasing my stock allocation in a down market.)
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CurlyDave
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Re: Which category to liquidate to cover a margin

Post by CurlyDave » Wed Jun 19, 2019 11:05 pm

Depending on your total holdings, your best course might be to negotiate a lower margin rate with Fidelity.

I was able to do this with my long-term major brokerage house when I needed a substantial amount of cash on short notice for a very similar reason. The magic words I used were "Interactive Brokers". IB currently has margin rates of 3.87% or less depending on how much money you borrow. I just called and told them that I preferred to keep my account with them, but they needed to do better than their standard margin rates. Two days later they called back and I had a very much lower margin rate.

I could not get the rate down to match IB, but they came pretty close.

The second thing I can tell you is that I told the people who borrowed from me exactly what my interest costs were and that in order to get the loan they would have to pay that interest. I was not going to make a profit on the transaction, but I was not going to take a net loss either. YMMV on that.

Topic Author
ddd
Posts: 57
Joined: Wed Apr 06, 2016 9:27 pm

Re: Which category to liquidate to cover a margin

Post by ddd » Thu Jun 20, 2019 12:25 am

@grabiner, rebalancing in 401k is a great idea! I will probably do that if liquidation is imminent. Thanks!

@CurlyDave, I never thought that the margin rates were negotiable. Will call them tomorrow. I might as well keep a portion of the balance if they offer me 3.37%.

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