Why not use Margin Loan as eFund?

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AndroAsc
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Why not use Margin Loan as eFund?

Post by AndroAsc » Sat Sep 28, 2019 11:03 pm

Discovered a new thing today, and now I'm trying to figure out why all our conventional eFund advice is to sock it in savings/CDs/etc....

One of the highest APY for online savings is 2.4% APY, which is where my eFund will be.
Interactive Brokers offer margin loans for is 3.35% (I assume this is APR rate?), which is only +1% higher than savings account. This is for a $50k loan.

Margin loans are callable, yes. From IB:

Margin Loan + Margin Deposit = Market Value of Security
Margin Deposit >= Margin Requirement

Regulation T: US rules governing margin accounts.
Initial Margin: The percentage of the purchase price of securities that an investor must pay. Reg T calls for initial margin of up to 50%.
Maintenance Margin: The minimum amount of equity that must be maintained in the investor's margin account. Reg T calls for a maintenance margin of at least 25%.
Margin Call: When the balance in a margin account falls below the maintenance requirement, the broker can issue a margin call requiring the investor to deposit more cash, or the broker can liquidate the position. There are no margin calls at IB.


Is Initial Margin how much one could borrow? So if I had a $100k taxable account, I can borrow up to $50k on a margin loan?
It looks like the loan is only called if the Margin Deposit goes under the Margin Requirement. What is the Margin Deposit, is this the $100k I am borrowing from? And so the maintenance of 25%, does this means that the $100k portfolio, if it drops below $25k, then the $50k loan becomes callable? Can someone please help me with the terms here, it's not evident as to what exactly is the trigger value for the margin call.

In any case, one should be able to back-calculate a "worst case scenario" of say the taxable account drops by 75%, and figure out what the max margin loan can be without triggering the call event. Given that the loan rates are so low (and it looks like historically they have been this low tracking +1% against CDs and savings), it seems that the longer you use this margin loan eFund the better off you will be.

What I mean is that for every 1 year that you don't use a traditional savings/CD eFund, and assuming portfolio returns 7%, you get a +4.5% extra return each year (vs base of 2.5%). If you had a margin loan, then you lose -6% (assuming 3.5% margin loan and 2.5% base). It seems almost a no brainer that a margin loan eFund would in the long-term yield better results, because all your money is invested in your portfolio, and dipping into eFund is going to be an infrequent event.

Am I missing something here? Should I move my taxable assets to Interactive Broker now?

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Re: Why not use Margin Loan as eFund?

Post by AlohaJoe » Sat Sep 28, 2019 11:10 pm

Most people don't have a $100,000 taxable account, especially when they're at the phase of their life where they most need an emergency fund.

By the time most people have a $100,000 taxable account, you'll find many people saying they no longer need an emergency fund at all.

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AndroAsc
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Re: Why not use Margin Loan as eFund?

Post by AndroAsc » Sat Sep 28, 2019 11:15 pm

AlohaJoe wrote:
Sat Sep 28, 2019 11:10 pm
Most people don't have a $100,000 taxable account, especially when they're at the phase of their life where they most need an emergency fund.

By the time most people have a $100,000 taxable account, you'll find many people saying they no longer need an emergency fund at all.
Let's assume for discussion sake, the person has at least a $100k taxable account. Is there anything wrong in my analysis in using margin loan as eFund? And to be clear, this eFund is for stuff like unemployment, major medical, and not small misc things like car repair or a new computer...

I'm not all that for using taxable as eFund, as murphy law states that you will be forced to liquidate when the market crashes. But in this case, it seems that you don't need to liquidate, but you need to pay a low interest rate. I guess you are taking the bet that you will recover from the eFund trigger event (e.g. unemployment) within a year, and be able to pay off the margin loan relatively quickly.

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Re: Why not use Margin Loan as eFund?

Post by marcopolo » Sat Sep 28, 2019 11:28 pm

AndroAsc wrote:
Sat Sep 28, 2019 11:03 pm
Discovered a new thing today, and now I'm trying to figure out why all our conventional eFund advice is to sock it in savings/CDs/etc....

One of the highest APY for online savings is 2.4% APY, which is where my eFund will be.
Interactive Brokers offer margin loans for is 3.35% (I assume this is APR rate?), which is only +1% higher than savings account. This is for a $50k loan.

Margin loans are callable, yes. From IB:

Margin Loan + Margin Deposit = Market Value of Security
Margin Deposit >= Margin Requirement

Regulation T: US rules governing margin accounts.
Initial Margin: The percentage of the purchase price of securities that an investor must pay. Reg T calls for initial margin of up to 50%.
Maintenance Margin: The minimum amount of equity that must be maintained in the investor's margin account. Reg T calls for a maintenance margin of at least 25%.
Margin Call: When the balance in a margin account falls below the maintenance requirement, the broker can issue a margin call requiring the investor to deposit more cash, or the broker can liquidate the position. There are no margin calls at IB.


Is Initial Margin how much one could borrow? So if I had a $100k taxable account, I can borrow up to $50k on a margin loan?
It looks like the loan is only called if the Margin Deposit goes under the Margin Requirement. What is the Margin Deposit, is this the $100k I am borrowing from? And so the maintenance of 25%, does this means that the $100k portfolio, if it drops below $25k, then the $50k loan becomes callable? Can someone please help me with the terms here, it's not evident as to what exactly is the trigger value for the margin call.

In any case, one should be able to back-calculate a "worst case scenario" of say the taxable account drops by 75%, and figure out what the max margin loan can be without triggering the call event. Given that the loan rates are so low (and it looks like historically they have been this low tracking +1% against CDs and savings), it seems that the longer you use this margin loan eFund the better off you will be.

What I mean is that for every 1 year that you don't use a traditional savings/CD eFund, and assuming portfolio returns 7%, you get a +4.5% extra return each year (vs base of 2.5%). If you had a margin loan, then you lose -6% (assuming 3.5% margin loan and 2.5% base). It seems almost a no brainer that a margin loan eFund would in the long-term yield better results, because all your money is invested in your portfolio, and dipping into eFund is going to be an infrequent event.

Am I missing something here? Should I move my taxable assets to Interactive Broker now?
You should talk to the guy in the other thread who is arguing that you can't borrow money to invest in stocks :beer

What you are suggesting is not that uncommon. A lot of people don't have a separate emergency fund. We don't have one. A margin loan is probably "plan D" or lower on the list of things we could do to fund short term emergency needs.

I suspect every brokerage has different implementations on how they manage margin accounts. But, a 50% requirement is common. That means you can borrow (take margin loan) up to 50% of your assets in the margin account. But, you would not want to go that high typically because if your assets drop even a little bit (making your loan slightly more that 50%), you would be subject to a margin call. So, if you want to be able to avoid a margin call while markets drop 50%, you might want to limit your margin loan to 25% of your assets in the margin account.

How margin calls are handled can also differ, some brokerages will send a notice and give you a chance to add money to your account to avoid a forced sale. Others may simply sell some of the assets to get you back below the margin threshold.

You went awfully quickly from "can't borrow to buy stocks" to "should i go all in with IB margin account" awfully quickly. I would advise that you slow down a bit, and learn a little more about the details (pros and cons) of using margin and leverage before making wholesale changes to how you manage your eFund.

Good luck.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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JoMoney
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Re: Why not use Margin Loan as eFund?

Post by JoMoney » Sat Sep 28, 2019 11:32 pm

FWIW, one could synthesize a leverage portfolio using deep in the money call options on a ETF or index... They could even do it inside of a IRA. Then keep cash as an emergency fund while still being in a position that's synthetically fully invested or leveraged beyond 100% invested.

Most advise that even a 100% stock portfolio is too much risk. I could imagine being fully in stocks, while floating a few weeks expenses on a credit card until payment is due, but I think that's the limit I'd ever consider. Since deciding I was a passive investor I've gotten pretty lazy, a leveraged portfolio requires maintenance.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Why not use Margin Loan as eFund?

Post by HawkeyePierce » Sat Sep 28, 2019 11:34 pm

I don't know much about margin borrowing, but in a perfect storm like 2008 couldn't this plan turn around to bite you?

Imagine:

0) Assume you plan to use margin to fund your e-fund.

1) You lose your job due to a widespread recession, so you need to live off your emergency fund for a while.

2) Stocks crash at the same time, leaving your stock portfolio 30-50% smaller, possibly pushing you under margin requirements but certainly limiting the amount you can borrow.

3) Due to the recession/market crash, brokerages restrict margin lending. (I believe this happened in 2008?)

Result: you no longer have an e-fund and have to sell securities at depressed prices.

Of course this depends on your asset allocation—if you're 60/40 you might be able to just sell bonds to live off of while you find a new job and the stock market rebounds.

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Re: Why not use Margin Loan as eFund?

Post by 305pelusa » Sat Sep 28, 2019 11:55 pm

AndroAsc wrote:
Sat Sep 28, 2019 11:03 pm

Is Initial Margin how much one could borrow? So if I had a $100k taxable account, I can borrow up to $50k on a margin loan?
It looks like the loan is only called if the Margin Deposit goes under the Margin Requirement. What is the Margin Deposit, is this the $100k I am borrowing from? And so the maintenance of 25%, does this means that the $100k portfolio, if it drops below $25k, then the $50k loan becomes callable? Can someone please help me with the terms here, it's not evident as to what exactly is the trigger value for the margin call.
If you bring in 100k, that is known as your equity. The initial margin of 50% means you can borrow another 100k on top of that for a total 200k of purchasing power. It's known as "50% margin" because 50% of the total balance is your own equity/money.

This margin % will change as the market changes. If your 200k of purchased stocks loses 10% (and is now worth 180k), then you still owe 100k while the leftover (80k) is your equity. Now the margin deposit is lower than 50% (it's 80/180 = 44.4%).

At a maintenance of 25%, you'll get liquidated once your equity is 33k and you owe 100k still. That's a total balance of 133k in stocks (33/133 = 25%). So a market drop of 33% would do that. It would bring your initial 200k stock investment down to 133k and trigger the margin call/liquidation.
AndroAsc wrote:
Sat Sep 28, 2019 11:03 pm
Am I missing something here? Should I move my taxable assets to Interactive Broker now?
Like someone else already said, eFunds are generally recommended in BHs for those really starting out with small accounts. If you already have 100k+ in assets, I would just sell some of my assets from my portfolio to cover the emergency. I'm not sure I would go through the trouble of opening an IB margin account just for the ability to take out margin loans during market downturns to avoid any selling.

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Re: Why not use Margin Loan as eFund?

Post by HEDGEFUNDIE » Sat Sep 28, 2019 11:59 pm

This is definitely better than a HELOC.

Margin interest is deductible.

M1 Finance offers margin at 4%, not much higher than IBKR, with a much better interface.

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AndroAsc
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Re: Why not use Margin Loan as eFund?

Post by AndroAsc » Sun Sep 29, 2019 7:34 am

HawkeyePierce wrote:
Sat Sep 28, 2019 11:34 pm
I don't know much about margin borrowing, but in a perfect storm like 2008 couldn't this plan turn around to bite you?

Imagine:

0) Assume you plan to use margin to fund your e-fund.

1) You lose your job due to a widespread recession, so you need to live off your emergency fund for a while.

2) Stocks crash at the same time, leaving your stock portfolio 30-50% smaller, possibly pushing you under margin requirements but certainly limiting the amount you can borrow.

3) Due to the recession/market crash, brokerages restrict margin lending. (I believe this happened in 2008?)

Result: you no longer have an e-fund and have to sell securities at depressed prices.

Of course this depends on your asset allocation—if you're 60/40 you might be able to just sell bonds to live off of while you find a new job and the stock market rebounds.
What does this mean? That brokerages totally disallowed margin loans?

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Re: Why not use Margin Loan as eFund?

Post by whodidntante » Sun Sep 29, 2019 8:04 am

AndroAsc wrote:
Sun Sep 29, 2019 7:34 am
HawkeyePierce wrote:
Sat Sep 28, 2019 11:34 pm
I don't know much about margin borrowing, but in a perfect storm like 2008 couldn't this plan turn around to bite you?

Imagine:

0) Assume you plan to use margin to fund your e-fund.

1) You lose your job due to a widespread recession, so you need to live off your emergency fund for a while.

2) Stocks crash at the same time, leaving your stock portfolio 30-50% smaller, possibly pushing you under margin requirements but certainly limiting the amount you can borrow.

3) Due to the recession/market crash, brokerages restrict margin lending. (I believe this happened in 2008?)

Result: you no longer have an e-fund and have to sell securities at depressed prices.

Of course this depends on your asset allocation—if you're 60/40 you might be able to just sell bonds to live off of while you find a new job and the stock market rebounds.
What does this mean? That brokerages totally disallowed margin loans?
Yeah, the person who wrote that should support their statement with facts.

One thing I know for sure happened is that IB increased margin requirements for equity futures during the financial crisis. And I know that because a poster here (market timer) said it happened to him. Honestly, you could learn a lot by reading his post history.

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Re: Why not use Margin Loan as eFund?

Post by alex_686 » Sun Sep 29, 2019 8:11 am

I used to work the margin desk. I would recommend using margin to handle cash flow issues but not as a emergency fund. Margin loans tend to have high/higher interest rates than alternatives.

As a rule of thumb I would not hold a margin loan longer than 90 days.

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Re: Why not use Margin Loan as eFund?

Post by whodidntante » Sun Sep 29, 2019 8:17 am

Using a margin loan, HELOC, personal loan, 0% purchase APR credit card, or cash-out refi all have the portfolio effect of shorting fixed income and increasing leverage. There is nothing inherently wrong with that, and many people have done it successfully. Just be honest with yourself about whether you are disciplined enough to use these tools to your benefit, or if it's likely to leave you worse off down the road. Certain people get into bad situations when they use credit.

There is an alternative to using a margin debit to withdraw cash, if you have a large taxable account, need money, and want to increase leverage to get it. You could instead sell equities and then restore exposure using futures. Bogleheads are usually well setup to do that because they hold broad market index funds, and futures can restore exposure to the type of asset classes Bogleheads tend to favor (Treasuries too). The reason to do this is you can be more leveraged with an acceptable risk of ruin. A margin debit could be more attractive if you have large capital gains though.

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Re: Why not use Margin Loan as eFund?

Post by mbasherp » Sun Sep 29, 2019 11:52 am

I have a taxable account approaching six figures and I’ve wondered if this might be worth exploring. It certainly seems preferable to a HELOC as a liquidity option.

We built a taxable account on moderate income because between DW and I there is only one 401k available. After we max that and 2 Roth IRAs, everything else goes to taxable, which is currently worth about 2 years of expenses. Then we have a 6 month emergency fund, plus a couple sinking funds.

The option to use some light margin for temporary liquidity events seems like a good way to avoid realizing capital gains. Although I still think keeping a moderate amount of cash around is a good idea, available margin might help avoid the temptation to accumulate too much.

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Re: Why not use Margin Loan as eFund?

Post by MotoTrojan » Sun Sep 29, 2019 12:45 pm

0% APR credit card(s) would be a better primary option imho.

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Re: Why not use Margin Loan as eFund?

Post by HEDGEFUNDIE » Sun Sep 29, 2019 1:01 pm

MotoTrojan wrote:
Sun Sep 29, 2019 12:45 pm
0% APR credit card(s) would be a better primary option imho.
For long term loans, yes. For short term loans it’s not worth the hit to your credit score to open a new card.

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Re: Why not use Margin Loan as eFund?

Post by grabiner » Sun Sep 29, 2019 1:03 pm

AndroAsc wrote:
Sat Sep 28, 2019 11:15 pm
Let's assume for discussion sake, the person has at least a $100k taxable account. Is there anything wrong in my analysis in using margin loan as eFund? And to be clear, this eFund is for stuff like unemployment, major medical, and not small misc things like car repair or a new computer...

I'm not all that for using taxable as eFund, as murphy law states that you will be forced to liquidate when the market crashes. But in this case, it seems that you don't need to liquidate, but you need to pay a low interest rate. I guess you are taking the bet that you will recover from the eFund trigger event (e.g. unemployment) within a year, and be able to pay off the margin loan relatively quickly.
The way to use a taxable account as an emergency fund is to sell stock for your emergency needs, and move an equal amount from bonds to stock in your IRA so that you keep your stock exposure. If this happens during a market crash, you are OK as long as your taxable account is still large enough for your cash needs, and you may actually be better off because the market crash allowed you to sell your taxable stock for a capital loss.

Taking out a margin loan may be better than selling stock for your cash needs if you need cash when the market is rising; selling stock in the rising market would give a taxable gain.
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Re: Why not use Margin Loan as eFund?

Post by 3504PIR » Sun Sep 29, 2019 1:08 pm

I was under the impression that margin was backed by an underlying asset, as in stock and could not be taken as cash. I must admit that I haven’t looked at a margin agreement in well over a decade. Back then you couldn’t just add $50k on margin to your cash balance. You purchased an asset with margin and it became callable when the underlying asset declined in value sufficiently enough to trigger a partial or total call of the loan.

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Re: Why not use Margin Loan as eFund?

Post by HEDGEFUNDIE » Sun Sep 29, 2019 1:18 pm

3504PIR wrote:
Sun Sep 29, 2019 1:08 pm
I was under the impression that margin was backed by an underlying asset, as in stock and could not be taken as cash. I must admit that I haven’t looked at a margin agreement in well over a decade. Back then you couldn’t just add $50k on margin to your cash balance. You purchased an asset with margin and it became callable when the underlying asset declined in value sufficiently enough to trigger a partial or total call of the loan.
At M1 you can borrow up to 35% of assets that you can pull out as cash.

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Re: Why not use Margin Loan as eFund?

Post by 3504PIR » Sun Sep 29, 2019 8:53 pm

HEDGEFUNDIE wrote:
Sun Sep 29, 2019 1:18 pm
3504PIR wrote:
Sun Sep 29, 2019 1:08 pm
I was under the impression that margin was backed by an underlying asset, as in stock and could not be taken as cash. I must admit that I haven’t looked at a margin agreement in well over a decade. Back then you couldn’t just add $50k on margin to your cash balance. You purchased an asset with margin and it became callable when the underlying asset declined in value sufficiently enough to trigger a partial or total call of the loan.
At M1 you can borrow up to 35% of assets that you can pull out as cash.
And there you have it. Thanks, times have changed.

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AndroAsc
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Re: Why not use Margin Loan as eFund?

Post by AndroAsc » Sun Sep 29, 2019 10:35 pm

alex_686 wrote:
Sun Sep 29, 2019 8:11 am
I used to work the margin desk. I would recommend using margin to handle cash flow issues but not as a emergency fund. Margin loans tend to have high/higher interest rates than alternatives.

As a rule of thumb I would not hold a margin loan longer than 90 days.
What alternatives are there? I don't believe in owning homes so the HELOC option is out.

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AndroAsc
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Re: Why not use Margin Loan as eFund?

Post by AndroAsc » Sun Sep 29, 2019 10:38 pm

MotoTrojan wrote:
Sun Sep 29, 2019 12:45 pm
0% APR credit card(s) would be a better primary option imho.
In the last recession, many banks stopped offering 0% APR and many banks cut existing credit line limits.

There was a community of 0% APR floaters, basically get $100k-1mil credit, do BT to savings that was yielding 5-6% APY, and pay off before the promo period ends. When the 2008 crash came, this entire game died.

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Re: Why not use Margin Loan as eFund?

Post by Park » Mon Sep 30, 2019 12:04 am

whodidntante wrote:
Sun Sep 29, 2019 8:17 am
Using a margin loan, HELOC, personal loan, 0% purchase APR credit card, or cash-out refi
In a recent post, there is mention that in the last recession, many banks stopped offering 0%APR and many banks cut existing credit line limits.

https://en.wikipedia.org/wiki/Home_equi ... _of_credit

"In 2008 major home equity lenders including Bank of America, Countrywide Financial, Citigroup, JP Morgan Chase, National City Mortgage, Washington Mutual and Wells Fargo began informing borrowers that their home equity lines of credit had been frozen, reduced, suspended, rescinded or restricted in some other manner."

Please correct me if I"m wrong, but a margin loan is a demand loan. Not only is it a demand loan, but the brokerage can change the rules as they see fit. They're most likely to change the rules, when you least want them to. And you have to trust your brokerage. There was a recent post here, where someone mentioned that due to the way Interactive Brokers changed the rules regarding futures in IRAs, he basically no longer trusted IB. From my own experience with IB, I understand where the lack of trust comes from.

An emergency fund is for emergencies. There is a chance, when you use a margin loan or HELOC or 0% purchase APR credit card as an emergency fund, that it will fail you in an emergency.

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Re: Why not use Margin Loan as eFund?

Post by Goal33 » Mon Sep 30, 2019 12:52 am

Yes this makes sense for some people. For example my brokerage account is around 4x annual expenses so even if it went down 50% it would still enable me to pull out 1x annual expenses on margin. So I use this as one option to cover emergencies.

I also monitor my credit cards and mentally note which ones have balance transfers available at a small fee and 0% interest

I don’t keep a specific emergency fund with these options available to me. I stopped once my taxable portfolio was around 100k
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Re: Why not use Margin Loan as eFund?

Post by AlohaJoe » Mon Sep 30, 2019 1:28 am

Park wrote:
Mon Sep 30, 2019 12:04 am
https://en.wikipedia.org/wiki/Home_equi ... _of_credit

"In 2008 major home equity lenders including Bank of America, Countrywide Financial, Citigroup, JP Morgan Chase, National City Mortgage, Washington Mutual and Wells Fargo began informing borrowers that their home equity lines of credit had been frozen, reduced, suspended, rescinded or restricted in some other manner."
In every single one of these cases the same thing happened: the bank re-valued the house, decided the home owner had less equity than previously thought, and reduced the available credit based on that new estimate of equity. In my many searches on the subject I've never found a single reported case of someone's HELOC being cut for any other reason.

For example, here's a Chase mortgage from 2008 that had their HELOC cut (this is linked from the Wikipedia page and is their example of the problem):
In April 2004, lead plaintiff Mary Yakas had a $71,750 credit limit under her HELOC, or home equity loan, with Chase. Her property was appraised at $718,000.

In December 2008, Chase suspended future draws on her account based on its assessment that her property value had shrunk to $674,000 and no longer supported her credit line.
Notice how small the valuation change was, $718,000 to $674,000 (only 7%!), that caused her the problems. She had basically pulled out every penny of her home equity via HELOC and then was caught when the bank re-valued her downward house by a small amount. Every story I've ever found about HELOCs in 2008 follow that same pattern.

If you have equity in your house even after a haircut, the average Boglehead doesn't really have much to fear.

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Re: Why not use Margin Loan as eFund?

Post by petulant » Mon Sep 30, 2019 7:39 am

AlohaJoe wrote:
Mon Sep 30, 2019 1:28 am
Park wrote:
Mon Sep 30, 2019 12:04 am
https://en.wikipedia.org/wiki/Home_equi ... _of_credit

"In 2008 major home equity lenders including Bank of America, Countrywide Financial, Citigroup, JP Morgan Chase, National City Mortgage, Washington Mutual and Wells Fargo began informing borrowers that their home equity lines of credit had been frozen, reduced, suspended, rescinded or restricted in some other manner."
In every single one of these cases the same thing happened: the bank re-valued the house, decided the home owner had less equity than previously thought, and reduced the available credit based on that new estimate of equity. In my many searches on the subject I've never found a single reported case of someone's HELOC being cut for any other reason.

For example, here's a Chase mortgage from 2008 that had their HELOC cut (this is linked from the Wikipedia page and is their example of the problem):
In April 2004, lead plaintiff Mary Yakas had a $71,750 credit limit under her HELOC, or home equity loan, with Chase. Her property was appraised at $718,000.

In December 2008, Chase suspended future draws on her account based on its assessment that her property value had shrunk to $674,000 and no longer supported her credit line.
Notice how small the valuation change was, $718,000 to $674,000 (only 7%!), that caused her the problems. She had basically pulled out every penny of her home equity via HELOC and then was caught when the bank re-valued her downward house by a small amount. Every story I've ever found about HELOCs in 2008 follow that same pattern.

If you have equity in your house even after a haircut, the average Boglehead doesn't really have much to fear.
Thank you for bringing this up! The risk of a HELOC restriction should be much less for a person who has basically paid off their house except for a HELOC.

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Re: Why not use Margin Loan as eFund?

Post by Park » Mon Sep 30, 2019 8:47 am

You may very well be right about HELOC being changed only due to the change in value of the house. Perhaps my memory fails me, but I thought that I've read posts on this board from those who had the HELOCs revoked, rather than just changed due to the change in value of the house.

About margin lending, margin requirements can change. The present initial margin requirement is 50%, but there have been periods of time where it has been higher. There have been short periods where it was 90% and even 100%.

https://www.frbsf.org/economic-research ... 00-09a.pdf

One can use margin loans for emergencies and as long term loans. But as the lender has complete control over the rules, they're best suited for short term loans of a nonemergent nature.

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Re: Why not use Margin Loan as eFund?

Post by welderwannabe » Mon Sep 30, 2019 10:53 am

MotoTrojan wrote:
Sun Sep 29, 2019 12:45 pm
0% APR credit card(s) would be a better primary option imho.
Except during 2008 credit was reduced and cards were cancelled. 0% rates also started to dry up.

I know this because it happened to me.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

alex_686
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Re: Why not use Margin Loan as eFund?

Post by alex_686 » Mon Sep 30, 2019 10:57 am

AndroAsc wrote:
Sun Sep 29, 2019 10:35 pm
What alternatives are there? I don't believe in owning homes so the HELOC option is out.
There are a couple of different tactics out there, but Whodidntante kind of nailed it. You are using leverage and leverage is hard to justify over the long run for the average investor. One has to assume a combination of high equity returns, a high spread over equity returns over your loan rate, and low volatility.

The alternatives depends on how much you are borrowing, what your time frame is, and your risk tolerance. The core of using taxable equities as your emergency fund is that you are using taxable equities as your emergency fund so selling equities has to be part of the plan. There is nuances here about the risk of tapping emergency funds during a downturn and selling stock with unrealized gains.

2 more points. Money if fungible. You could sell bonds in your tax deferred space and buy equities to keep your AA is constant. Or you could tap your Roth accounts.

Spirit Rider
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Re: Why not use Margin Loan as eFund?

Post by Spirit Rider » Mon Sep 30, 2019 12:45 pm

The bottom line. While you can use debt for contingencies*. You should not rely on debt for contingencies.

While I used six figures in 0% credit card offers and a HELOC to fund living expenses while being a founder of a bootstrap startup from 2002 - 2004. I had six figures in I bonds and other cash equivalents to fall back on if those were not available. Margin loans, would have been extremely problematic from 2000 - 2002 and 2008 - 2010. As already mentioned, 0% credit card offers and HELOCs with < 50% equity (in many areas) evaporated in starting in 2007. I also had credit limits on credit cards significantly reduced.

Consider that < 10 years ago we ran into a perfect storm of a 50% stock market crash, a 50% real estate market crash and millions of layoffs. It would a delusion to think it can't happen again.

*I really dislike the term emergency fund. There are very few "emergencies" requiring immediate cash within a day or two. Most substantial needs of cash occur over time.

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Re: Why not use Margin Loan as eFund?

Post by MotoTrojan » Mon Sep 30, 2019 1:54 pm

AndroAsc wrote:
Sun Sep 29, 2019 10:38 pm
MotoTrojan wrote:
Sun Sep 29, 2019 12:45 pm
0% APR credit card(s) would be a better primary option imho.
In the last recession, many banks stopped offering 0% APR and many banks cut existing credit line limits.

There was a community of 0% APR floaters, basically get $100k-1mil credit, do BT to savings that was yielding 5-6% APY, and pay off before the promo period ends. When the 2008 crash came, this entire game died.
One could preemptively have one and roll it as expiration approaches.

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Re: Why not use Margin Loan as eFund?

Post by Spirit Rider » Mon Sep 30, 2019 10:08 pm

MotoTrojan wrote:
Mon Sep 30, 2019 1:54 pm
One could preemptively have one and roll it as expiration approaches.
You are missing the point already made in your quoted replies. In 2008 and especially after the 2009 CARD act. There were little to NO 0% balance transfer offers available for several years. You can't rollover to something that doesn't exist.

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Re: Why not use Margin Loan as eFund?

Post by comeinvest » Wed Oct 02, 2019 10:05 am

HEDGEFUNDIE wrote:
Sat Sep 28, 2019 11:59 pm
This is definitely better than a HELOC.

Margin interest is deductible.

M1 Finance offers margin at 4%, not much higher than IBKR, with a much better interface.
With $12,000 standard deduction, 3.5% interest rate, and no other itemized deductions, you will need to borrow more than $342,857 to deduct, and only the portion above this is deductible, right?

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Re: Why not use Margin Loan as eFund?

Post by HEDGEFUNDIE » Wed Oct 02, 2019 10:07 am

comeinvest wrote:
Wed Oct 02, 2019 10:05 am
HEDGEFUNDIE wrote:
Sat Sep 28, 2019 11:59 pm
This is definitely better than a HELOC.

Margin interest is deductible.

M1 Finance offers margin at 4%, not much higher than IBKR, with a much better interface.
With $12,000 standard deduction, 3.5% interest rate, and no other itemized deductions, you will need to borrow more than $342,857 to deduct, and only the portion above this is deductible, right?
I mean sure in the worst case it’s not deductible.

Many people have a mortgage and pay SALT and give to charity. So margin interest would be mostly deductible.

msk
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Re: Why not use Margin Loan as eFund?

Post by msk » Wed Oct 02, 2019 10:52 am

IB has particularly low interest rates for margin loans. I would happily use a margin loan at IB as my eFund. That does not apply to other brokerages. Same issue with credit card debt. Interest rates too high. Entire above discussion depends on the interest rates charged by CC, Heloc, brokerage margin, under the mattress, bank of Mom and Dad, etc. IB is particularly special.

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Re: Why not use Margin Loan as eFund?

Post by fareastwarriors » Wed Oct 02, 2019 10:54 am

I used IB margin loan for downpayment for a house. Worked out great, no regrets.

petulant
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Re: Why not use Margin Loan as eFund?

Post by petulant » Wed Oct 02, 2019 11:06 am

Has anybody parsed the usefulness of the investment-related interest deduction from margin for this strategy? As I understand it, you can deduct margin interest from your taxes only if you can offset ordinary income, which appears to be nonqualified dividend and interest. Qualified dividends and capital gains need not apply, nor does nontaxable interest such as municipal bond income. The upshot seems to be that for those who keep treasuries or REITs in their taxable, using IB's margin loan as an emergency fund could have additional benefits, so long as it satisfies the requirement that the interest be related to investments (I have no legal opinion).

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Re: Why not use Margin Loan as eFund?

Post by whodidntante » Wed Oct 02, 2019 12:34 pm

An IB margin loan does not require payments of any kind, so long as you maintain maintenance margin. The interest compounds if you aren't paying anything. That's a pretty useful feature for anything that I would call an emergency.

alex_686
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Re: Why not use Margin Loan as eFund?

Post by alex_686 » Wed Oct 02, 2019 12:38 pm

whodidntante wrote:
Wed Oct 02, 2019 12:34 pm
An IB margin loan does not require payments of any kind, so long as you maintain maintenance margin. The interest compounds if you aren't paying anything. That's a pretty useful feature for anything that I would call an emergency.
I think this is true for all margin loans.

Spirit Rider
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Re: Why not use Margin Loan as eFund?

Post by Spirit Rider » Wed Oct 02, 2019 1:02 pm

The margin investment expense does not have to be directly based margin purchases. Money is fungible. However, there are strict rules on timing and association of the two.

The interest on margin loan for external expenses absent an equivalent investment. Is unlikely to qualify for the deduction. I.e., the circumstances requiring the use as an eFund is generally not going to be deductible.

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Re: Why not use Margin Loan as eFund?

Post by garlandwhizzer » Wed Oct 02, 2019 1:46 pm

Margin loans and leverage in general increases potential outcomes at both ends of the investing spectrum. Potential gains can be greatly increased in a ongoing bull market--no margin calls and the borrowed dollars spent in equity will produce gains substantially in excess of their costs. The downside is what happens in a bear market particularly a long and severe one. Margin calls come after such an event has already been devastating the investment portfolio for quite some time, usually in the background of a significant recession when the investor's job or income stream may be a risk and new credit is not available. I speak from experience here, not theory. In such a circumstance the investor is forced to sell equity at fire sale prices which can devastate both the portfolio and the ones emotions.

Margin and leverage are two edged swords, they can cut out large gains in the future or slice away the investor's flesh at the worst possible time. Whether it works out well or not depends a great deal on Mr. Market's future mood swings. I personally believe there is timing risk to such a move now, after a great 10+ year bull market. Bull markets don't last forever and often the greater the preceding bull, the deeper the following bear. The best time for such a strategy is when stocks are on sale and the economy after a deep recession is starting to grow and take off. In my judgement that is far from the current situation. That doesn't mean leverage if taken now won't work out in the long run. It may be turn out to be a brilliant move over the next decade. Or it may not. Like everything else that increases expected returns it increases risk (Low Vol the possible exception). If you're very risk tolerant and you have a sanguine view of markets future going forward, it's something to consider.

Garland Whizzer

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HomerJ
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Re: Why not use Margin Loan as eFund?

Post by HomerJ » Wed Oct 02, 2019 1:56 pm

It's funny how the smart curve works.

At the bottom, you have people who think borrowing money to cover emergencies is a good idea.

Then you have the broad middle who think having actual money, instead of borrowing money, to cover emergencies is a better idea.

Then you get back to the top of the curve again where people are just so much smarter than everyone else that they think borrowing money to cover an emergency is a good idea again.

Me, I think I'll stay in the middle.

You guys really don't need to absolutely maximize every last bit of return in order to become very wealthy. You know that right? You're still going to have millions someday even if you keep some money in a CD or in iBonds as an emergency fund.
The J stands for Jay

comeinvest
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Re: Why not use Margin Loan as eFund?

Post by comeinvest » Wed Oct 02, 2019 3:31 pm

Spirit Rider wrote:
Wed Oct 02, 2019 1:02 pm
The margin investment expense does not have to be directly based margin purchases. Money is fungible. However, there are strict rules on timing and association of the two.

The interest on margin loan for external expenses absent an equivalent investment. Is unlikely to qualify for the deduction. I.e., the circumstances requiring the use as an eFund is generally not going to be deductible.
"Money is fungible" - Now that you mentioned it, do you, by any chance, have insight or a link to what those strict timing rules are? Let's say I have a few dozen cash contributions and withdrawals from/to my IB account per year, and a few dozen ETF purchases and sales per year, resulting in a fluctuating cash or margin balance. Furthermore, dividends will reduce the margin balance. I imagine it will be difficult to associate, or "disassociate", a particular withdrawal action, or a particular security purchase, with a particular portion of the margin balance, because as you say, money is fungible. Having that said, so what are the rules to obey when "structuring" the transactions, to make the margin tax deductible?

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Re: Why not use Margin Loan as eFund?

Post by nisiprius » Wed Oct 02, 2019 3:40 pm

Debt is not cash. Emergencies are emergencies. Keep it simple.

Naturally, people who are lending money may find it advantageous to give the impression that what they offer is always available. What good would warnings serve, particularly since the warnings would implicitly refer to difficult, embarrassing situations they would prefer not to think about, and would prefer that you not think about. It is like trying to get a bank to explain fine print that says that early withdrawal is "at the bank's discretion," or that they have the right "to require seven days' advance notice of customer withdrawals." "Oh, I don't think we would ever really do a thing like that." Unless they were desperate, and they would prefer that you not think about the possibility of their being desperate.

Didn't people learn in 2006-2009 that you cannot count on getting a loan whenever you need it, and that even an existing "line of credit" on a HELOC or credit card can be reduced or revoked?

What are the chances that times when financial institutions are having financial emergencies are exactly the times when you might encounter a financial emergency?
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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Re: Why not use Margin Loan as eFund?

Post by HEDGEFUNDIE » Wed Oct 02, 2019 3:48 pm

HomerJ wrote:
Wed Oct 02, 2019 1:56 pm
It's funny how the smart curve works.

At the bottom, you have people who think borrowing money to cover emergencies is a good idea.

Then you have the broad middle who think having actual money, instead of borrowing money, to cover emergencies is a better idea.

Then you get back to the top of the curve again where people are just so much smarter than everyone else that they think borrowing money to cover an emergency is a good idea again.

Me, I think I'll stay in the middle.

You guys really don't need to absolutely maximize every last bit of return in order to become very wealthy. You know that right? You're still going to have millions someday even if you keep some money in a CD or in iBonds as an emergency fund.
Folks at the bottom are not getting the same interest rates as the folks at the top, nor do they have the financial cushion that makes leveraging a smart move (and not just a necessity).

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Re: Why not use Margin Loan as eFund?

Post by HEDGEFUNDIE » Wed Oct 02, 2019 3:48 pm

nisiprius wrote:
Wed Oct 02, 2019 3:40 pm
What are the chances that times when financial institutions are having financial emergencies are exactly the times when you might encounter a financial emergency?
I would posit that the correlation is close to zero.

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Re: Why not use Margin Loan as eFund?

Post by Spirit Rider » Wed Oct 02, 2019 6:25 pm

HEDGEFUNDIE wrote:
Wed Oct 02, 2019 3:48 pm
nisiprius wrote:
Wed Oct 02, 2019 3:40 pm
What are the chances that times when financial institutions are having financial emergencies are exactly the times when you might encounter a financial emergency?
I would posit that the correlation is close to zero.
You would assume to be 100% wrong.

For myself, many of my friends, family and acquaintances; significant cash flow shortages in their lives, coincided with the Dot Com crash and/or the the Great Recession.

In the Dot Com crash, I was without significant employment income from mid-2002 until 2005. This coincided with a 50% drop in the stock market, major layoffs and unemployment/underemployment in IT for several years.

I survived because I had contingency funding for living expenses during those years. I never had to sell equities at a significant loss or even touch my beloved 1998 - 2001 3%+ iBonds. I had significant sources of contingency cash flow including cash, short-term bonds, 0% CC offers and a HELOC.

Friends, family and many colleagues were unemployed, under employed, sold equities at the bottom and lost marriages/families. All because they had inadequate contingency funds.

In the Great recession I was laid off in 2009 and was unemployed/underemployed for about a year. This coincided with a 60% drop in the stock market, up to 50% drop in many real estate markets, major layoffs and unemployment/underemployment in the entire country for several years.

I survived because I had contingency funding for living expenses during that year. Here again, I never had to sell equities at a significant loss or even touch my beloved 1998 - 2001 3%+ iBonds. This time it was because of significant sources of actual contingency cash and short-term bonds. Which was a good thing, because the HELOC was reduced to the current loan balance and there were no 0% CC offers to be had.

Friends and family were ok, because they listened to me and had adequate contingency funds. Many acquaintances and colleagues were not so lucky. Many were unemployed, under employed, sold equities at the bottom, lost their homes and marriages/families. All because they had inadequate contingency funds.

In another situation, a localized real estate bubble/crash in the late 1980s, caused major stress on banks and ripple effects on the local economy. I was able to buy my current house (new construction) foreclosed on the builder at < 50% of original asking price.

In the real world, there is a high correlation between economic disruptions, financial institution distress and individual consequences.

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Re: Why not use Margin Loan as eFund?

Post by Ping Pong » Thu Oct 03, 2019 9:25 am

As has been mentioned, they can suddenly change the margin rules on you if they’re panicking. Or they can jack up the interest rate by thousands of basis points. If a brokerage loses their funding source during a market panic, they’re going to pull out all the stops to recall those loans as quickly as possible. Of course, these margin changes would cause stocks to fall even further, and the Bogleheads(R) with real cash would be able to scoop them up cheaply.

You have to keep in mind where the brokerages get the money to loan to you. It doesn’t come out of thin air. Investors lend money to the brokerages. When the market tanks, investors suddenly change their minds and stop lending or demand astronomical rates. So the brokerages have to immediately compensate.

Don’t rely on the kindness of strangers.

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Re: Why not use Margin Loan as eFund?

Post by michaeljc70 » Thu Oct 03, 2019 9:46 am

I don't know if someone mentioned this, but IB used to have a minimum in monthly trading fees. I was with them for sometime but when I went to a 3 fund portfolio it made no sense. They do have margin rates way lower than most of the big brokerages.

I think it is fine to use a margin account as an EF. The thing I would worry about is if you cannot pay it back in a timely manner and rates are rising because it is an adjustable rate. I never really had an EF (I did have a smaller cash cushion) as I could cash flow just about anything from my income. If I lost my job and had to sell investments in a downturn it could have been bad but I think analysis on here and elsewhere have shown you still come out better off in the long run.

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Re: Why not use Margin Loan as eFund?

Post by Bacchus01 » Thu Oct 03, 2019 10:15 am

AlohaJoe wrote:
Sat Sep 28, 2019 11:10 pm
Most people don't have a $100,000 taxable account, especially when they're at the phase of their life where they most need an emergency fund.

By the time most people have a $100,000 taxable account, you'll find many people saying they no longer need an emergency fund at all.
Really? I have never, ever heard this.

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Re: Why not use Margin Loan as eFund?

Post by HEDGEFUNDIE » Thu Oct 03, 2019 10:33 am

Ping Pong wrote:
Thu Oct 03, 2019 9:25 am
As has been mentioned, they can suddenly change the margin rules on you if they’re panicking. Or they can jack up the interest rate by thousands of basis points. If a brokerage loses their funding source during a market panic, they’re going to pull out all the stops to recall those loans as quickly as possible. Of course, these margin changes would cause stocks to fall even further, and the Bogleheads(R) with real cash would be able to scoop them up cheaply.

You have to keep in mind where the brokerages get the money to loan to you. It doesn’t come out of thin air. Investors lend money to the brokerages. When the market tanks, investors suddenly change their minds and stop lending or demand astronomical rates. So the brokerages have to immediately compensate.

Don’t rely on the kindness of strangers.
In a financial crisis the central bank helicopters money into the system and interest rates plummet. In short, money becomes cheap right when more people need it.

In lockstep with the Fed, M1 Finance just announced a rate cut today on their margin borrowing to 3.75%.

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