Buying on margin in times like these, while maintaining correct asset allocation?

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thibaulthib
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Buying on margin in times like these, while maintaining correct asset allocation?

Post by thibaulthib » Wed Mar 25, 2020 9:53 am

Hi BH!

I was just wondering, is it wise to buy on margin in times like these, whereby the market is down 30-35%, while maintaining the correct asset allocation ?

I'm 30 yo, my AA is 80/20, and have a total of USD $150K invested (right now, i.e. including the current loss of 30%), i.e. $120K in stocks and $30K in bonds.

I was thinking going 120%, meaning having a total of USD $180K invested, i.e. $144K in stocks and $36K in bonds.

I know that it doesn't make sense to buy on margin to buy bonds, but doing so would help me to keep my AA as per my strategy and what I feel comfortable with.

My long term goal is not to stay on margin, but this would help me to invest more right now while the market is down, and reimburse it in the coming months.

I also know that timing the market is wrong, but that time in the market is the key. But this crash seems to be a great opportunity, so I am seeking your advise here.

Thank you !
Last edited by thibaulthib on Wed Mar 25, 2020 9:55 am, edited 1 time in total.

Lee_WSP
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by Lee_WSP » Wed Mar 25, 2020 9:55 am

No. It can still go down, or up. Do you have the extra money to lose? If so, why do you need margin?

But more importantly, they charge a lot of interest with few exceptions.

Topic Author
thibaulthib
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by thibaulthib » Wed Mar 25, 2020 9:57 am

Lee_WSP wrote:
Wed Mar 25, 2020 9:55 am
No. It can still go down, or up. Do you have the extra money to lose? If so, why do you need margin?

But more importantly, they charge a lot of interest with few exceptions.
Thank you Lee, I forgot to mention that I am using IBKR which has extremely low fees with regards to margin loan, as in something like 1.5% interest only.

rascott
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by rascott » Wed Mar 25, 2020 9:59 am

Are you prepared to meet a margin call if equities drop significantly??

Topic Author
thibaulthib
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by thibaulthib » Wed Mar 25, 2020 10:10 am

I dont think going 1.2x would trigger a margin call that easily especially if I keep my AA to 80/20 and after the 35% drop. I agree that historically it only went down to -50% most of the time, like 2000 0r 2008, and that we dont know what the future holds.

But do you really think 120% as risky taking into consideration the above?

Lock
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by Lock » Wed Mar 25, 2020 10:11 am

Here's an easy possible (non-BH :D) solution - NTSX. The fund is 90% equities and 60% treasury futures. Say you have a 70/30 AA and hypothetically you moved 1/3 of your bonds (10% of your portfolio) to NTSX. What would your exposure be now? 79% equities and 26% bonds. You've just implemented your leverage with keeping your approximate bond exposure.

ER is reasonable...

(Disclaimer: I implement an NTSX-like strategy, but do the futures portion myself)

guyinlaw
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by guyinlaw » Wed Mar 25, 2020 10:16 am

Have a large emergency fund.. See post below.
viewtopic.php?f=10&t=307633

You should be OK >50% decline.. Theoretically it is good idea, if behaviorally can you stick with it.

I overestimated my risk tolerance and luckily went from 120% to ~80% stocks before this crash..
"Equity markets could get worse if the slowdown extends further, but also realize that the markets will rebound far before economic data improve."

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Steve Reading
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by Steve Reading » Wed Mar 25, 2020 10:21 am

thibaulthib wrote:
Wed Mar 25, 2020 9:53 am
I'm 30 yo, my AA is 80/20, and have a total of USD $150K invested (right now, i.e. including the current loss of 30%), i.e. $120K in stocks and $30K in bonds.

I was thinking going 120%, meaning having a total of USD $180K invested, i.e. $144K in stocks and $36K in bonds.
Sell 24k in bonds and buy 24k in stocks.

garlandwhizzer
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by garlandwhizzer » Wed Mar 25, 2020 12:00 pm

Margin increases both potential return and potential risk. It works well if you know where the market is going in the short/near term which unfortunately no one knows with reliable accuracy. If you choose to use margin it's helpful to have an emergency fund or a solid reliable income stream in case the market tanks again and you get a margin call. Selling your margin position at fire sale prices is no fun. Right now, I don't think anyone knows reliably whether or not we've hit the bottom of this bull market yet. When we get a vaccine or an effective treatment for CV-19, I suspect the market bottom will be behind us for good. Until then, I believe there will be a lot of market volatility in both directions based on the latest news flow. In short, buying on margin at this point is more akin to gambling than a long term investing plan. I've never had good luck with gambling but adherence to a long term investing plan has worked well for me.

Garland Whizzer

MotoTrojan
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by MotoTrojan » Wed Mar 25, 2020 12:09 pm

No it doesn’t. Just move bonds to equities in tax-advantaged (increase AA).

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grabiner
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by grabiner » Wed Mar 25, 2020 12:45 pm

If you buy on margin, you aren't maintaining your asset allocation. If your portfolio is $150K, and you have $144K in stock, then you have the risk of 96% stock whether you have $6K in bonds, or $36K in bonds and $30K in margin debt. Either way, if the stock market loses 1/3 of its value (as it did in the last month), your portfolio will lose 32% of its value, which is $48K.
Wiki David Grabiner

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Phineas J. Whoopee
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by Phineas J. Whoopee » Wed Mar 25, 2020 8:26 pm

What is your plan should you experience a large margin call? Just because you went 120% doesn't necessarily mean any moment's market action won't make it far greater.

What is your plan? If you have a workable one then fine. If not, I wouldn't do it.

Debtor's prisons are, thankfully, in the past (setting certain recent editorials aside), but the old Wall Street saying went:

He who sells what isn't his'n must buy it back or go to pris'n.

PJW

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watchnerd
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by watchnerd » Wed Mar 25, 2020 8:32 pm

Okay, we're definitely not at the bottom yet when we see these kinds of questions....
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Lee_WSP
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by Lee_WSP » Wed Mar 25, 2020 8:49 pm

watchnerd wrote:
Wed Mar 25, 2020 8:32 pm
Okay, we're definitely not at the bottom yet when we see these kinds of questions....
Hahaha.... :oops: ... Yeah. :beer

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watchnerd
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by watchnerd » Wed Mar 25, 2020 8:51 pm

Lee_WSP wrote:
Wed Mar 25, 2020 8:49 pm
watchnerd wrote:
Wed Mar 25, 2020 8:32 pm
Okay, we're definitely not at the bottom yet when we see these kinds of questions....
Hahaha.... :oops: ... Yeah. :beer
It's going to take a lot more pain to re-educate the Children of the Bull.

:sharebeer
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

luckyducky99
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by luckyducky99 » Wed Mar 25, 2020 10:16 pm

You're 30 years young with what appears to be a healthy appetite for risk.

Why do you own any bonds at all?

Why would you pay to borrow money from someone else to buy stocks when you could borrow it from yourself by just selling your bonds?

Topic Author
thibaulthib
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by thibaulthib » Wed Mar 25, 2020 11:15 pm

Thank you all for your answers, indeed my risk tolerance is quite high.

I will follow your advise of slowly selling bonds to buy more stocks, but without buying anything on margin.

Thank you folks !

MoneyMarathon
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Re: Buying on margin in times like these, while maintaining correct asset allocation?

Post by MoneyMarathon » Thu Mar 26, 2020 12:24 am

thibaulthib wrote:
Wed Mar 25, 2020 9:53 am
My long term goal is not to stay on margin, but this would help me to invest more right now while the market is down, and reimburse it in the coming months.
If you use margin, you either

(a) Accept that the investments can decline to the point where the brokerage liquidates for you (at maintenance margin).

(b) Find your own bands for target leverage and liquidate some if you're down (or add margin when you're up) to get back to target.

The naive approach is usually (a), but it's extremely risky.

The approach of (b) can underperform and requires a lot of attention to the account. Lots of opportunity for error.

You could just increase equities closer to 100/0 and have much the same effect without all the risks of using margin.

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