Do you have a strategy for using leverage to invest and how to pay off the loan?JackoC wrote: ↑Wed Aug 04, 2021 9:44 amI agree. Though I would say previous posters first statement, if limited to 'majority' not 'vast majority' could practically be true. The statement it's 'against BH principal' and whole second paragraph is off base though IMO. It makes various unstated assumptions what the margin borrowing is used for which are not necessarily true, even besides the issue of 'how much'.hithere wrote: ↑Wed Aug 04, 2021 7:34 amSalt makes food much tastier, but can lead to intoxication and death at high enough doses. I believe the old adage that the dose makes the poison is applicable to margin as well. Everyone talks about how they know people who got wiped out because of margin. Well, plenty of people have died of salt poisoning as well - does that mean that we shouldn't consume salt at all? Of course not. Using obscene amounts of margin (and, to an extent, leverage in general) without regard for the risks is a financial suicide. Using a little bit of margin with well-diversified ETFs is okay and provides a good boost in long-term returns.Dagwood wrote: ↑Fri Jul 09, 2021 5:32 am I have no issue with IBK. That being said, I have no interest in buying individual stocks and I have even less interest in borrowing on margin. Margin investing is, in my humble opinion, inappropriate for the vast majority of retail investors and inappropriate for a BH.
The whole BH philosophy in large measure hinges on the discipline to save and invest regularly (and thus defer gratification) and to ignore the short term volatility in the market. I always look at this latter point this way: If over a 20 or 30 year period the large indices like the S&P 500, Russell 1000, the Dow, all have little or zero return, is there anywhere you are going to be able to successfully "hide"? Maybe, but the better plan, as compared to stumbling around and incurring tax and transaction costs along the way, is to do what Jack said: stay the course, stay diversified, keep costs low, and invest as regularly as you can.
That's a long way of saying that BDs that make their money on selling the ability to trade frequently at low cost and margin lending are not where I want to be.
Besides just having a leveraged stock position, another straight forward and entirely BH ('minimize costs') application of margin lending is if you have rental real estate (many people on this forum are super stock fans and despise DIY real estate...but that's not a general BH principal, not a valid one anyway). You can have ETF assets in your RE LLC, then borrow against those with IBKR to finance properties at much lower rates than banks charge against the properties themselves, at least for some of your borrowing. As a business expense there's no question about full deductibility of interest cost as there can be with personal margin loans. And there's no reasonable argument against using some leverage in RE investing.
Another as has been covered on many threads is the potential advantage in later life of borrowing against a large appreciated asset position you intend to mainly leave to heirs, rather than liquidating part and paying capital gains tax which the heirs could avoid via the 'basis step up' feature of the current tax code. It does depend on assuming that feature will remain part of the code until your death, IOW it's not a riskless strategy, but it does not in any way involve 'getting in over your head'.
And a simpler benefit is that if you have marginable assets at IBKR and need money in an emergency, you can borrow some amount at a low interest rate. That can substitute for at least *some* of any liquidity reserve ('emergency fund', etc) you'd otherwise set aside earning a low interest rate. Some amount depending on tolerance of risk that the liquidity won't be there when you need it. For example if you assume you'll be able to borrow 20% of your current asset value at IBKR (their current limit is ~75%), you're making a very low risk assumption. The 75% is model based and likely to decline in times of very high volatility, but even were their limit to go all the way down to 50% of value and market value also drop 50%, you could still borrow >20% of the original value. Nor are other forms of contingent liquidity certain so that's not the correct benchmark for comparison. A bank can easily cancel a HELOC when something happens to your credit, or it just wants to reduce its exposure to that business, something which actually happens, whereas broker margin lenders pulling out of that business is a hypothetical and they basically don't care about your personal credit. Of course just having the liquidity in the bank now doesn't present any risk of a lender canceling your borrowing facility, but has an opportunity cost. Fortunately you don't have to address contingent liquidity with just one solution. But planning to borrow a fairly small % of your asset value at IBKR, in an emergency, can be part of your strategy, with no costs unless/until you borrow.
I.e., only 10-20% leverage…only make interest payments as long as they are low…but pay off the loan once your investments return some satisfactory amount?
That’s my biggest hesitation with leverage, how to time moves…