Author Topic: Getting leverage  (Read 26574 times)

stahleyp

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Re: Getting leverage
« Reply #30 on: February 26, 2018, 10:25:33 AM »
I wouldn't bother with a 401k loan for a few reasons. 

1) it's not tax deductible (though to be fair most of the loan is paid back to yourself - you'll want to see the fees the plan keeper chargers). 

2) loans are usually pretty small (maxes out at the lesser $50,000 or 50% of account value).

3) I'm pretty sure you don't keep the investments in the plan. So you're not even getting the money from the bonds in this case.
Paul


Shooter MacGavin

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Re: Getting leverage
« Reply #31 on: February 26, 2018, 12:37:55 PM »
Has anyone here used loan from 401k plan as leverage? It seems to be a good strategy to get some leverage. Since my personal portfolio is all stock, I'm pretty conservative in 401k, most of the fund are invested in short term bond/money market type of funds which returns around 3.5% annually. I can loan money for about 4.5% from 401k.

hillfronter83, out of curiosity, do you keep your 401k in money market type funds because you are close to retirement age?  You don't have to answer this question if you don't want to but to me I'm not sure why anyone not close to retirement age wouldn't want to tax advantage of tax deferral within their 401k, so just wondering...

thepupil

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Re: Getting leverage
« Reply #32 on: February 26, 2018, 12:52:24 PM »
Leverage should be matched with suitable assets when the rate cannot be locked in (most margin investors have a variable rate). So for example, a good use of leverage is a diversified arbitrage portfolio that runs off over a period of 1 year, or some special situations in fixed income maturing or convertible shortly. Slightly less suitable is a solid, very large company with a 25% maintenance requirement - maybe like Berkshire. The least suitable is pretty much every stock that you may have to hold for many years as a long term investment if rates rise or the business does not perform as expected or you misjudge.

EDIT: I quoted scorpion from May 2016 but meant to quote hillfronters question about using a 401k loan from Feb 2018.

Nope, because they come due if/when you leave your employer for voluntary/involuntary reasons. I think the tax bill changed this to delay it a bit, but the point still stands. It can go from a 5 year amoritizing loan to a 0-1 year loan really quickly. This creates a bad scenario where  you can lose your job (which may be correlated to the economy/stock market) AND effectively be forced seller of whatever you are levering to buy.

Also some plans prevent new contributions while there is a loan, making the foregone tax savings equal to a very high interest rate for a small loan.
« Last Edit: February 26, 2018, 01:41:00 PM by thepupil »

hillfronter83

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Re: Getting leverage
« Reply #33 on: February 26, 2018, 01:32:42 PM »
Leverage should be matched with suitable assets when the rate cannot be locked in (most margin investors have a variable rate). So for example, a good use of leverage is a diversified arbitrage portfolio that runs off over a period of 1 year, or some special situations in fixed income maturing or convertible shortly. Slightly less suitable is a solid, very large company with a 25% maintenance requirement - maybe like Berkshire. The least suitable is pretty much every stock that you may have to hold for many years as a long term investment if rates rise or the business does not perform as expected or you misjudge.

Nope, because they come due if/when you leave your employer for voluntary/involuntary reasons. I think the tax bill changed this to delay it a bit, but the point still stands. It can go from a 5 year amoritizing loan to a 0-1 year loan really quickly. This creates a bad scenario where  you can lose your job (which may be correlated to the economy/stock market) AND effectively be forced seller of whatever you are levering to buy.

Also some plans prevent new contributions while there is a loan, making the foregone tax savings equal to a very high interest rate for a small loan.

[/quote]

hillfronter83, out of curiosity, do you keep your 401k in money market type funds because you are close to retirement age?  You don't have to answer this question if you don't want to but to me I'm not sure why anyone not close to retirement age wouldn't want to tax advantage of tax deferral within their 401k, so just wondering...
[/quote]

Thanks everyone. It's always nice to listen to wisdom of this board! The reason I'm asking is that a recent investment opportunity requires me to come up with a big chunk of cash. The expected return is about 15-30% within a couple of months period. I'm thinking about borrowing against the 401k with the intention of pay back within a couple of months. Then I thought about using this loan for some short term MA arbitrage opportunity, etc.

And I'm not close to retirement age yet. The reason I keep 401k in safe investments is that I'm pretty aggressive in personal accounts and IRA. And my 401k doesn't provide many attractive options other than index funds.

james22

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Re: Getting leverage
« Reply #34 on: February 26, 2018, 07:01:40 PM »
With direct deposit of my paycheck, a local bank will loan me a year's salary at ~3.5% (they then recover 25% of every paycheck until paid off).

I'll probably take advantage of in any significant correction, BRK falls to 1.2 P/B, etc.
BRK, BAM l SV, EM l Energy l Fannie Mae, Freddie Mac l Stable Value, Cash Value of Pension

LR1400

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Re: Getting leverage
« Reply #35 on: April 13, 2018, 08:19:51 AM »
What are thoughts on just buying a levered ETF if you want to use leverage?

Disclaimer. I have only seen this recommended I have not researched in depth. Initial research points to them being poor.


Shooter MacGavin

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Re: Getting leverage
« Reply #36 on: April 13, 2018, 08:53:21 AM »
What are thoughts on just buying a levered ETF if you want to use leverage?

Disclaimer. I have only seen this recommended I have not researched in depth. Initial research points to them being poor.

There is really no reason to do this if you are managing your own money and purchasing securities you like in an IB account.  You can get the same or custom leverage with IB (if you want) and you don't need to buy a basket of securities.  You can even hedge somewhat by buying puts.  The hit to your equity is basically the same.  You stand the same chance of getting impaired. 

Levered Funds also have higher expenses and fees and if they're taking their cut once a month or once a quarter, and the assets are down (so down even more due to the leverage), it's going to be a bigger dollar bite out of your principal.

I'm all for as much cheap, long-dated, non callable leverage as possible. The same way private equity does it.  Keep all the upside, pass on the downside.  pat themselves on the back for their high IRRs.  But i haven't found a great way to do it (besides owning good companies that know how to issue that kind of debt.) 
« Last Edit: April 13, 2018, 08:56:57 AM by Shooter MacGavin »

bennycx

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Re: Getting leverage
« Reply #37 on: May 08, 2018, 08:59:46 AM »
Say I have a very concentrated portfolio of stocks in IB. What are the pros and cons of these 2 options of getting leverage?
1. Portfolio Margin at IB -- i'm not sure what the typical initial and maintenance margin is needed for say a basket of 3 stocks
2. 5 year personal loan i can obtain at low 3% -- i'm pretty sure i can beat 3% p.a. for the next 5 years

Mondegreen

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Re: Getting leverage
« Reply #38 on: May 08, 2018, 09:35:51 AM »
The margin loan from IB will be cheaper but margin is a terrible way to borrow money.

A longer term loan is a better way to borrow, but make sure you run the maths on it (as you are paying off principle throughout, the potential return wasn't that appealing in my case). You will also likely have to lie about why you want the loan.

IMO the best way to borrow cheaply on a relatively small scale is through 0% interest credit cards. If you are intelligent and spread it across multiple cards you can borrow a reasonably significant amount of money for free.

Most importantly, make sure any borrowed money is comfortably covered by earnings/equity in your portfolio. It's not worth getting into financial trouble over

Dynamic

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Re: Getting leverage
« Reply #39 on: May 10, 2018, 01:50:50 AM »
Margin is something to be cautious about because of the possibility of a margin call at the worst possible moment.

I believe Interactive Brokers will lend 25% of your portfolio overnight (and up to 400% temporarily during trading hours).

If you borrow 25%, a small decline in prices will cause a margin call.
If you borrow 10% you can presumably withstand a 50% decline in your portfolio market prices without a margin call. Even a flash crash on top caused by algorithmic traders is likely to be OK if they pull the plug and the market recovers before the next trading day.

It is possible that a market panic could be compounded by greatly increased long term risk-free interest rates and that stock prices for many firms could drop more than 50% quite rationally taking perhaps 10 years to recover via growth in fundamentals. Try to think about these unlikely scenarios and whether you could avoid a forced sale at the worst time.

Personally, I'd be very wary of exceeding 10% margin in normal times for fear of having to make panic decisions to satisfy the lending criteria (and even then I'd like to have other resources available to cover the margin loan). A margin call only has to happen once in a lifetime to wipe out a significant chunk of your portfolio or even put you at zero. Non-callable long-term leverage is far safer.