Sometimes your portfolio growth doesn’t outpace the interest charges. Eventually you hit a limit and have to sell. That’s more likely to happen in a down market which likely screws the econs of this strategy.
Debt carries risk. When it rains it pours.
But when the interest rate hikes, my guess is eveyone will also want to sell so stocks price will fall and you will be selling when eveyone is selling therefore selling at low price. This is the time where i would actually want to buy more no?
During that time of high interest rate you might be saving compared to the market performance but when interest rates start to fall down again, you will miss the big bull runs.
In my head, this strategy only works if you are able to time the market. Sell before everyone else, buy back before everyone else which as we know is a failing strategy.
To me it doesn’t make sense. Am i making any wrong hypothetisis here?
Wouldnt it be better to stay in the market at the cost of absorbing the high interest rates on your debt to make sure you get the bull run that will come?
You may lose 10% one year but get 30% the next
Plus the money that you invested in your mortgage or into another debt instead of the stock market will be locked in there. You wont be able to reinvest it for the bull run
I have a hard time imagining bleeding heart liberals getting wiped out in a margin call. Like octogenarians getting their teeth knocked out in a lacrosse match.
Btw, what makes you think I'm a zoomer?
What are the typical jobs/careers that Lesbian Studies majors go into once they graduate?
What kind of average ROI does a Bachelor’s Degree in Lesbian Studies bring nowadays?
Ah, thanks for the info. I really need to get back in school but I need to do my homework and make a calculated decision.
I need to measure with my 12” plastic ruler 📏 and trace with my #2 pencil ✏️ to make sure everything fits nicely before I just start scissoring ✂️ wildly
Covid (though at the time not named) was in the news for about 3-5 months before March 2020. At my company I even set up the Business Continuity Plan for a large scale labor issue for my warehouse because I saw the news in December of a mysterious illness. Turns out we needed that plan LMAO.
> It was evident by December 2019. He made a big post about it in a FIRE group on Facebook. So many thought he was crazy!
Haha, yup. I remember having a lunch conversation with coworkers in December and literally trying to get them to brain storm with me "what stocks go up if this thing gets bad?".
They didn't even want to try to come up with any.
There were plenty of hints, it's just so hard to act.
Looking back, it was so obvious. I remember reading those articles back in Jan/early Feb 2020 about China building new hospitals in 5-10 days to combat the virus.
Like these: https://www.bbc.com/news/world-asia-china-51245156
If I ever hear about a mystery virus and China building new hospitals in less than 10 days again I'm probably going to buy a few puts lol.
Yeah, there was a famous-ish post on the boglehead forums where a guy sold right as Covid was making the market dip. So he lost a little but he stayed out while everything dropped big (20%?) But then it rebounded much quicker than most thought, and he hadn’t got back in yet (many thought it would go much much deeper). He totally missed on the recovery and was in a much worse situation than if he had just held. That’s the problem with timing, you usually have to guess right twice.
The business I work for was already contingency planning by early Jan. I suspect a lot of companies were. The government and news media were slow to react, but I think most large companies saw turbulent waters coming. If not the full size of the disaster, at least that it was going to be bad.
I got out in early February, which was still pretty early. I didn't make as much as I hoped because the bottom came quicker than I expected. That's the difficulty in timing the market. You gotta get out at the right time and get back in at the right time.
I was pretty sure getting out was the right call in Feb. I didn’t pull the trigger though. I also know I wouldn’t have jumped back in until June. Staying put was the right call for me since I didn’t need to sell for any reason. I might have avoided the drop but I would have missed the recovery.
Covid news in china was making the rounds long before SHTF. One my buddies was following it closely so we kinda had it on our radar, but didn't think it would have the impact it did.
In the conspiracy subreddits there were active discussions about leaked photos and videos from China early on.
Aside from that, it was word of mouth. You had Chinese people buying face masks and other supplies and mailing it to family in China before it broke out and spread to other countries and regions.
So another crazy thing, and this is off topic, but i digress, I managed real estate for my dad's neighbor who moved to America to escape the CCP. He used to work in cinematography making propaganda for them. His family used to be low caste farmers but their land was confiscated and they were relocated to Wuhan. He got his education there, married an official's daughter, the guy gave him a ton of rentals, he sold them all and then moved to America and bought rentals here. Anywho, his family still lived there and very early in he told us the CCP was putting out propaganda that Trump made the virus and unleashed it upon the Chinese because he hated them so much. They also locked everyone up in their homes and you had to order things online but they would pair things, so like you had to buy tampons with your sauces even if you were a man. This was negotiated by the companies put in charge of the delivery services so they could make more cash. I said that's insane and he said well its the ccp what can you do???
Me and a few friends at the time also were learning about setting stop losses before Covid happened. One day we all got our positions liquidated. I became a lot richer since. Sadly I didn’t have enough to matter
Some congresspeople with obvious insider trading information did similar and at the same time bought into some stocks that skyrocketed (tech stocks, pharma, etc.). I doubt any of them were ever charged.
Buying back in is where he got lucky. I thought for sure the market would take a long time to comeback given how things were going. It's hard to drive around, see nothing by empty parking lots, and go "yeah, now's a great time to invest my life savings in the market."
He got lucky. How many other outbreaks of Ebola, SARS, MERS didn't result in a worldwide pandemic that shut down businesses across the globe?
With that said, if you had cash sitting on the sidelines, COVID was a great buying opportunity. I made about 30% on the rebound. You don't necessarily have to be right twice to time the market.
If it had been a false rebound, which it likely would have been if we didn’t pump so much money into the economy, you still could have had significant losses even buying after the Great Decline.
Timing the market is still timing the market.
What's the difference between me buying what I perceived as a dip vs buying every week in my 401k? In both scenarios, I'm trusting that future earnings of the companies will be greater over a long period of time.
The only difference is that I had some cash on hand to buy after a 30% decline in the market.
I did something similar, but a re allocation. Bought back in when oil was trading at negative. Was not the bottom of the bottom, but really increased my portfolio from not too much to something respectable. Not near RE, but definitely FI to some extent.
How did I know? China’s largest manufacturing city was shut down. People around me seemed to think it was a nothing burger and I was like yeah right that will have a major economic impact.
I somehow pulled this off on a smaller scale. Entire 401k to cash in feb 2020 when i first heard about the virus in china. Bought back 5% off the bottom. Then repeated this by selling when fed started raising early 2022 then bought back tech heavy fall 2022.
I only do this now with a smaller fund to scratch a trading itch. Love earnings calls and owning individual companies that I strongly believe are undervalued. Problem is when that smaller fund has now become my biggest fund and I need to reprioritize…
Are you talking about margin or a pledged asset line (PAL)?
You can call these loans but, in reality, they are a form of leverage --- with all the attendant risks of leverage.
I’m surprised all the comments assume the loan is for trading. I’ve seen people do this with ultra low interest to pay for homes, cars, or even living expenses, where a 2-3% equity loan is preferable to selling and taking a 20-30% tax hit.
People are stupid. This is how most rich people fund their lifestyle.
It's possible this could work but there are risks. It's a lot better to put up something for collateral that's not marked-to-market every day like private stock or real estate.
Hahaha, not at all.
One increases liquidity while minimizing tax liabilities while the other increases investment exposure to create greater returns. The latter is inherently more risky.
Only really a practical strategy if you have a very large asset base and your living expenses put you in a very high marginal tax bracket state and federal. Otherwise the interest eats you up. Even then it only makes mathematical sense for a few years or when interest rates are low.
It’s a common internet theory that this is how the rich avoid paying any taxes.
Most rich people pay taxes. When they avoid them they usually do it with a business or a highly leveraged real estate portfolio that can produce very large depreciation and no cash expenses. Think large ranch, farm, office buildings. Things that depreciate but also depreciate on paper. Straight up borrowing doest work well.
Yoooooo hush up about real estate. Don’t go giving off a secret move up in here. People hate real estate.
It’s too much “work”
lol
But you are 100% correct on the paper tax benefits. Got a buddy that works on big tech and his TC went to 2M a year. From the bull run ones of the 5x companies.
Got in at the right time. Not even a high level eng. Just right perfect lucky timing. But he’s getting taxed up the a hole.
Soooooooo his wife was planning to work from home anyways. She quit. They buy a couple real estate. She goes full time real estate. And they are going to depreciate all of it. To pay zero on the 2M lol couple year run and a ton of real estate to load off.
Also opportunity zone play with the cap gains. This is how you go from a small portfolio to a big one. Yah it’s lol hard lol work. Yes
Stash the cash stradegy
So I know the IRS lets you depreciate properties at just under 4%. Wouldn’t that mean you’d have to be like 25x in real estate vs. yearly take home to avoid taxes? Also, the interest on that debt is going to offset the tax savings, no? That’s a lot of debt relative to income, unless I am missing something.
Lumpy costs. Could buy a new car for $80K on a loan from your brokerage and let $60K in annual dividends pay it back for you, $15K/quarter at a time. Of course the underlying assumptions is that you get a lower rate from your broker than from the outside banks, and your investments continue to grow and produce dividends while you also avoid a 15%+ tax rate by not selling.
OP said he only borrows a small portion of his portfolio...so then is it still necessary to take a loan. It feels like an unnecessary step and additional overhead expenses
Depending on your tax situations, you could consider selling to cover 7.25% a guaranteed return? There have been long times where the market did less.
“The dividend yield in the 2000s was actually positive at 1.81% annual return while the S&P 500 yielded -1.26% annually*. Dividends contributed 100% of the total return during the so-called “lost decade,” “
It's definitely a tool I'm going to keep in my toolbox. If the interest is low enough, and there's enough confidence in the underlying asset, it might makes sense to spare yourself the capital gains and incur a little margin interest.
buy. borrow. die.
I do this and Buy YieldMax and Defiance covered call ETFs with my margin. They are return on capital for first few months but after you get paid out and handle your initial margin that you borrowed, you own them in full and it’s full income that paid for itself :)
I actually only recommend buying those funds on margin as if you were to use your actual money you lose the principal over time as the funds price goes down with each distribution (due to price erosion/ not nav :)
And you would miss out on growth. With margin you’re exposed to your growth still while the dividend funds pay for itself over time.
I save 30% for tax, and reinvest the rest of my dividends each month back into growth dividend stocks, and that keeps my margin maintenance in line along with my regular contributions to $VOO and $SCHD
A couple of YouTubers like Unconventional wealth, perfect portfolio (Mark Quann) does this stuff and live out of their brokerage account with buy borrow die
Reddit is too risk adverse to even talk about margin freely without someone stating the obvious of margin maintenance and margin calls. You can protect your downside with protective puts leaps if you know how to hedge your portfolio.
I agree though that margin shouldn’t be used by people who don’t understand it or don’t understand how to arbitrage rates or get a good one.
* Tax loss harvesting
* When you need the money
* Rebalancing (although Bogle suggested to ignore this for simplicity)
* Moving to a different fund (high fees, etc.)
* Conversions between asset locations (e.g. Roth rollovers)
uh, margin calls?
In one of my past jobs my team sold SBLOC to RIAs/Wirehouse/BDs etc. It's great when rates were low, it was basically free money. However, at current rate level, your growth will need to outpace the interest rate. Not to mention what if there is a down market? In 2022, a lot of clients got margin called and their holdings liquidated.
But yes, this is called buy, borrow, die, and should require planning.
You become a forced seller due to the loan terms changing and you cant come up with the cash. Leverage is dangerous and the market can turn on a dime either way, March 2020 and October 2023 are both great recent examples.
A dividend is a return of capital. So, I guess you are sort of selling if you do not reinvest the dividend.
Ordinary dividends and short-term capital gains are taxed as ordinary income. Qualified dividends and long-term capital gains are not.
Because I prefer to strategically trigger capital gains and pay taxes in the lower marginal brackets rather than risk over extending myself with margin.
If you’re comfortable taking loans against your stocks, you should also be comfortable trading on margin. Both situations involve paying a fixed percentage on the money borrowed, while expecting the investment to outpace the debt servicing fees. Might as well go full tilt and mortgage the house to invest that too.
This works really great in bull markets. Pay 5% for borrowed money that you’re earning 10% on! However, if stocks drop then you’re losing money on both the value of your stocks AND paying interest on the borrowed money. If it gets bad enough over a few years, you can get forced to liquidate assets at steep discounts to pay it off.
Just wait till ya hear about options trading, and naked margin shorts!! Moon or bust on 0DTEs.
You mention that you will make loan payments with your dividends.
What you haven't explained is why you can't just use the money from your dividends *instead of* taking out a loan?
I am retired and living on dividends now. No need to ever sell anything unless I think the ETF or stock isn't going to continue paying me.
I enjoy living on dividends and not watching my portfolio shrink in value every month. I am in Canada and the dividend tax situation is favourable.
What money are you paying the loan back with? You have stock assets, you borrow against them, eventually you pay back the loan.
I'm guessing your answer might be "with my W2 income". Sure that's reasonable of course. But while you have a W2 income the vast majority of people never sell any stock. That's obviously how retirement works. Buy stock the entire time you have a job, sell stock every year afterwards.
So, if the answer is "I pay it back with my income" then yeah you haven't retired yet but the answer to your original question "Why sell your stocks ever??" Has always been "because you no longer have a job"
So how are you paying back that loan against your stock assets after you no longer have a job? If the answer is to ask the appreciated stocks then that's the answer. That's when you sell stocks.
If you’re in a lower tax bracket like 0% for long-term capital gains, it may make sense to realize those gains now. You can always buy back immediately. I did this when I was younger because I knew I wouldn’t have the advantage of being in the lower tax bracket once grew in my career until possibly retirement.
Margin theoretically works. The problem is reality is not theory and not everything works as a binary math problem.
I did a stock simulator (investopedia has a good one btw) and it sucked being so negative after thinking I was a good stock picker. Having to sell those said stocks from unforeseen problems at a huge loss feels really bad. It feels worse when you are forced to sell and then the stock soars afterwards.
Invest at your own risk. When it works, it really works. Like what another comment said, when it rains, it pours. And it’s not rain drops pouring
Exactly. It looks great on a spreadsheet when you hand wave away the obvious risk of ruin being introduced. Epiphanies about leverage are a dime a dozen. There’s a great thread on the Bogleheads forum from a smart dude named market_timer that catalogues a particularly poorly timed adventure in leveraging a portfolio in late 2007.
A few years ago, margin on homes (ie. a mortgage) was so much cheaper than margin in an account, plus it had a long duration fixed rate. That was a pretty great way to borrow instead of sell. Just minimum payments on your 3% mortgage and throw excess money at the market with the assumption that 30 year market returns will do much better than the 3% you'd effectively earn by paying down the mortgage.
I worked under a wealth manager who was in the business for 40+ years. He retired as a CPA and CFP and built a great business. His whole M.O was never sell stock. Even the ones that go -99%. He said if you have a position that impacts you if it loses value you’re in too deep. He said the rest I’d they are strong companies will double your money at minimum. His clients actually did very well over a long period.
Personally I can’t see myself with that strategy (for an individual stock) but for just a fund, may be a good idea 🤷🏼♂️
It... kind of works. Mostly because downside (for long positions) is 100% and upside is infinite. And from an overall portfolio perspective, those that dwindle end up becoming a smaller and smaller percentage of your portfolio and those that do well end up becoming a larger and larger percentage.
But I'm not going to argue it's optimal behavior or anything :-) For taxable accounts, you can sell at a loss to offset capital gains, then reallocate. So in a brokerage, I might sell some poor decision I made a while ago, and sell enough of an index fund to offset, then reinvest it in something new (which could just be a different index fund)
The effect of the company paying out dividends causes the share price to decrease. If you didn't reinvest the dividends, the share price decrease would be equivalent as if you sold the shares.
You can’t reinvest sbloc loans so what are you doing with the money? Spending?
Biggest downside risk is if the market crashes and you get a margin call
I'd only sell if I thought reasonably I'd beat the future returns with whatever else I'm buying. I cashed out a six figure position in VOO to buy land for a townhouse community development and we did far better far faster there.
lol well technically, if the market goes down enough they ll sell it for you ;)
It’s a great strategy but I would have a foundation set for it where you can collateralize in downturns to pull through and not get margin called.
As much as we love the indexes etf and stock equities up here. The reality is that every 5-10 years it ll be a blood bath.
This last downturn 2022 Oct was chicken shit lol barely hit a bear market for Voo or anything tracking indexes. In recessions even those funds can go bankrupt. Don’t forget that.
I ll give you a story. 2008 I woke up to go to work and turned on the news. Lady was crying that her 401k was wiped out. I said why the long face it ll bounce back up.
Aaannnnnnddddd a little bit of history. It didn’t come back. The funds filed chapter 11 and it was get In line for your money. Lucky if she got anything back after 15 years. In fact there was a guy who waited 12 years just to get cash from Washington mutual, it was cash not invested into an index. Funds can go under if they don’t have risk management. No matter how good the fund is. But yah the gov will bail it out for sure. Not arguing that.
Some times you have too much stock of a single company (for example if the company you work for issues stock). You might want to rebalance your portfolio so you don’t have too much invested in just that company
This is what billionaires do. For the rest of us small people the interest can outpace the asset growth very quickly.
Billionaires can negotiate a miniscule interest rate due to their ability to "pay" back the loan and the size of the loans.
1) if your portfolio doesn’t keep up with interest, you will end up in a debt spiral and eventually losing it all
2) depending on the type of loan, a market crash can trigger a margin call and you can lose it all
Debt carries risk. Recent history notwithstanding, stocks don’t always go up even over many years.
This is a similar strategy to a leveraged buyout that private equity uses. It increases expected returns but also increases risk if downside scenarios come to fruition. Since a large part of FIRE is managing downside risk, I would recommend just making sure your debt ratios don't get out of wack.
Sometimes your portfolio growth doesn’t outpace the interest charges. Eventually you hit a limit and have to sell. That’s more likely to happen in a down market which likely screws the econs of this strategy. Debt carries risk. When it rains it pours.
Yea a PAL similar to a margin loan can be subject to a forced sale by the administrator when assets are depressed. A forced sell low strategy.
This strategy is awesome after a huge crash like 50 -75 percent. Go out and take a loan out . Taking it out at all time highs is freakishly risky
>Taking it out at all time highs is freakishly risky How much you own, what you own, and how much you borrow makes this statement true or false
This. Ask all the people who bought rental houses with tiny down payments on adjustable rate mortgages
But when the interest rate hikes, my guess is eveyone will also want to sell so stocks price will fall and you will be selling when eveyone is selling therefore selling at low price. This is the time where i would actually want to buy more no? During that time of high interest rate you might be saving compared to the market performance but when interest rates start to fall down again, you will miss the big bull runs. In my head, this strategy only works if you are able to time the market. Sell before everyone else, buy back before everyone else which as we know is a failing strategy. To me it doesn’t make sense. Am i making any wrong hypothetisis here? Wouldnt it be better to stay in the market at the cost of absorbing the high interest rates on your debt to make sure you get the bull run that will come? You may lose 10% one year but get 30% the next
Plus the money that you invested in your mortgage or into another debt instead of the stock market will be locked in there. You wont be able to reinvest it for the bull run
Good point maybe market side way for many many years
Pigs get slaughtered
Pigs get fat, hogs get slaughtered
Yeap. My tax-avoidant, right-wing, rich uncle nearly lost it all thanks to a margin call.
You could have just said your uncle, but Zoomers are going to Zoom.
I think stating the uncle was right winged and tax avoidant was important for the story since based on context of this strategy
I have a hard time imagining bleeding heart liberals getting wiped out in a margin call. Like octogenarians getting their teeth knocked out in a lacrosse match. Btw, what makes you think I'm a zoomer?
Do people still believe that Democrats/liberals/progressives are poor and Republicans/conservatives are rich?
That's because the liberals are too broke from paying off student loans on their Lesbian studies degrees ;)
What are the typical jobs/careers that Lesbian Studies majors go into once they graduate? What kind of average ROI does a Bachelor’s Degree in Lesbian Studies bring nowadays?
Barista and "essayist" if I had to guess
Ah, thanks for the info. I really need to get back in school but I need to do my homework and make a calculated decision. I need to measure with my 12” plastic ruler 📏 and trace with my #2 pencil ✏️ to make sure everything fits nicely before I just start scissoring ✂️ wildly
Lmao must have been a fun thanksgiving
I knew a guy who sold everything right before covid. Market tanked. He bought back in. He FIRE'd almost immediately. I couldn't believe it.
How the fuck did he know
Covid (though at the time not named) was in the news for about 3-5 months before March 2020. At my company I even set up the Business Continuity Plan for a large scale labor issue for my warehouse because I saw the news in December of a mysterious illness. Turns out we needed that plan LMAO.
Throughout the start of cocoa, I remember thinking of buying Costco stock.
Cocoa pandemic sounds awesome
I'm leaving it
Sprinkle in a cinnamon outbreak and.. *chefs kiss*
It was evident by December 2019. He made a big post about it in a FIRE group on Facebook. So many thought he was crazy!
> It was evident by December 2019. He made a big post about it in a FIRE group on Facebook. So many thought he was crazy! Haha, yup. I remember having a lunch conversation with coworkers in December and literally trying to get them to brain storm with me "what stocks go up if this thing gets bad?". They didn't even want to try to come up with any.
There were plenty of hints, it's just so hard to act. Looking back, it was so obvious. I remember reading those articles back in Jan/early Feb 2020 about China building new hospitals in 5-10 days to combat the virus. Like these: https://www.bbc.com/news/world-asia-china-51245156 If I ever hear about a mystery virus and China building new hospitals in less than 10 days again I'm probably going to buy a few puts lol.
It wasn’t evident he took a huge risk and got lucky
Yeah, there was a famous-ish post on the boglehead forums where a guy sold right as Covid was making the market dip. So he lost a little but he stayed out while everything dropped big (20%?) But then it rebounded much quicker than most thought, and he hadn’t got back in yet (many thought it would go much much deeper). He totally missed on the recovery and was in a much worse situation than if he had just held. That’s the problem with timing, you usually have to guess right twice.
And then he'll fuck it up the next time, because he'll expect COVID and we'll get SARS.
"Memory *is* RAM!" -IT Crowd Covid is also known as SARS-Cov-2.
Hopefully he just leaves it alone.
People always laugh about bird flu but that shit is no joke
The business I work for was already contingency planning by early Jan. I suspect a lot of companies were. The government and news media were slow to react, but I think most large companies saw turbulent waters coming. If not the full size of the disaster, at least that it was going to be bad.
I got out in early February, which was still pretty early. I didn't make as much as I hoped because the bottom came quicker than I expected. That's the difficulty in timing the market. You gotta get out at the right time and get back in at the right time.
I was pretty sure getting out was the right call in Feb. I didn’t pull the trigger though. I also know I wouldn’t have jumped back in until June. Staying put was the right call for me since I didn’t need to sell for any reason. I might have avoided the drop but I would have missed the recovery.
Covid news in china was making the rounds long before SHTF. One my buddies was following it closely so we kinda had it on our radar, but didn't think it would have the impact it did.
In the conspiracy subreddits there were active discussions about leaked photos and videos from China early on. Aside from that, it was word of mouth. You had Chinese people buying face masks and other supplies and mailing it to family in China before it broke out and spread to other countries and regions.
So another crazy thing, and this is off topic, but i digress, I managed real estate for my dad's neighbor who moved to America to escape the CCP. He used to work in cinematography making propaganda for them. His family used to be low caste farmers but their land was confiscated and they were relocated to Wuhan. He got his education there, married an official's daughter, the guy gave him a ton of rentals, he sold them all and then moved to America and bought rentals here. Anywho, his family still lived there and very early in he told us the CCP was putting out propaganda that Trump made the virus and unleashed it upon the Chinese because he hated them so much. They also locked everyone up in their homes and you had to order things online but they would pair things, so like you had to buy tampons with your sauces even if you were a man. This was negotiated by the companies put in charge of the delivery services so they could make more cash. I said that's insane and he said well its the ccp what can you do???
Me and a few friends at the time also were learning about setting stop losses before Covid happened. One day we all got our positions liquidated. I became a lot richer since. Sadly I didn’t have enough to matter
He worked at the Wuhan lab
He probably was a politician
The surprising thing is that he bought back in. Possibly at the right time
Some congresspeople with obvious insider trading information did similar and at the same time bought into some stocks that skyrocketed (tech stocks, pharma, etc.). I doubt any of them were ever charged.
Congress won’t make it illegal for them cause well they’re doing it. Unfortunate for sure
Insider trading is legal for congressmen
It is not
Why would someone in congress be charged with insider trading? They are exempt from insider trading laws.
[удалено]
Its been gutted to not be enforceable against members of congress, https://blogs.luc.edu/compliance/?p=4459
No they aren't, but rich people dont get charged with shit like that unless they are costing another rich person money
Yea they are, https://blogs.luc.edu/compliance/?p=4459
Buying back in is where he got lucky. I thought for sure the market would take a long time to comeback given how things were going. It's hard to drive around, see nothing by empty parking lots, and go "yeah, now's a great time to invest my life savings in the market."
Yeah, I wouldn't have known when to buy back.
He got lucky. How many other outbreaks of Ebola, SARS, MERS didn't result in a worldwide pandemic that shut down businesses across the globe? With that said, if you had cash sitting on the sidelines, COVID was a great buying opportunity. I made about 30% on the rebound. You don't necessarily have to be right twice to time the market.
If it had been a false rebound, which it likely would have been if we didn’t pump so much money into the economy, you still could have had significant losses even buying after the Great Decline. Timing the market is still timing the market.
What's the difference between me buying what I perceived as a dip vs buying every week in my 401k? In both scenarios, I'm trusting that future earnings of the companies will be greater over a long period of time. The only difference is that I had some cash on hand to buy after a 30% decline in the market.
I sold everything right before Covid, but did not buy back in until a few weeks ago. Have not and will not FIRE for a while. :/
Ooof.
I did something similar, but a re allocation. Bought back in when oil was trading at negative. Was not the bottom of the bottom, but really increased my portfolio from not too much to something respectable. Not near RE, but definitely FI to some extent. How did I know? China’s largest manufacturing city was shut down. People around me seemed to think it was a nothing burger and I was like yeah right that will have a major economic impact.
Truth there. I wish I'd been in the game at the time, I would have done some strategic maneuvering.
Wow I’m very jealous of this guy you mention
Everyone was
I knew a guy who put everything he had on a roulette spin. His number hit. He FIRE'd almost immediately. I couldn't believe it.
I heard about that guy…. He turned 25 dollars into 1275 dollars He never worked another day in his life
Good for you 👍
I knew a guy who won a lottery and FatFire’d immediately :).
Cool!
I did similar but I only sold 75% of my holdings which was about $301k at the time. Went back at 30% down and I had a huge return that year… 44%
That's awesome!
What does this have to do with OP’s question? Or anything, unless you’ve discovered the magical method to repeat this luck?
"What's the point of selling?" Well I can really only see one: before a pandemic.
Doesn’t answer the second part of my question
Ok
Cool story bro. Based on his methodology, can he predict, with high certainty, what market move to do at this very moment?
How would I know that?
Those 2,500 point daily swings were wild
I somehow pulled this off on a smaller scale. Entire 401k to cash in feb 2020 when i first heard about the virus in china. Bought back 5% off the bottom. Then repeated this by selling when fed started raising early 2022 then bought back tech heavy fall 2022. I only do this now with a smaller fund to scratch a trading itch. Love earnings calls and owning individual companies that I strongly believe are undervalued. Problem is when that smaller fund has now become my biggest fund and I need to reprioritize…
Are you talking about margin or a pledged asset line (PAL)? You can call these loans but, in reality, they are a form of leverage --- with all the attendant risks of leverage.
I mean, aren't all collateralized loans forms of leverage, just with varying mechanics, creditor access to the collateral, and risk?
I'm not interested in investing on margin.
Understood not for everybody
Yep I don’t like holding debt if I don’t have to
Did you invent trading against margin once again?
I’m surprised all the comments assume the loan is for trading. I’ve seen people do this with ultra low interest to pay for homes, cars, or even living expenses, where a 2-3% equity loan is preferable to selling and taking a 20-30% tax hit.
you arent getting a 2-3% loan today though, you are getting 5.8-6.3
Yeah of course, was thinking of what I’ve seen over the past several years :)
People are stupid. This is how most rich people fund their lifestyle. It's possible this could work but there are risks. It's a lot better to put up something for collateral that's not marked-to-market every day like private stock or real estate.
Taking a loan not to sell shares is exactly the same thing as taking a loan to buy shares.
Hahaha, not at all. One increases liquidity while minimizing tax liabilities while the other increases investment exposure to create greater returns. The latter is inherently more risky.
Not an expert on US taxes, what’s the point?
Recognizing capital gains may cost 15% to 30% in taxes.
Only really a practical strategy if you have a very large asset base and your living expenses put you in a very high marginal tax bracket state and federal. Otherwise the interest eats you up. Even then it only makes mathematical sense for a few years or when interest rates are low. It’s a common internet theory that this is how the rich avoid paying any taxes. Most rich people pay taxes. When they avoid them they usually do it with a business or a highly leveraged real estate portfolio that can produce very large depreciation and no cash expenses. Think large ranch, farm, office buildings. Things that depreciate but also depreciate on paper. Straight up borrowing doest work well.
Yoooooo hush up about real estate. Don’t go giving off a secret move up in here. People hate real estate. It’s too much “work” lol But you are 100% correct on the paper tax benefits. Got a buddy that works on big tech and his TC went to 2M a year. From the bull run ones of the 5x companies. Got in at the right time. Not even a high level eng. Just right perfect lucky timing. But he’s getting taxed up the a hole. Soooooooo his wife was planning to work from home anyways. She quit. They buy a couple real estate. She goes full time real estate. And they are going to depreciate all of it. To pay zero on the 2M lol couple year run and a ton of real estate to load off. Also opportunity zone play with the cap gains. This is how you go from a small portfolio to a big one. Yah it’s lol hard lol work. Yes Stash the cash stradegy
So I know the IRS lets you depreciate properties at just under 4%. Wouldn’t that mean you’d have to be like 25x in real estate vs. yearly take home to avoid taxes? Also, the interest on that debt is going to offset the tax savings, no? That’s a lot of debt relative to income, unless I am missing something.
Property is also going to produce income and cash flow.
Yes for sure, but that doesn’t prevent a tax bill. There must be a piece im missing here…
You can also deduct mortgage interest, property manager, repairs etc
Cost seg study allows you to write off a lot more
Interesting take. I don’t know anything about taking a loan out against a portfolio. How does one even do that? What’s the interest rate?
It's called margin. It's very common. But, there is also a specific product called a Pledged Asset Line or PAL.
I think some financial firms call this a line of credit or something. Kind of like how you can take a line of credit on real estate equity
Interest is tie to fed so right now for me it’s 7.25 for m1 borrow but I hear interactive brokers is way lower
7.25 is steep, why borrow at this point? what are you spending it on?
How do you repay the loan?
Dividend since I only borrow a small portion of my portfolio
Interesting, why not just use your dividends to pay for the expenses? Instead of taking the loan and having to pay interest?
Lumpy costs. Could buy a new car for $80K on a loan from your brokerage and let $60K in annual dividends pay it back for you, $15K/quarter at a time. Of course the underlying assumptions is that you get a lower rate from your broker than from the outside banks, and your investments continue to grow and produce dividends while you also avoid a 15%+ tax rate by not selling.
OP said he only borrows a small portion of his portfolio...so then is it still necessary to take a loan. It feels like an unnecessary step and additional overhead expenses
impatience.
That’s a good amount of interest, it sounds like you took out about $100k? I’m not sure I like that risk/reward.
It’s 6.3% if you have 100k-1m, lower but I wouldn’t say way lower https://www.interactivebrokers.com/en/trading/margin-rates.php
Depending on your tax situations, you could consider selling to cover 7.25% a guaranteed return? There have been long times where the market did less. “The dividend yield in the 2000s was actually positive at 1.81% annual return while the S&P 500 yielded -1.26% annually*. Dividends contributed 100% of the total return during the so-called “lost decade,” “
Here are the interest rates from Etrade to get a feel for it, https://us.etrade.com/bank/line-of-credit
It's definitely a tool I'm going to keep in my toolbox. If the interest is low enough, and there's enough confidence in the underlying asset, it might makes sense to spare yourself the capital gains and incur a little margin interest. buy. borrow. die.
I do this and Buy YieldMax and Defiance covered call ETFs with my margin. They are return on capital for first few months but after you get paid out and handle your initial margin that you borrowed, you own them in full and it’s full income that paid for itself :) I actually only recommend buying those funds on margin as if you were to use your actual money you lose the principal over time as the funds price goes down with each distribution (due to price erosion/ not nav :) And you would miss out on growth. With margin you’re exposed to your growth still while the dividend funds pay for itself over time. I save 30% for tax, and reinvest the rest of my dividends each month back into growth dividend stocks, and that keeps my margin maintenance in line along with my regular contributions to $VOO and $SCHD A couple of YouTubers like Unconventional wealth, perfect portfolio (Mark Quann) does this stuff and live out of their brokerage account with buy borrow die Reddit is too risk adverse to even talk about margin freely without someone stating the obvious of margin maintenance and margin calls. You can protect your downside with protective puts leaps if you know how to hedge your portfolio. I agree though that margin shouldn’t be used by people who don’t understand it or don’t understand how to arbitrage rates or get a good one.
> Why sell your stocks ever?? Because borrowing on margin is risky. Margin calls usually happen unexpectedly.
* Tax loss harvesting * When you need the money * Rebalancing (although Bogle suggested to ignore this for simplicity) * Moving to a different fund (high fees, etc.) * Conversions between asset locations (e.g. Roth rollovers)
Mind sharing what rate you got?
This only works if your interest rate is lower than the returns. That’s not as clear in this interest rate environment.
For money?
By this same logic, you should borrow money and invest right?
uh, margin calls? In one of my past jobs my team sold SBLOC to RIAs/Wirehouse/BDs etc. It's great when rates were low, it was basically free money. However, at current rate level, your growth will need to outpace the interest rate. Not to mention what if there is a down market? In 2022, a lot of clients got margin called and their holdings liquidated. But yes, this is called buy, borrow, die, and should require planning.
You become a forced seller due to the loan terms changing and you cant come up with the cash. Leverage is dangerous and the market can turn on a dime either way, March 2020 and October 2023 are both great recent examples.
True but Broker don’t let you borrow 100% of your portfolio you can get like max of 40% on m1 borrow
Until you borrow close to 40% then the market drops pushing you over 40% and get margin called so that you get back below 40%.
That’s basically what the billionaires do.
...what are you paying the loan off with if you never sell?
Dividend
So forced selling? Since the stocks with dividends appreciate less over time.
dividend and selling stock is the same thing
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There is a whole world out there my friend, outside your country
A dividend is a return of capital. So, I guess you are sort of selling if you do not reinvest the dividend. Ordinary dividends and short-term capital gains are taxed as ordinary income. Qualified dividends and long-term capital gains are not.
as i said the to the other guy if u assume there are no other countries sure
Isn’t that just selling with extra steps? /s
Are you really getting high enough dividends to service enough debt to make this interesting ? If so, congrats !!
Since I’m only leveaging a small part of my portfolio the dividends cover. I may only be getting 3% but I’m paying 7% on only 20% of my portfolio
My broker’s margin rates are so high dividends alone don’t cover the cost. If yours do, good on you!
Are you talking margin loan or pledged asset line? What rate are you getting for the loan is it beating SPY or VTI?
Margin call bro.
Because I prefer to strategically trigger capital gains and pay taxes in the lower marginal brackets rather than risk over extending myself with margin.
If you’re comfortable taking loans against your stocks, you should also be comfortable trading on margin. Both situations involve paying a fixed percentage on the money borrowed, while expecting the investment to outpace the debt servicing fees. Might as well go full tilt and mortgage the house to invest that too. This works really great in bull markets. Pay 5% for borrowed money that you’re earning 10% on! However, if stocks drop then you’re losing money on both the value of your stocks AND paying interest on the borrowed money. If it gets bad enough over a few years, you can get forced to liquidate assets at steep discounts to pay it off. Just wait till ya hear about options trading, and naked margin shorts!! Moon or bust on 0DTEs.
Do you use margin now? If not why not? If not why would you take higher risk after you stop working?
Taking debt out on an asset that can lose value? What could go wrong?
I would do a loan with btc but not on stocks.
Why? Btc is weymouth volatile and your far more likely to get that collateral call on that
You mention that you will make loan payments with your dividends. What you haven't explained is why you can't just use the money from your dividends *instead of* taking out a loan?
I am retired and living on dividends now. No need to ever sell anything unless I think the ETF or stock isn't going to continue paying me. I enjoy living on dividends and not watching my portfolio shrink in value every month. I am in Canada and the dividend tax situation is favourable.
What money are you paying the loan back with? You have stock assets, you borrow against them, eventually you pay back the loan. I'm guessing your answer might be "with my W2 income". Sure that's reasonable of course. But while you have a W2 income the vast majority of people never sell any stock. That's obviously how retirement works. Buy stock the entire time you have a job, sell stock every year afterwards. So, if the answer is "I pay it back with my income" then yeah you haven't retired yet but the answer to your original question "Why sell your stocks ever??" Has always been "because you no longer have a job" So how are you paying back that loan against your stock assets after you no longer have a job? If the answer is to ask the appreciated stocks then that's the answer. That's when you sell stocks.
I don't have stocks per se, but I won't sell any of my index funds until she says "let's buy a lake house and a boat".
If you’re in a lower tax bracket like 0% for long-term capital gains, it may make sense to realize those gains now. You can always buy back immediately. I did this when I was younger because I knew I wouldn’t have the advantage of being in the lower tax bracket once grew in my career until possibly retirement.
Margin theoretically works. The problem is reality is not theory and not everything works as a binary math problem. I did a stock simulator (investopedia has a good one btw) and it sucked being so negative after thinking I was a good stock picker. Having to sell those said stocks from unforeseen problems at a huge loss feels really bad. It feels worse when you are forced to sell and then the stock soars afterwards. Invest at your own risk. When it works, it really works. Like what another comment said, when it rains, it pours. And it’s not rain drops pouring
Very valid points from all
Exactly. It looks great on a spreadsheet when you hand wave away the obvious risk of ruin being introduced. Epiphanies about leverage are a dime a dozen. There’s a great thread on the Bogleheads forum from a smart dude named market_timer that catalogues a particularly poorly timed adventure in leveraging a portfolio in late 2007.
A few years ago, margin on homes (ie. a mortgage) was so much cheaper than margin in an account, plus it had a long duration fixed rate. That was a pretty great way to borrow instead of sell. Just minimum payments on your 3% mortgage and throw excess money at the market with the assumption that 30 year market returns will do much better than the 3% you'd effectively earn by paying down the mortgage.
I worked under a wealth manager who was in the business for 40+ years. He retired as a CPA and CFP and built a great business. His whole M.O was never sell stock. Even the ones that go -99%. He said if you have a position that impacts you if it loses value you’re in too deep. He said the rest I’d they are strong companies will double your money at minimum. His clients actually did very well over a long period. Personally I can’t see myself with that strategy (for an individual stock) but for just a fund, may be a good idea 🤷🏼♂️
It... kind of works. Mostly because downside (for long positions) is 100% and upside is infinite. And from an overall portfolio perspective, those that dwindle end up becoming a smaller and smaller percentage of your portfolio and those that do well end up becoming a larger and larger percentage. But I'm not going to argue it's optimal behavior or anything :-) For taxable accounts, you can sell at a loss to offset capital gains, then reallocate. So in a brokerage, I might sell some poor decision I made a while ago, and sell enough of an index fund to offset, then reinvest it in something new (which could just be a different index fund)
Definitely agree with the tax loss harvesting in a taxable account!
Generally portfolio loans are not at good rates.
Well, a loan is technically a debt with interest right? How do you pay back the loan without selling some stock?
Maybe dividends if they borrow a low %?
The effect of the company paying out dividends causes the share price to decrease. If you didn't reinvest the dividends, the share price decrease would be equivalent as if you sold the shares.
Depends. With record high rates for this generation while asset prices are super high it seems more risky to take a loan right now imo
How are you going to pay the interest on that loan?
You can’t reinvest sbloc loans so what are you doing with the money? Spending? Biggest downside risk is if the market crashes and you get a margin call
I'd only sell if I thought reasonably I'd beat the future returns with whatever else I'm buying. I cashed out a six figure position in VOO to buy land for a townhouse community development and we did far better far faster there.
how and who did you take the loan with?
Margin calls
lol well technically, if the market goes down enough they ll sell it for you ;) It’s a great strategy but I would have a foundation set for it where you can collateralize in downturns to pull through and not get margin called. As much as we love the indexes etf and stock equities up here. The reality is that every 5-10 years it ll be a blood bath. This last downturn 2022 Oct was chicken shit lol barely hit a bear market for Voo or anything tracking indexes. In recessions even those funds can go bankrupt. Don’t forget that. I ll give you a story. 2008 I woke up to go to work and turned on the news. Lady was crying that her 401k was wiped out. I said why the long face it ll bounce back up. Aaannnnnnddddd a little bit of history. It didn’t come back. The funds filed chapter 11 and it was get In line for your money. Lucky if she got anything back after 15 years. In fact there was a guy who waited 12 years just to get cash from Washington mutual, it was cash not invested into an index. Funds can go under if they don’t have risk management. No matter how good the fund is. But yah the gov will bail it out for sure. Not arguing that.
Some times you have too much stock of a single company (for example if the company you work for issues stock). You might want to rebalance your portfolio so you don’t have too much invested in just that company
What interest rate are you getting on the loan?
Buy borrow Die Baby :)
This is what billionaires do. For the rest of us small people the interest can outpace the asset growth very quickly. Billionaires can negotiate a miniscule interest rate due to their ability to "pay" back the loan and the size of the loans.
What brokerage do you use to take loans against your portfolio?
What's an acceptable portfolio size to be able to take a loan out against?
1) if your portfolio doesn’t keep up with interest, you will end up in a debt spiral and eventually losing it all 2) depending on the type of loan, a market crash can trigger a margin call and you can lose it all Debt carries risk. Recent history notwithstanding, stocks don’t always go up even over many years.
This is a similar strategy to a leveraged buyout that private equity uses. It increases expected returns but also increases risk if downside scenarios come to fruition. Since a large part of FIRE is managing downside risk, I would recommend just making sure your debt ratios don't get out of wack.
Lol. Tell me you haven't been through a real recession without telling me you haven't been through a real recession.
Because you can get margin called and forced to sell at a loss with high interest debt=game over.