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Interactive Brokers margin investing

  • Last Updated:
  • Feb 13th, 2018 11:11 pm
[OP]
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Dec 23, 2010
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Moon

Interactive Brokers margin investing

What is the chance of failure long term if I invest in the stock margin with the following ratios:

$750 cash + $550 on margin every 2 weeks. Since I'm investing every 2 weeks I will effectively be doing DCA and will be using a diversified portfolio though 100% equity.

Maintenance margin would be 25%.

Seems extremely unlikely for this strategy to fail since it would require my DCA portfolio to lose over 40% before I hit even a single margin call.
22 replies
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Dec 14, 2010
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You are not considering the following variables:

- Your brokerage might raise the minimum margin requirements when the market goes down; Most brokerages did that in 2008 and caught many people off-guard.

- The market tanked 50% in 2008, Nasdaq tanked 80% in 2001, so if a crash does happen, there's little protection if you are leveraged that much. I rather borrow from HELOC (if you have one) or LOC than margin, and I try to keep my margin borrowing under 25%, and mostly for trading.

You can keep DCA, but the market might tank at a rate faster than you can keep covering when equities drop that fast. Hence my personal preference to limit margin borrowing to 25%, and use the rest from other sources that cannot get a margin call (as long as you pay the interest to these LOCs, they don't get called out, and 2001 and 2008 are good examples of it, provided you keep doing the interest payment). There's always the risk of them being called too, but it's far less probable than a margin call.


Rod
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For leveraged equity portfolio think long term, do not panic sell and be very diversified. 40% is a good cushion and I was more leveraged than that until they liquidated my positions. The challenge will be not to get greedy and break your own rule and borrow too much. Just be prepared for the pain when markets swing. The pain is mental but it will affect you physically. Markets can be very erratic and at times nothing will make sense but just remember it's not the end of the world even if they liquidate you.

IB does not margin call. They liquidate Smiling Face With Open Mouth. I lost my entire BABA position last week Face With Tears Of Joy.You can mark positions for them to liquidate last. Is $750.00 enough to start an IB account?
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Oct 19, 2016
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As the others above have said the risk of broker raising margin or IB selling your stocks to maintain margins...

Instead I would consider using long term call options (if you know how to use them properly) OR just buy a leveraged etf such as SSO (2x S&P500).
[OP]
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Dec 23, 2010
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zakarydoks wrote:
Feb 12th, 2018 10:56 pm
For leveraged equity portfolio think long term, do not panic sell and be very diversified. 40% is a good cushion and I was more leveraged than that until they liquidated my positions. The challenge will be not to get greedy and break your own rule and borrow too much. Just be prepared for the pain when markets swing. The pain is mental but it will affect you physically. Markets can be very erratic and at times nothing will make sense but just remember it's not the end of the world even if they liquidate you.

IB does not margin call. They liquidate Smiling Face With Open Mouth. I lost my entire BABA position last week Face With Tears Of Joy.You can mark positions for them to liquidate last. Is $750.00 enough to start an IB account?
I know they liquidate but you can use DCA to make it such that the order of liquidation is from most recently bought and thus the lowest possible loss. You can also buy puts to guarantee there will be no liquidation if your portfolio is approaching margin requirements. I think people posting don't realize that if you are dollar cost averaging the market has to crash far more than 40% for me to have my positions liquidated. Market crash of 40% won't result in a portfolio loss of 40% for DCA. For a market crash of 40% to result in portfolio loss of 40% all my holdings have to be at the top of the market. This is the reason I think my risk of margin call is extremely unlikely.
Last edited by Applesmack on Feb 13th, 2018 1:57 pm, edited 1 time in total.
[OP]
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rodbarc wrote:
Feb 12th, 2018 10:47 pm
You are not considering the following variables:

- Your brokerage might raise the minimum margin requirements when the market goes down; Most brokerages did that in 2008 and caught many people off-guard.

- The market tanked 50% in 2008, Nasdaq tanked 80% in 2001, so if a crash does happen, there's little protection if you are leveraged that much. I rather borrow from HELOC (if you have one) or LOC than margin, and I try to keep my margin borrowing under 25%, and mostly for trading.

You can keep DCA, but the market might tank at a rate faster than you can keep covering when equities drop that fast. Hence my personal preference to limit margin borrowing to 25%, and use the rest from other sources that cannot get a margin call (as long as you pay the interest to these LOCs, they don't get called out, and 2001 and 2008 are good examples of it, provided you keep doing the interest payment). There's always the risk of them being called too, but it's far less probable than a margin call.


Rod
You can buy put options to guarantee that your holdings will not hit margin requirements. During a severe downturn where you are deeply in the red I think that is money well spent. Also being 100% in the NASDAQ is not diversified.

Also volatility may actually be good for my strategy due to DCA and I should consider investing in more volatile indexes such as XBI. The more the price goes down the more I gain from DCA.
Last edited by Applesmack on Feb 13th, 2018 2:03 pm, edited 1 time in total.
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Apr 9, 2012
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I know people say you can't time the market. But you really want to do leveraged investing when the bull markets been running for 9+ years? Why not just invest the $750 DCA over time and when things do really turn bad then leverage. I would say you are putting yourself at too much risk to leverage when the market haven't fallen for so long. Just remember the general rule. The market usually falls 3 times faster than it raises meaning it will only take 1 year to wipe out all the gains for the past 3 years.
Last edited by atang810 on Feb 13th, 2018 2:15 pm, edited 1 time in total.
[OP]
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Dec 23, 2010
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atang810 wrote:
Feb 13th, 2018 2:15 pm
I know people say you can't time the market. But you really want to do leveraged investing when the bull markets been running for 9+ years? Why not just invest the $750 DCA over time and when things do really turn bad then leverage. I would say you are putting yourself at too much risk to leverage when the market haven't fallen for so long.
What you are suggesting is the definition of timing the market though. DCA allows me to weather market downturns since even as the market is falling I continue buying. Even if the market falls now nobody knows how long this correction may be nor how steep this correction may be. The market may also continue the bull run for another decade. The more the price falls the more DCA benefits me.
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My personal preference is to keep margin loan value below 50% of net equity (excluding HELOC available balance) and below 25% (including HELOC room). This way I pay the lowest possible interest while still maintaining the safe margin levels.
rodbarc wrote:
Feb 12th, 2018 10:47 pm
You are not considering the following variables:

- Your brokerage might raise the minimum margin requirements when the market goes down; Most brokerages did that in 2008 and caught many people off-guard.

- The market tanked 50% in 2008, Nasdaq tanked 80% in 2001, so if a crash does happen, there's little protection if you are leveraged that much. I rather borrow from HELOC (if you have one) or LOC than margin, and I try to keep my margin borrowing under 25%, and mostly for trading.

You can keep DCA, but the market might tank at a rate faster than you can keep covering when equities drop that fast. Hence my personal preference to limit margin borrowing to 25%, and use the rest from other sources that cannot get a margin call (as long as you pay the interest to these LOCs, they don't get called out, and 2001 and 2008 are good examples of it, provided you keep doing the interest payment). There's always the risk of them being called too, but it's far less probable than a margin call.


Rod
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Invest a lump sum $50K now, and then do DCA of $750 per week with $550 margin borrowing.
Applesmack wrote:
Feb 13th, 2018 2:18 pm
What you are suggesting is the definition of timing the market though. DCA allows me to weather market downturns since even as the market is falling I continue buying. Even if the market falls now nobody knows how long this correction may be nor how steep this correction may be. The market may also continue the bull run for another decade. The more the price falls the more DCA benefits me.
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OR

First 52 weeks, DCA @ $750 / week (this will give you a head start of $39K in equity)
From 53rd week, DCA @ $750/ week, $550 margin loan
atang810 wrote:
Feb 13th, 2018 2:15 pm
I know people say you can't time the market. But you really want to do leveraged investing when the bull markets been running for 9+ years? Why not just invest the $750 DCA over time and when things do really turn bad then leverage. I would say you are putting yourself at too much risk to leverage when the market haven't fallen for so long. Just remember the general rule. The market usually falls 3 times faster than it raises meaning it will only take 1 year to wipe out all the gains for the past 3 years.
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ruchir wrote:
Feb 13th, 2018 2:29 pm
Invest a lump sum $50K now, and then do DCA of $750 per week with $550 margin borrowing.
I don't have 50k. I plan to obtain the 10k required for opening an IB margin account and DCA that 10k (no margin added) over the span of a year at most. I will buy more if the market is falling than if the market is rising. Thus it will take me 1 year to DCA my 10k if the market only rises but if there are drops I will invest a bigger chunk of that 10k than normal. Thus if the market falls it will take me less than 1 year to DCA that 10k. As I'm DCAing the 10k I will also put in $750 every 2 weeks and $550 on margin. After the 10k runs out I will continue to put $750 every 2 weeks and $550 on margin. Doing this strategy I feel I am very unlikely to face margin calls that will cause my portfolio to face extremely costly liquidations since IB liquidates assets based on most recently purchased and my DCA strategy will protect my most negative investments from liquidation.
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sounds like a plan!
Applesmack wrote:
Feb 13th, 2018 2:35 pm
I don't have 50k. I plan to obtain the 10k required for opening an IB margin account and DCA that 10k (no margin added) over the span of a year at most. I will buy more if the market is falling than if the market is rising. Thus it will take me 1 year to DCA my 10k if the market only rises but if there are drops I will invest a bigger chunk of that 10k than normal. Thus if the market falls it will take me less than 1 year to DCA that 10k. As I'm DCAing the 10k I will also put in $750 every 2 weeks and $550 on margin. After the 10k runs out I will continue to put $750 every 2 weeks and $550 on margin.
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Applesmack wrote:
Feb 13th, 2018 1:57 pm
I know they liquidate but you can use DCA to make it such that the order of liquidation is from most recently bought and thus the lowest possible loss. You can also buy puts to guarantee there will be no liquidation if your portfolio is approaching margin requirements. I think people posting don't realize that if you are dollar cost averaging the market has to crash far more than 40% for me to have my positions liquidated. Market crash of 40% won't result in a portfolio loss of 40% for DCA. For a market crash of 40% to result in portfolio loss of 40% all my holdings have to be at the top of the market. This is the reason I think my risk of margin call is extremely unlikely.
I know what you mean because I try to maintain a 10-50% cushion. You want to liquidate positions with low potential first, not to minimize loss. Buying put options like any hedging is expensive if you do it long term. I would rather sell insurance than buy insurance. What you are doing here is increasing your volatility to increase returns so you want do it as cheaply as possible. Like you said, as the market goes up you will have a bigger cushion OR you can use the additional margin. What is your plan for that?

Think of overall portfolio volatility and exposures and what strategies you can employ to achieve that desired level. Leverage increases volatility (magnifies gains AND loss) and it cost interest. When you buy put options which is basically a negative correlated asset which lowers volatility but is very costly. Alternatively you can simply lower leverage and buy call options. You can also consider selling put options instead. I encourage you to do it because your plan is well thought it out and you got your bases covered.

A good read. Buffett's Alpha
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Applesmack wrote:
Feb 13th, 2018 1:57 pm
I know they liquidate but you can use DCA to make it such that the order of liquidation is from most recently bought and thus the lowest possible loss. You can also buy puts to guarantee there will be no liquidation if your portfolio is approaching margin requirements. I think people posting don't realize that if you are dollar cost averaging the market has to crash far more than 40% for me to have my positions liquidated. Market crash of 40% won't result in a portfolio loss of 40% for DCA. For a market crash of 40% to result in portfolio loss of 40% all my holdings have to be at the top of the market. This is the reason I think my risk of margin call is extremely unlikely.
It wont need to drop 40% if they change your margin requirements. Which they can do at anytime and often do during a downturn. Otherwise...like you said you are pretty safe

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