Hello,
I have a 100k portfolio and I’m wondering if a Lombard loan could be interesting to have some leverage and continue investing. For info, my strategy it’s buy-and-hold (for good).
Do you have previous experience with this kind of loans? what is your feedback?
Thanks in advance
Margin loan will amplify your gains as well as your losses and generates costs as well. One could argue it’s a no brainer at 1.5% interest p.A. when globol portfolio generates dividend in excess of that.
In any case, it’s a loan. Only take as much as loan as you can comfortably and quickly pay back in case sh** hits the fan.
thanks for the feedback!
My idea was to calculate risk/payback scenarios considering a worst-case of -40% of the portfolio.
For Reg.T margin regulation (up to 50% loan based on asset value) you can have a Margin Ratio of up to 1.43 and endure a 40% drawdown without getting a margin call. I’d recommend calculating for a drawdown of at least 50%, which would bake the maximum margin ratio of 1.33 or less. Then again, it’s far better to have some cash/margin available for corrections, instead of being blown-up and not being able to buy at a discount.
In my opinion, it is prudent to account for another possible covid-response dip in markets. So factor in the possibility of having to inject cash if the collateral value of your securities dips.You should also account for the possibility of companies not paying out a dividend (for example, a number of good dividend companies didn’t pay a dividend this year). In other words, don’t use more secured financing than you can realistically afford in a worst-case scenario. The last thing you want is to be forced out of your position at a loss.
If you can earn a decent yield on your cash, that is obviously an incentive to use Lombard loans and keep your cash available.
My advice would be different for day traders. In that case, Lombard loans provide a great tool for bridging short-term liquidity gaps caused by settlement cycles, in my opinion.
I couldnt say it better
I’ve turned it around and around in every ways I could, firmly wanting to believe that leveraging my investments could turboboost my returns without an unsustainable level of aditional risk. My conclusion: lombard loans are, like most other kinds of debts, still a negative cash allocation and must be considered as part of my global portfolio allocation (rather than solely in regards to what I do with my stocks).
It can make some sense if you are 100% invested in stocks, keep it at a reasonable level and are willing to loose some assets in case of a big market drop, or if it is bigger than your potential emergency fund and you are willing to sacrifice your assets (sell at a loss) in order to preserve your emergency fund in case of a big market drop. If you’re not willing to go that way, you’re probably better off investing your emergency fund (if you have one). As I am not ready to do that, that’s where I’ve realised that lombard loans don’t fit my risk tolerance.
I think it doesn’t make sense if you have an emergency fund.
Hi guys! Am I wrong or taking a loan for investing breaks one of the conditions to be sure not to be considered a professional investor? If it is so, the risk of having my whole capital gains taxed would be a no-go for me, even before thinking about the investment risk-reward itself…
As long as your loan interest is lower than dividend yield, it does not qualify.
Ok, thank you! I didn’t know that, as it is not explicitly stated in the tax office statement. Very useful! Is it the average portfolio dividend the benchmark?
It’s one of the criteria for being classified as a professional. It’s not about the yield in % but cash value for the tax year. If you receive more than 100 CHF in dividends per 100 CHF of loan interest, you should be safe.
Tax decide on any criteria who is pro or not. Not any real rules to follow or need to reach all criteria.
Thanks for your answer.
As you said I consider it as a matter or risk tolerance. Let’s say I have 50k as emergency fund and I don’t want to invest it (directly). I would see the Lombard loan as a way to invest the emergency fund indirectly, considering that it will be used only in worst-case scenario. Knowing that my profile is buy-and-hold forever I guess in that hypothetical worst-case (-50%?) my portfolio would have the same value no matter if I used the emergency fund or the loan.
On the other hand, regarding costs and other implications, my hypothesis is to compensate the costs with dividends and deduct the interests.
Am I maybe too biased? ^_^’
Well, honestly, if you have that cash, better to invest it instead of paying interest. You can always withdraw cash on Margin in case of an emergency.
Unless you have 1.25% on your best savings account, and your canton allows you to deduct up to 1600 CHF of interest you receive 
Only if your borrowing rate is lower than 1.25% then…
How sure are you about this criteria? Makes no sense to me, because dividends arent guaranteed.
You are exposed to the exact same risks with that emergency fund and 50K of lombard loan or without either. Either your loan gets called back and you can’t use your emergency fund for other things or your loan holds firm and you could contract it whenever you do have an emergency.
Holding cash while having a loan can give a sense of security, but it is only a feeling: the risk is still there, though it is harder to spot.
ETA: What I mean is, if your risk tolerance doesn’t allow you to invest all your assets and keep no cash, then taking a loan of the same or more amount than you hold cash means that you are overinvested relatively to your risk tolerance. It won’t show as long as everything goes fine but it’ll probably be terribly real if shit ever hits the fan.
I am interested in taking up a lombard loan too. My portfolio is at 400K currently so I could take up a 120K loan and put the money into SCHD (80K), DIVO (20K) and JEPI (20K) to generate 4-5% yield and have some growth as well as the majority of the money would go to SCHD.
Are there any Tax benefits? For example if you have a loan for real estate, you get tax benefits.