Margin cash loan from IB - MMM post

HI everybody!

This was not possible for Switzerland back when I checked in 2018. Now I have a cash account so I?m not so motivated to change it just to test it.
Does anybody knows if this is now possible in Switzerland as well? By simply transfer out more cash than you have on the account?
Could be interesting for a couple of reason:

  • invest emergency fund instaead of keeping it cash: withdrawing 10k for a car problem/dentist whatever out of 200k invested in ETF is a no risk move
  • alternative way to finance a home

I can’t seem to find any country of validity or something. Thanks!

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It’s possible with IB at low rates. Other brokers, including the swiss ones, will do it at higher rates (Swissquote’s stated rate is 3% for CHF, search for Lombard loan).

My take is that MMM is mainly writing for his situation, nowadays. The situation is clearly different for someone already FIRED with excess assets than for someone who’d take a hit loosing money. Margin loans terms can change in dire times, when you need them the most and Switzerland doesn’t tax capital gains, so it’s not as important to avoid selling when you need quick cash. It’s an option to finance an expense that you plan to repay quickly (and then do) but I’d not use it as an emergency fund.

Otherwise, it’s just plain leverage. Use it if you’re comfortable with it and it fits your strategy and risk assessment, don’t if it doesn’t.

I have a margin loan of a few percents of my NW. It is really good to have more flexibility.

Thanks. So you basically need to have a margin account, and then you can transfer negative CHF position to your bank account? Is that easy?

I may reconsider and switch from a cash to a margin account.

Obviously not negative but yes you can potentially take out more money than you have invested.

How does the repayment schedule work? Is it over a fixed period?

The loan and the interest are payed from the liquidity in the account right? So it would be like a normal mortgage with the tricky bit that your asset are acting as collateral and the interest rate is relatively low unless the market goes crazy.

The interest just makes your cash position more negative over time. As long as you meet the margin requirements no position will be sold.

I am struggling to understand how the loan is payed.
The interest goes against your cash balance, how about the principal?

If you take the loan out to buy stocks I guess that as long as you meet the margin is OK and then when you liquidate the leveraged position you close the loan.

What happens to people like MMM that take out a loan to withdraw money and use it externally? How do they repay the principal part of the loan?

Either they never pay back the principal before the end of time, or they either get money from their account (dividends or sale) or they send back money to IB. They can of course be liquidated if they don’t meet the margin requirements

I think it’s faily simply. Depending on the portfolio you have I belive you can get up to a 1:2 margin, i.e. if you have 100K you can borrow up to 200K.

What is suggested by this is basically that you take a short position in USD, by withdrawing it (or whatever currency you choose).

You don’t need to repay anything as long as you don’t get a margin call (if your portfolio value decreases, you may get positions sold automatically to cover it). If not, you just keep paying interest to keep the borrowed cash (pretty much like a CH mortgage once you stop deducting the debt). Just make sure you don’t take too much of the margin like MMM did.

And looking here, seems this is available for :switzerland investors:

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As other have said, there are no principal repayment requirements unless you reach the limit of the margin you are allowed. Be wary that your debt amount is fixed, aside from accruing interests, (say 100’000.-) but that, unlike a house, the value of your assets moves wildly. Your assets can loose half of their value overnight (well, not quite overnight but pretty quickly) so what could have been a 100% margin (100’000.- of debt, 100’000.- of assets) can become 200% (100’000.- of debt, 50’000.- of assets) without you doing a thing, resulting in a margin call.

If your margin is called, you’ll have a few days to cough up the difference in money. If you can’t, your assets are sold at their low price to get you back into “acceptable” margin territory. This can happen again and again if the price of your stocks keep falling.

Note that margin becomes dangerous when stock prices drop. Big stock price drops tend to happen when other bad things happen in society, meaning two things:

  • you could be out of a job, if you’ve loaned the money, the person you’ve loaned it to could not be able to repay it anymore, the value of your house could be reassessed (dangerous if you have a mortgage too), the value of your other assets may decrease too, making it a very bad time to sell anything. In short, you could be in financial troubles already ;

  • the situation may be too dire with too many people on margin so that the broker needs to adapt its margin requirements, either lowering the total margin available (you’d get called when you thought you were safe) or the interests due (your margin becomes suddenly unsustainable).

Margin loans are part of the things that go well as long as all goes well but can get really, really, really bad when things get bad. Apply caution. MMM is a very enthusiastic person and, in this case, writes in a genuinely reckless way without emphazing the consequences margin play can have. That he just discovered a tool that’s been there for ages may mean he hasn’t truly internalized what being margin called really means when you don’t have the money to meet the requirements. He, himself, has got the money, after all. Be wary if you’re not a multimilionnaire yourself and are borrowing more than you can repay in a blink.

I’d read Market Timer’s cautionary tale before going on margin: A different approach to asset allocation - Bogleheads.org

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Thank you, now it is all clear. I think the article is really dangerous in the sense that doesn’t fully explain the possible consequences.

I think as long as you keep the margin low (10-15% range) there won’t be any issues. So if you have 100k in assets, you could take a 10-15k margin loan and would only get margin called if the stock market drops by 85-90%. The global stock market never dropped that much. I don’t remember the exact numbers from 1929, but I think Swiss stocks dropped by 50% and something like VT (if it would have existed) by 65-70%.

As soon as I pass the 100k mark in IBKR, I will close my emergency cash fund and invest that in stocks too.

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I’d feel relatively safe with a 10%-20% loan too but the concept makes way more sense, in my view, for a retired american person who pays capital gains on their stocks (which have considerably increased in value over time) than for a frugal swiss person in the accumulation phase who can cashflow most small needs (including raising a small amount of money to help friends) and wouldn’t pay capital gains by liquidating stocks when they need more.

Also, I’d not take a loan and keep a cash/bond allocation together (outside of the 2nd pillar), including no emergency fund. The two play the same purpose and can fail at the same time. If I’m not at ease with the concept of needing to request a margin loan in case of an emergency, I’d not be at ease with the concept of having one when that same emergency occurs. Margin loans are for highly risk tolerant profiles in my book (or specific strategies which are not the topic of this thread).

Yes, capital gain are an important part for US person to consider and margin loan help with liquidity without triggering taxes for them.

But I don’t agree with you that liquidating stocks is always feasible for a swiss person. I would not keep a consistent margin loan “active”, but it would actually make me sleep better to know that I can withdraw up to 15-20% in cash in a few hours without having to sell. Selling during a crash to cover some emergency or unexpected purchase can be devastating to your long term gains.

And here comes some considerations:

  • the market doesn’t crash 50% in one day. It may take 5-6 months. In that period, you can fasten your belt and go super saving mode to cover the margin loan you may have took out to avoid selling during a crash. If they fire you, you still can go super saving and there is arbeitslosigkeit versicherung.
  • If the market crash, the loan interest rate will go up for sure, but paradoxically your margin loan calling risk may come down. Let me explain my thoughts: if you need too much cash to be paying with your cash reserve, and the market has crashed 50% from all time high, instead of selling stocks you can open a relatively safe 10-20% margin loan because it is highly unlikely the market will crash again 80% AFTER crashing 50%.

If the market are at all time high, then if an emergency come, I would sell some stocks instead of taking out a margin loan. Because we don’t ahve capital gain taxes.

I have right now 15k in cash “losing” opportunity cost of 5% per year. And I have 210k on IB where 10% would be 21k.

I will test some things out, but if it works well I’m doing something with that 15k (maybe even dump it in my 2nd pillar to lower my taxable income and make 1% interest). I will not open actively a margin loan, but I will be sleeping better knowing I could use it just in case.

To me it makes sense even if you are Swiss, because the interest you pay on CHF is so low. I don’t see why the loan interest would go up in case of a crash. Anyway the reference rate is negative now so you still have some margin before it increases for CHF.

But if you take money out, it is obviously safer to keep it to a small share of the total portfolio like maximum 20%.

“Interactive Brokers has margin rates of about 2.5% for their lite accounts right now, 1.5% for pro. They will issue you a debit card that allows you to make purchases using your margin, no cash withdrawal required. It’s a fantastic setup as long as your collateral securities are all fairly stable and/or you don’t push it too far.”

From Bogleheads. Is this debit card available for us?

Last I checked the card was only available for the US (as well as it was the margin loan)
but now checking again I see there is an .eu website promoting it:
https://www.interactivebrokers.eu/de/index.php?f=27393
it may be they open it up for Switzerland as well?
I’ll try to find out more later on

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Would be amazing! Makes the “emergency fund” even more accessible.

I guess Swiss quite could be an option too.
Not sure if one can “withdraw” this money though.

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