The stock market has an average annualized return of 7%, and hence a monthly return of 0.57%.
One way to look at it is that for every 1k chf of cash that you keep on your bank account, you pay 5.70 chf each month.
10k of emergency fund costs you 57 chf /month. That’s like a phone subscription (!)
My problem is that once a year I receive my cantonal and communal tax bills (Zurich), and I need to cough up a fair bit of money. So I keep the full amount as cash on my bank account. This idle cash has an opportunity cost.
A friend mentioned to me the following cunning strategy: invest the tax money into my portfolio of ETFs in IB, and when I receive the tax bills, get a margin loan at 1.5% from IB to pay my taxes.
(This also works for emergency funds)
Have some people on this forum also tried this strategy?
The amount of leverage would be tiny. The market would need to crash more than 90% in a month to get a margin call.
We are talking several 1k chf / year of “opportunity cost”. We try hard to optimize our phone plans and other small fees in our life, doesn’t it make sense to also optimize that?
That’s the part I wouldn’t agree (same as saying we expect a 7% return on stock). Saving on phone plans is safe. Your portfolio allocation is a whole different game, it depends on your risk profile, some people have more or less appetite for risk, and maybe for you it makes sense to be 100% or more in stock and not have any emergency fund, but I doubt that’s the case for most people.
(remember that those 7% are historical average, over fairly long time period, with a very large variance and not guarantees)
I am a little puzzled by your concept of “idle cash”. The taxes you owe are for services (of the community, canton and country) you’ve consumed while being eligible to proceeds you’ve made while being in the jurisdiction you’re taxed in. So, your “idle cash” is actually “cash making proceeds while under protection of such jurisdiction”, no? Hence, your deliberations about lost opportunity cost would amount to getting better treatment than others taxed in the same jurisdiction?
Maybe I completely misunderstood your question/point.
Edit: corrected ‘that’ with ‘than’ in the last appearance of ‘that’/‘than’.
Hi Zack! I completely get the spirit of what you say and I see things very similarly. I am not a fan of using margin, but I usually go for a slightly more expensive but safer solution. I try to postpone tax payments as long as possible. I don’t pay the anticipated amounts asked by the canton and municipality. I wait for the final bill and pay everything at once. So I am able to invest the money for almost a year in the meanwhile. The state charges you 2.5% yearly interest, but in the long term this is almost certainly lower than the stock market return. I know it is not the 1.5% that you get by IB, but I am more comfortable doing it this way.
Like in risk mitigation, it’s a matter of evaluating the scenarii we can think of.
If all goes well, it’s a non-issue: your stocks are going up and you can sell them at a profit to pay for your taxes so you don’t need margin. If you’d use margin in this case, you may also ask yourself why you are not making more use of it on a regular basis in your regular investing strategy.
Now if stocks go down, chances are the margin requirements go up. It can be a raise in interest rates, harsher criteria to qualify (which may make you unable to get a margin loan at that specific time), it will cause your assets to cover a lesser available margin amount and, depending on how deep on margin you need to go, how many assets you have and how deep and quickly the stocks fall, could trigger a risk of margin call.
Then, it could happen in a deeper crisis where CHF would get stronger vs the dollar/euro/the currency you’re investing in. This could further cut into your losses.
Then, you could also face an emergency. Say you loose your job but the unemployment offices take time to process your claims so you have to go a few months without income. Your car could break at the same time, or you could have to face some additional health costs (which may even be the reason why you can’t work anymore).
If you can still fulfill your obligations then, then it might be a suitable strategy for you. If not, that’s a matter of balancing the gains vs the risks. I’d not do it with my emergency fund and if I was going to do it with my taxes, I’d probably be on margin as a part of my global strategy (meaning I’d use it for my regular investments, making the available additional margin for the taxes not necessarily an opportunity for more gains).
So I could see the “opportunity cost” of not investing my emergency fund as a kind of “insurance” that I’m buying: “If a big problem happens, here is a chuck of money to throw at it”.
What’s the monthly cost of this insurance?
Let’s say that I die in 70 years, that my emergency fund is 10k and that the annualized total market return is 7% (inflation adjusted).
In 70 years, 10k invested on the stock market would grow to 1,139,893 chf.
So the average cost per year is the “emergency fund” insurance is
(1,139,893 - 10k) / 70 = 16,141 chf
And per month that is 1,345 chf.
That’s… a pretty expensive insurance?
But of course 70 years is a bit extreme. If you do the same computation with 20 years, then it costs you 120 chf /months.
I think even if you can take a lot of risk, unless you’re very optimistic about everything an emergency fund might make a lot of sense. Think about sequence of events, stock going down 50% + losing job and subsequently missing part of the market recovery, might be good to try a few scenario and see how you’d fare and if you’d be ok with the outcome
Thanks, I would have also put it there, but was wondering if there is a different way since it is somehow interlinked with the Wertschriften. All clear then!
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!
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.
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