To begin, I am no experienced trader. I never got involved in the stock market until 2014-2015. I am also close to retirement age. Through luck and leveraging using margin loan my stock portfolio grew ~$1.5M in the last seven months. Here is the situation. IB portfolio margin account: Portfolio snapshot Net Asset Value: $2,903,623.05 Stocks: Only three positions total value $4,801,070.08 stock A: value $249,788, cost basis $18,326, long stock B: value $125,600, cost basis $125,100, short stock C: value $4,428,000, cost basis $3,128,220, short/long (short/long indicates the capital gain category) Cash(margin loan): -$1,897,261.15 Accruals: -$185.88 Initial Margin: $1,498,297.58 Maintenance Margin: $1,413,853.34 Available Funds: $1,404,780.19 Excess Liquidity: $1,489,769.72 Buying Power: $9,365,201.27 Special Memorandum Account: $0 Withdrawable Cash: $1,377,605.47 Withdrawable Cash Without Borrowing: $0 Question: How much a hit the portfolio can take before I get a margin call if there is a downturn. The loan to asset ratio is 39.5%. It is too high I think. I'd like to reduce it by cashing in on Stock C to pay off some margin loans although the upside of it still looks good. Because of position concentration I think IB imposes higher maintenance margin requirement on the portfolio margin account than the Reg-T margin account I previously held. I should add I want to liquidate stock B very soon, perhaps in weeks. Stock A should be reasonably stable. We've had it since after the crash in 2008. Stock C we held even longer, since 2002. It took off only two years ago. I made the profit mostly on stock C through the use of margin loans. Our other fixed and liquid assets outside of this is ~$2.7M I don't think we are worried too much about retirement. But it is not relevant to the question at hand. Advice is appreciated.
With all of this money on the line, you do not have a personal financial advisor at a regulated firm? And these are conflicting statements. "...I never got involved in the stock market until 2014-2015." "... Stock A should be reasonably stable. We've had it since after the crash in 2008. Stock C we held even longer, since 2002. It took off only two years ago. I made the profit mostly on stock C through the use of margin loans."
No. I do not have a financial adviser. There is no conflicting statement. My wife managed the stock in the early going. I stayed on the sidelines and never asked any questions. You know what happens when two people manage the same stock portfolio.
The problem with PM at IB is it's entirely a black box. You can experiment in an IB paper trade account to see what different combinations would give you, but you have no idea what changes they'll make to The Algorithm or when they'll make them. As a result, I find their PM entirely worthless because while it might give your more margin than Reg-T at this instant you can't count on it to be similar an instant from now. BTW, congrats on hitting a 7 figure account and the humility to realize how you got there!
I think if my portfolio is not so concentrated I would get better maintenance margin ratio as per the PM regulation. I wonder if I could go back to Reg-T. The concentration is what it is. When I took over active management the portfolio was quite diverse as a matter of fact. The concentrate was by design to bet the lone horse so to speak following the explosive growth of that particular stock. The fact my stock portfolio grew the way it did is akin to hitting the jackpot. I neglected to say I liquidated the entire position in Stock C last year (during the climb) and use the proceed to fund more purchase of it not long after. That and using margin loans created what I have in the portfolio to buy more. So all of the gain in the portfolio now is unrealized. As a result for the first time in my life I am faced with the problem of being in the highest tax bracket. Then again it is a problem many people would rather have I presume.
I'm not sure if this applies to portfolio margin (but I imagine it must), you're trying to hit a moving target. The event that will bring margin into question will likely be accompanied by changes to maintenance margin. And more you the point, you've been bullish in a very long bull market, take your gains and bring your positions to not leveraged amounts!!! A repeat of 2008 with a relatively conservative portfolio (say...MO, KO, & TRV) would bring your balance to 0. A repeat of 1987, and you'd be liquidated by IB with some very nice "tax write-offs". You gambled and won...the house is looking to get paid.
Excellent advice Mr. beer. OP, maybe you should look into options if you still want to leverage. I did, back in 2013, and never looked back.
Yes I have been bullish with my leverage on the lone horse and it paid off so far. Further to my position in Stock C, my margin loan as of today is 43% ($1,897,261/$4,428,000) of the total value of stock C. Only 4% of it is long at the present time. 11% more will become long in 4/18. 11% more will become long in 7/18. 26% more will become long in 8/18. The remaining two lots will become long in 10/18 (22%) and 2/19 (15%, this is the lot I picked up in the mini correction earlier this month). Assuming the share price of Stock C stays put I will have to wait until 8/18 to payoff the loan to not incur a 40% capital gain tax. By 7/18 I will only have 26% (4%+11%+11%, less than 43%) of stock C to be long, which is not enough. I can also consider liquidating stock A (only 6% of the value of stock C). It will give me 32% (26%+6%) in 7/18. Even if luck stays with me and the share price keeps climbing such that I can pay off the loan in 7/18. It is still almost 5 months away. I need a strategy to better protect against a potential downturn between now and 7/18. I am not at all concerned about the margin interests. As many of you know IB's margin interest rate is obscenely low.