Save like a pessimist, invest like an optimist
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Save like a pessimist, invest like an optimist
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Re: Save like a pessimist, invest like an optimist
#2One question that's been top of mind lately for me is how optimistic you should be in your investing strategy.
IBK currently allows retail investors to trade on margin with an annual interest rate of only 1% (yes, really). You can borrow up to 2x your principle at this rate.
If you were extremely optimistic, you would borrow 2x your principal and expect to 3x your annual return.
If you were optimistic but wanted to avoid risk of ruin, you would borrow between 0-1x of your principal.
Curious if anyone here has considered this or has a strong opinion on it.
Side-note: I'm assuming my "principle" in the above scenarios is the remaining cash I have on hand after my rainy day fund (i.e. the saving like a pessimist part).
Re: Save like a pessimist, invest like an optimist
#3One question that's been top of mind lately for me is how optimistic you should be in your investing strategy. IBK currently allows retail investors to trade on margin with an annual interest rate of only 1% (yes, really). You can borrow up to 2x your principle at this rate. If you were extremely optimistic, you would borrow 2x your principal and expect to 3x your annual return. If you were optimistic but wanted to a…
I personally don’t invest on margin. It just feels weird to take a short-term loan (whatever the interest rate) when I have the cash to cover the loan. And if I don’t have the cash to cover the margin loan, I should be working on increasing my emergency fund instead.
In short, there’s no set of circumstances where my decision tree comes down on the side of taking the loan.
Re: Save like a pessimist, invest like an optimist
#4One question that's been top of mind lately for me is how optimistic you should be in your investing strategy. IBK currently allows retail investors to trade on margin with an annual interest rate of only 1% (yes, really). You can borrow up to 2x your principle at this rate. If you were extremely optimistic, you would borrow 2x your principal and expect to 3x your annual return. If you were optimistic but wanted to a…
I personally don’t invest on margin. It just feels weird to take a short-term loan (whatever the interest rate) when I have the cash to cover the loan. And if I don’t have the cash to cover the margin loan, I should be working on increasing my emergency fund instead. In short, there’s no set of circumstances where my decision tree comes down on the side of taking the loan.
> It just feels weird to take a short-term loan (whatever the interest rate) when I have the cash to cover the loan. And if I don’t have the cash to cover the margin loan, I should be working on increasing my emergency fund instead.
I see. Would your thinking change if your emergency fund was sufficiently large but much smaller than your investable cash?
For example, let's say your rainy day fund was $10, and you have $100. You have $90 to invest. In this case, the short-term loan you're taking out could range from $0-270 (the majority of cases would not be covered by your rainy day fund).
Re: Save like a pessimist, invest like an optimist
#5One question that's been top of mind lately for me is how optimistic you should be in your investing strategy. IBK currently allows retail investors to trade on margin with an annual interest rate of only 1% (yes, really). You can borrow up to 2x your principle at this rate. If you were extremely optimistic, you would borrow 2x your principal and expect to 3x your annual return. If you were optimistic but wanted to a…
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Re: Save like a pessimist, invest like an optimist
#6One question that's been top of mind lately for me is how optimistic you should be in your investing strategy. IBK currently allows retail investors to trade on margin with an annual interest rate of only 1% (yes, really). You can borrow up to 2x your principle at this rate. If you were extremely optimistic, you would borrow 2x your principal and expect to 3x your annual return. If you were optimistic but wanted to a…
I personally don’t invest on margin. It just feels weird to take a short-term loan (whatever the interest rate) when I have the cash to cover the loan. And if I don’t have the cash to cover the margin loan, I should be working on increasing my emergency fund instead. In short, there’s no set of circumstances where my decision tree comes down on the side of taking the loan.
I actually have a somewhat controversial opinion (that shouldn’t be controversial because it’s all math, but it still is regardless) that, after you save 5-6x your emergency fund, you don’t need an emergency fund at all and you’re better off investing it all in a total market index fund. The reason being that even if there is a market crash, you’ll still be able to afford the emergency since you’ve saved multiples of it already, and in general in the long run having stocks instead of cash or T-bonds in an EF will be better. Various blogs have done the math and it all checks out, but people still push back at me for this. Having an EF if your net worth is a few multiples of your emergency fund, is entirely psychological. Which is fine. But people should just be aware that it’s a bias they have.
Perhaps investing on margin is the same. I have personally taken the leap and got rid of my emergency fund. But I haven’t looked at investing long-term on margin yet. I did see a test from HEDGEFUNDFIE on bogleheads forums about this. But I haven’t looked into it. I definitely think taking out a margin loan while simultaneously having an EF in cash makes no sense though.
Re: Save like a pessimist, invest like an optimist
#7The article is kind of fluffy. Not everyone should save and invest the same way. Someone who's closer to retirement shouldn't necessarily be investing like an "optimist" (i.e. more risky long-term portfolio), and they'll probably want more liquid assets than someone who's in their 20s with very limited obligations.
Having an emergency fund can benefit everyone but beyond that your portfolio should ideally be driven by your goals and their timeline. If you have no goals and you're just trying to make as much money as possible in the stock market like a lot of new retail investors, this definitely should be given some thought.
I think most could be better served by learning and applying goal-based investing and modern portfolio theory to achieve what this article is clumsily trying to suggest.
Re: Save like a pessimist, invest like an optimist
#8Earlier quoted context omitted.
I personally don’t invest on margin. It just feels weird to take a short-term loan (whatever the interest rate) when I have the cash to cover the loan. And if I don’t have the cash to cover the margin loan, I should be working on increasing my emergency fund instead. In short, there’s no set of circumstances where my decision tree comes down on the side of taking the loan.
> It just feels weird to take a short-term loan (whatever the interest rate) when I have the cash to cover the loan. And if I don’t have the cash to cover the margin loan, I should be working on increasing my emergency fund instead. I see. Would your thinking change if your emergency fund was sufficiently large but much smaller than your investable cash? For example, let's say your rainy day fund was $10, and you hav…
No. If a margin call came in a down market, it would wipe out my emergency fund; that’s the exact opposite of “saving like a pessimist.” If I have $90 to invest, then I have $90 to invest; I’m not going to gamble with someone else’s money whatever the odds.
Re: Save like a pessimist, invest like an optimist
#9Earlier quoted context omitted.
I personally don’t invest on margin. It just feels weird to take a short-term loan (whatever the interest rate) when I have the cash to cover the loan. And if I don’t have the cash to cover the margin loan, I should be working on increasing my emergency fund instead. In short, there’s no set of circumstances where my decision tree comes down on the side of taking the loan.
I actually have a somewhat controversial opinion (that shouldn’t be controversial because it’s all math, but it still is regardless) that, after you save 5-6x your emergency fund, you don’t need an emergency fund at all and you’re better off investing it all in a total market index fund. The reason being that even if there is a market crash, you’ll still be able to afford the emergency since you’ve saved multiples of…
I’ve thought about this too, and came to a different conclusion. The primary reason is just because the markets haven’t collapsed more than 85% over a months long period before, doesn’t mean it won’t in the future. And, my marginal utility for money gets so high below a certain level, that it’s not worth risking this outcome when the marginal utility of more money is relatively smaller.
Re: Save like a pessimist, invest like an optimist
#10Earlier quoted context omitted.
> It just feels weird to take a short-term loan (whatever the interest rate) when I have the cash to cover the loan. And if I don’t have the cash to cover the margin loan, I should be working on increasing my emergency fund instead. I see. Would your thinking change if your emergency fund was sufficiently large but much smaller than your investable cash? For example, let's say your rainy day fund was $10, and you hav…
No. If a margin call came in a down market, it would wipe out my emergency fund; that’s the exact opposite of “saving like a pessimist.” If I have $90 to invest, then I have $90 to invest; I’m not going to gamble with someone else’s money whatever the odds.
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