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Sunday, June 23, 2013

Are you a margin account expert? Tips and tricks on how to deal with a margin account situation

On regular market days, my non-registered portfolio is usually around the 120k mark value. But for that, I need a normal stock market condition. I need the usual of what the stock market is usually around, somewhere between the 12 300 points to 12 600 points.

This past Friday, the TSX close its session at less than 12 000 points. That's no good news for retail investors who are fat on the margin!! Just like who? Just like me!

Here's the situation:

My non-registered portfolio is at: $116 431.23, -3.99% 
I had used $53 245.01 of my margin money
I have left available $8 758.63 in margin $$$

The portion of that is left available of my margin account is directly link to the value of the non-registered portfolio. Which mean that if the value of my non-registered portfolio decreased, the amount that is left on my margin decreased too...

This is exactly the reason why it's not the best thing of the world to invest using margin cash.

I guess it was about 2 years ago, when I open my margin account, and BANG!!!!, automatically, I was giving a margin value of $50 000. Imagine: I had at my disposal $50 000 that I could used on whatever I wanted!! Exciting? Ohh yeahhh. And now, my margin portfolio worth more than 60k. My portfolio worth a lot, so in result, I had been giving a 62k worth in margin. However, while playing with a margin account, there's one thing you need to keep in mind: your margin value depend of the value of your portfolio and your portfolio value depend on the appreciation of the stock market. And that's the tricky part. The stock market being what it is, EXTREMELY volatile and unpredictable, it is very risky to invest on a margin account. I knew that from the start, but I wanted to get a margin account more than anything else. Once you begin to experiencing the stock market, you'll never get enough of it. Its toxic, addictive and sexy... buy you knew that right? 

At first, the plan was to partly used the margin money to pay off some debt and leave a big amount on it to protect myself from any horrific situation. I did that, but among the way, I ALSO used my margin to invest. And this is how I had now used over $53 000 of my margin value. 

I certainly know how important it is to follow my stock value because I have a margin account, but I won't lie, especially these days, I am not following my stocks, but I do check my broker account almost every day (but sometime not everyday). This being said, I know the value of what I hold. Most of my holders in my non-registered portfolio are high quality stocks:

K-Bro Linen Inc. (KBL)
Westshore Terminals Invest Corp (WTE)
WesternOne Inc. (WEQ)
TransCanada Corp (TRP)
Canadian National Railway Co (CNR)
Firm Capital Mortgage Investment Corporation (FC)
Enbridge Inc. (ENB)
Agrium Inc. (AGU)
Canadian Utilities Limited (CU)
Bank of Nova Scotia (BNS)
Methanex Corporation (MX)
Fortis Inc. (FTS)
Pembina Pipeline Corporation (PPL)
Enbridge Income Fund Holdings Inc. (ENF)
Corby Distilleries Limited (CDL.A)
Davis + Henderson Corporation (DH)
Premium Brands Holdings Corporation (PBH)
iShares S&P/TSX Capped REIT Index (XRE)
Exchange Income Corporation (EIF)
Student Transportation (STB)
TMX Group Inc. (X)
Emera Incorporated (EMA)
Black Diamond Group (BDI)
Cineplex Inc. (CGX)
Rogers Sugar Inc. (RSI)

Those are the stocks that help me surviving on my margin. They are excellent stocks that everyone should hold in their portfolio.

This being said, even excellent quality stocks can decreased in value. That's why alternative solutions must be available. Holding high quality stocks alone is just not the all of it. I have $25 000 available on different credit lines. If see that the stock market keep deteriorating, I will transfer some funds over my margin account. At TD alone, I have 14k available on two credit lines. And I also have a 11k on a credit card at less than 10%. When I feel insecure, before going to work in the early morning, I transfer a 5k over my margin. Once out of work, if I see that my non-registered portfolio is at a regular value (usually around 120k), I transfer back the 5k over the line of credit. Its important to proceed to the transfer before midnight because if not, you'll pay interest on the 5k or whatever else amount. I proceed with those types of transfer on a regular basis.

What I like is to have between $13 000-15 000 left on my margin account. But with the current condition of the stock market, my margin value is only at 8k. I am totally aware of how risky this is.

We talked about this before in previous post. If the stock market keep going down, another option would be to transfer the stocks hold in my TFSA over my non-registered portfolio. Lately, I have invested most of my new stocks over my TFSA. Transferring my TFSA over my non-registered could add maybe 1k in value to my non-registered account. It wouldn't be much profitable, but in case of emergency its an option.

At this time, I am not under the impression that I am dealing with a real danger, but I have to be careful.

Lately, I have used over $1 500 on one of my credit line to pay my 2012 taxes. I haven't received any of my refunds yet (around $500) and I did my taxes about 2 weeks ago. Its taking way toooo long. With my upcoming paycheck, I will have around $500 left available for payment of the credit line... but nothing left to go on my margin account. So I definitively need to be careful. From now on, I promise I will try to be a good Dividend Girl and I won't trade on margin anymore. 

I will be away for about two weeks sometime in July. During that time, I may left a 5k from my credit line into my margin just to keep my peace of mind during my vacations because Internet could be more or less available during that period of time. 

Really, with a margin account, there's no magic trick. Holding a margin can get tricky and complicated, but there's always a way out or almost.


Anonymous said...

Ouch. Sounds more like gambling than investing... Good luck with that bet. - Cheers.

Anonymous said...

I like how your plan to deal with your overuse of leverage in your margin account is to borrow more money. That's a flawless plan...

You're forgetting to mentioned that some of the stocks you hold are currently eligible for reduced margin requirements. I.e. You can borrow up to 70%. It is possible that these stocks you hold continue to decline in value enough that they no longer qualify, so you will be hit with a double whammy with your margin.

Also, since you can't do an in kind transfer from a tfsa to a non registered account, if you face a margin call, you might have to sell some of your tfsa holdings at a loss to transfer your tfsa money over to cover..

You seem to be planning for a best worst case, and not the worst worst case. E.g. What if the market goes down, your margin called, you exhaust your lines of credit to cover, and then the market drops again and you face another margin call? You were recently declined for more credit so your likely at your limit of affordable credit.

Anonymous said...

You might want to consider buying the domain..

Anonymous said...

I'm having similar problem ($33000 margin). I'm planing to trim my holding to reduce my margin rather than transfering from credits cards. I guess all the defensive dividends stocks are taking the hit.

Anonymous said...

Hi Sunny,

Thank you for your blog posts. It is educational and entertaining all at once :)
Sunny, I was wondering, since you follow Derek Foster's investments, do you have a current list of the stocks he holds in his portfolio? I was told that in order to get that information I would have to buy his video series, which I haven't done yet. Do you think you could share that information with your loyal readers ? We'd really appreciate it if you have that info. thx.

Sunny said...

I just like the way some readers like to, if I can say, get over me.

I try to provide the best possible view of what is like to be on a margin because I never been able to find anyone sharing their real experience with margin.

This was just an overview. It is true, the loan margin value hold by a stock can be reduced at anytime. Right there, its another big risk. However, the risk is reduced if you hold the big vast majority of your asset in blue chips.

Bankers are there to make money and they make a big deal of cash on holders of margin. Its another type of loan, but with much more higher risk. That is what I wanted to share also, the level of risk associated with margin.

With a cash reserved of 35k that is available at anytime on credit lines and credit card at around 10%. That is the solution for the worst.

I have a few thousands more available on credit card at higher interest rate.

I could even borrow money to my mom. she could be ok to borrow a 5k I guess.

And the thing is just soo funny!!!!

Carla dear, Derek Foster is kind of the man of my life without being the man of my life so girl, why don't you buy his video series?

The video series of Derek Foster are pretty cheap and once you pay, you have unlimited access to it.

Anonymous said...

I'm glad you understand how margin works and the risks. Keep your sense of humour. I don't see the grumpy people who trash you posting THEIR blogs. How about they tell you their stories? Best advice from me: Go long.

Anonymous said...

My mostly European portfolio has been hit by -10% in last 2 weeks. I am holding 40% in cash (and all monthly income I get I put to 100% cash) and rest in extreme high risk stocks. However I have 0% margin and don't have any leveraged stuff like ETFs.

I hope that your portfolio will survive. Glad to hear that you have some reserves for dark day.

Anonymous said...

danger zone!!! less than 9K of available margin.. PLUS you borrowed so much on credit already. Time to sell and be worry free. You have a really bad portfolio and this leads to this situation. Good luck, this is not even a bear market we are experiencing, your portfolio is a mess and this is why you are less with very little room to manoeuvre. Markets made all time highs, yet you are still losing a lot of money. Get out before the major crash... You have been warned!!! You will be crying that you haven't done so, trust me, listen to me and everyone else that have been warning youi that such disaster will happen. It's just a question of time.

Anonymous said...

Buying on margin is a fools game. You are trying to run before you can walk. You are only making others rich. Very stupid.


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