invest, borrow, die
Invest, borrow, die.

Invest, Borrow, Die?

money

We usually manage more significant sums of monies, such as bonuses, in the same manner we handle our paychecks; they are deposited and then spent. Here's a better strategy.


It's not uncommon to receive a bonus, maybe proceeds from the sale of an asset, or even a small inheritance, and within no time, have nothing left but memories. We're almost programmed to waste away any lump sum cash we receive. Why? Because we're accustomed to depositing our paycheck and spending it, hopefully, with a little left over to save. We're not used to handling large amounts and often treat them like a paycheck - we spend it.

This article illustrates an approach to managing funds without simply watching them disappear while treating them like a paycheck.

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Have you ever heard the stories of the trust fund babies running around with an Amex card? They're not paying taxes. There's no job to pay off the card. So how does that all workout?

This is their strategy. It is precisely how many financially sophisticated individuals manage their finances. In simple terms, funds are invested in a brokerage account, and a margin account tied to a credit card is used to provide for needed expenses, etc.  The die part? Theoretically, the portfolio is never sold to mitigate paying taxes.  

You may not be a trust fund baby, but you can still take advantage of this strategy.

Let's break this down so that it makes sense.

First, you need a lump sum investment consisting of funds you don't currently need to cover your everyday expenses. Then, maybe dedicate some of your next bonus or another lump sum to this account or even start saving.

Next, set up a brokerage account that permits easy access and has a margin account arrangement with a reasonable interest rate structure. Two firms you may want to investigate are RobinHood and Interactive Brokers.  (Click here if you want a referral link to Interactive Brokers with additional cash benefits.) I use both of these accounts, and they are easy to work with, have low margin rates, and offer debit cards linked to their margin accounts.

Unfortunately, many commonly known brokerages have much higher interest rates and are less client-friendly. As a point of interest, Interactive Brokers may be the only brokerage offering access to security investing in almost every exchange on earth. No other broker provides this breadth of investment access. It's also highly rated.

An alternative you may want to consider is approaching this with a managed fund. One of the best offerings that meet the criteria of a low-cost margin account and easy, non-credit-checking access is Wealthfront. These are what are known as Robo Advisors, and they not only offer risk-adjusted diversified portfolios but, with larger accounts ($100,000), provide tax-loss harvesting, which is a strategy that optimizes your capital gain and loss transactions. Best of all, they only charge 25 basis points (.0025) for their services.

Depending on your investing mastery, get your account invested. Although all investments present a level of risk, this account needs to be in for the long haul and has to be an account in which you're not going to freak out if the market moves down. As a perspective, the S&P 500 index acts as a benchmark of the performance of the U.S. stock market overall, dating back to the 1920s (in its current form, to the 1950s). The index has returned a historic annualized average return of around 10.5% since its 1957 inception through 2021. So the critical factor is that your account should perform reasonably well over the long term.

Margin is simply borrowing against your portfolio. Your portfolio will be used as collateral against your margin loan. There are percentage limits set by Federal regulation as to how much you can borrow, and you should establish lower limits you will want to adhere to to be on the safe side.

The account has to be invested as you can't margin cash. If you want an account with the least amount of risk and minimum volatility, you might look into an ETF such as SHV or research other options. Still, your minimal risk account has to be classified as a security so you can margin it. If you take cash out of a cash account, you'll only reduce your own cash and won't utilize the margin concept.

Use the portfolio's margin account to meet unexpected bills, pay off debt and make other investments.

The brokerage will charge "interest only" on the margin loan, which will be taken directly from the portfolio. The concept is that interest, dividends, and appreciation will cover these margin loan payments. The expectation is that over time, the earnings and appreciation in the portfolio will offset the interest and may even allow you to reduce margin borrowing. Besides the ease of borrowing, that is, no credit checks, a significant benefit with margin is that there is no credit hit for using your margin credit.

You do have to be careful when using margin. The brokerage will ensure that should your account value decrease below a certain threshold; they will sell and cover any margin loan subject to allowing you the timely opportunity to remediate the situation. Generally, keeping a reasonable margin percentage and making wise investment decisions will mitigate unexpected margin calls. On the other hand, you don't want to max it out or go crazy with your investment choices, particularly in a choppy market.

Several Internet resources (YouTube) cover the ins and outs of margin accounts. However, I recommend you understand how margin works before committing to investing and using the margin facility.

Again, where does the die part come into play? You mitigate the tax impact if you maintain a portfolio and generally never or rarely sell your investments. This keeps the portfolio growing which in turn facilitates additional margin funds.

So let's try to visualize this. You received some funds which you feel comfortable about investing in the market. You set up your brokerage account, get approved for margin, and believe that up to xx% of the account's value can be made available to borrow. Of course, you can use these funds to invest in other securities, but you use some of these funds for an unexpected bill and maybe a new kitchen update. The interest and dividends earned quickly take care of the margin interest expense, and over time, with appreciation, additional investments, and transactions that recognize your tax situation; you're able to liquidate part of the portfolio, reduce or eliminate the margin borrowing and continue to move forward with an even more sizeable portfolio.

How does this compare to how you handle your lump sum distributions now? Typically funds are put in your checking account or another liquid and accessible platform. You reduce the account to meet expenses and to make improvements to your home, and after a while, the account disappears. There is a big difference between not touching the principal of your investments and wasting your principal. The "invest, borrow, die" concept sounds a little strange but, in practice, has several built-in safeguards that generate a far better financial result than the more common approach.

It's worth your consideration.

Note: The information provided on this site is based on my own personal experience and should not be construed as professional advice. I have not been engaged as a financial advisor or planner or CPA with any reader. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.
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