Reducing Margin Exposure
As short term interest rates have climbed over the past couple of years, brokerage margin rates have climbed with them -- in some cases, quite dramatically. This has presented me (and other investors, I'm sure) with a bit of a dilemma.
As a long term investor with some confidence that I should be able to average 10%+ annual returns, I found it reasonable to use a small amount of margin in one of my accounts to boost my compounding ability ... or at least, I found it reasonable when margin rates were around 6%.
But with rates now at 10%+ from many brokers -- I'm paying almost 11% in the account I'm worried about -- I can't justify using much margin anymore, except for extraordinary short term opportunities.
More information on various brokers, including their margin rates, is available in a Business Week article from last month (I looked at the print initially -- the online version doesn't have the helpful chart that lists everyone's margin rates). It seems the average margin rate for relatively small margin loans (as I use -- most of my account isn't on margin) is hovering around 10%.
So what to do if I can't justify borrowing money at 10 or 11%?
Although I generally don't like to sell unless I have strong concerns about an individual company, I'm letting go of several smaller positions in my margined account -- some at a loss, some at a gain, but on the whole I'm taking a profit to significantly reduce my margin exposure.
If the account were not on margin, I likely would have been content to hold these companies for a much longer term -- they all have positive things going for them, and I think most probably have bright futures regardless of their current price or valuation. But since it's borrowed money, I have to be a bit more impatient -- and these are the companies that I either wouldn't put new money into now or I think are getting a bit overvalued in the short term, or that are down and not likely to recover in the very near future.
I'll post a separate note on each of the stocks I've sold today to explain my reasoning in some detail, but I have sold all of my Rofin-Sinar (RSTI) and Formfactor (FORM) and Middleby (MIDD), and, (because these holdings are split across accounts,) roughly half of my Lionsgate (LGF) and Imax (IMAX) holdings.
As a long term investor with some confidence that I should be able to average 10%+ annual returns, I found it reasonable to use a small amount of margin in one of my accounts to boost my compounding ability ... or at least, I found it reasonable when margin rates were around 6%.
But with rates now at 10%+ from many brokers -- I'm paying almost 11% in the account I'm worried about -- I can't justify using much margin anymore, except for extraordinary short term opportunities.
More information on various brokers, including their margin rates, is available in a Business Week article from last month (I looked at the print initially -- the online version doesn't have the helpful chart that lists everyone's margin rates). It seems the average margin rate for relatively small margin loans (as I use -- most of my account isn't on margin) is hovering around 10%.
So what to do if I can't justify borrowing money at 10 or 11%?
Although I generally don't like to sell unless I have strong concerns about an individual company, I'm letting go of several smaller positions in my margined account -- some at a loss, some at a gain, but on the whole I'm taking a profit to significantly reduce my margin exposure.
If the account were not on margin, I likely would have been content to hold these companies for a much longer term -- they all have positive things going for them, and I think most probably have bright futures regardless of their current price or valuation. But since it's borrowed money, I have to be a bit more impatient -- and these are the companies that I either wouldn't put new money into now or I think are getting a bit overvalued in the short term, or that are down and not likely to recover in the very near future.
I'll post a separate note on each of the stocks I've sold today to explain my reasoning in some detail, but I have sold all of my Rofin-Sinar (RSTI) and Formfactor (FORM) and Middleby (MIDD), and, (because these holdings are split across accounts,) roughly half of my Lionsgate (LGF) and Imax (IMAX) holdings.
Labels: sell
This article posted by One Guy @ 8/23/2006 10:17:00 AM 0 comments
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