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Dear ERN and all regular forum contributors,
Really appreciative for all the content, advice, experiences contained here. An excellent resource on the path to freedom!
I'm looking for thoughts on the following:
I'm not a US citizen and am based outside the US in regions where the tax rate on capital gains, dividend / interest income is zero. In addition my pension pot is free to move, not locked up, can reside in a brokerage account without any tax implications.
In such a scenario what assets would you hold in an option writing brokerage account?
e.g. would you still go for munis and prefs or would you switch the balance to S&P500 etfs, VTIs etc
Additionally if you were to have a majority of assets in a brokerage account would you start to focus on counterparty risk concerns of the brokerage a bit more?!
Any insight most welcome
Cheers
GlobalERN
e.g. would you still go for munis and prefs or would you switch the balance to S&P500 etfs, VTIs etc
I wouldn’t personally do that as adding direct equity exposure to the margin cash is loading up a bit too much on equity leverage for me. Even for those paying US taxes the long equity positions are tax efficient.
If I were you I’d stay in the fixed income space and, since you can ignore tax implications, focus on credit quality and pre-tax return to figure out your balance of margin assets. Others here use some equities in their mix so perhaps they will chime in with thoughts.
What assets? I would probably not double the equity risk. So, something in the fixed-income realm would be best as a diversifier. What exactly probably depends on your personal tax situation.
Counterparty risk is not of any concern for us retail investors. If you start running this strategy with billions instead of millions and you do that through OTC transactions with a small set of counterparts, then you will look into counterparty risk. 🙂
Thanks both for your thoughts, I tend to agree with the diversification benefits of non-equity in the option account.
On counterparty risk I view IB as my counterparty, as a retail investor.
One could call it credit risk as well, either way....
I was meaning the hopefully very low risk scenario of IB or equivalent ever going bust (e.g. MF Global) and your assets held there are frozen and subject to the SIPC administration/liquidation/recovery process. Bearing market risk on frozen assets for the duration.
So at a certain size of portfolio I think that risk becomes relevant, even more so if only using one brokerage provider for all investments.
Less relevant perhaps if all assets are spread across property, a fidelity/vanguard type pension/fund platform and a brokerage account.....and if margin for option trades held as less volatile FI/prefs!
@globalern Yes, I'm familiar with the MF Global scenario. It crossed my mind especially considering that I had a few colleagues who got burned by MF back then. Burned in the sense that they never lost money but they lost access to their money for a certain period.
I don't think that's a problem with IB. It's run far better than MF Global. Never trusted that sleazy Corzine guy.
Also, keep in mind that if you keep your principal, not in cash (which is not FDIC insured!) but invested in ETFs, Mutual Funds, Preferred shares, etc., then those assets are held with a custodian away from your broker. If the broker goes bust the assets in custody should be protected.
I'm always surprised how much the muni ETFs drive my performance. Seems to balance out over time, but lots of ups and downs.
@navypack Same here. More vol comes from the Muni bonds and Preferreds than the put writing. But it's still a risk worth taking. Yields aren't that bad in the Closed-End Fund Munis and Preferreds.