How to Manage Correlation in Your Portfolio, Margin Debt worse than Mortgage Debt, Importance of Liquidity: WWII 084

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Main Topic: Managing correlation in your portfolio

Managing correlation doesn't have to be an extensive mathematical exercise for the retail investor. In this episode, I give you some practical advice that any investor can follow to be sure that their portfolio holdings are not largely correlated.

Topics covered include:

  • Customer correlation
  • Supplier Correlation
  • Commodity Input correlation
  • Regulatory correlation
  • And more

Ask JB: Margin debt versus mortgage debt and the importance of liquidity

Why is it socially praised to take on $500k of debt at 4% APR to buy a house, but socially shocking to say you have $500k of margin debt at 2% APR to buy stocks? (self.investing)

submitted an hour ago by wakka54

JB Says: When you own a home with a mortgage on it, if you have a 30 year mortgage, your interest rate is fixed. Margin interest rates are variable and will increase every time the Fed raises the overnight rate.

If the stock market collapses, you may get a margin call, having to add equity into your account. You don’t get margin calls with mortgages.

As we experienced with the housing crash in 2008, 2009, housing prices can fall, but this happens fairly slowly. The stock market can crash 20% in a single day if the circuit breakers are not triggered.

Lastly, you can insure your home such that if there is a disaster, you will have money to buy another home. There is no such insurance with stocks.

So, it’s not really about the interest rate, the stigma is due to all the other realities

Ask JB: How hard is it to sell stocks trading under a dollar?Discussion (self.investing)

submitted 10 hours ago by 954courier

I usually stick to "safer" plays and trade shares of major companies. That being said, how hard is it to sell stocks that are trading under a dollar?

For example, if I own 20K worth of a stock that was trading between fifty and fifty five cents but, one day, it shot up to over three dollars; how hard would it be to trade all of such a stock? Is it likely that only some (not all) of the sell order would be fulfilled?

JB Says: You are asking about a subject called “liquidity.” Liquidity is all about the average daily volume. The lower the volume, the more illiquid. For example, if you hold $100k of a $10 stock in one name, and daily volume is 100,000 shares or $1,000,000, then you could liquidate your position and only be 10% of average daily volume that day.

If you owned $100,000 of a .10 stock and the average daily volume was 100,000 shares or $10,000 per day, it would take you ten trading days at the full average daily volume to liquidate your position. If you attempted to be most of the volume on a particular day, you would most likely end up moving the price down with the selling pressure that you yourself are creating.

News: New home sales continued strength albeit lack of supply and oil rallies

About the Author

Jeremy Scott Bailey is an investor, author, entrepreneur and host of the "What Works In Investing?" podcast now available on iTunes. He is founder and Chief Investment Officer of Burgeón Group, Inc. an investment advisory firm that provides portfolio management services to families and individuals.

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