A.I.M. Users Bulletin Board

[ls7550]

Funding income via debt:

Some opt to never sell and instead fund spending/income via debt/borrowing. Upon passing there's step-up of the capital value, executors can sell holdings at a cost of stock basis of the stock value at the time of the persons passing (tax efficiently) ... and use the proceeds to pay off the debts/borrowings.

Where to borrow from? Well one option might be to use leveraged ETF's and the overnight cost of borrowing rate they pay in order to scale up exposure. Generally half in 2x, half in bonds rebalanced yearly will tend to near mirror 100% in 1x stock. PV example that dates back to 1998. Or you may know of better choices where debt might be perhaps fixed at low rates/cost.

How might this fit in with AIM? Well AIM tends to cash accumulate over time. Start with 50/50 stock/cash AIM and over time it tends to drift to 20/80 (whatever) stock/cash levels.

Consider $1M capital, $1M stock exposure. The first year we might hold $960K of 1x stock, $20K of 2x stock, $20K in bonds. Overall we still have $1M of long stock exposure. The next year we revise that to $920K of 1x stock, $40K of 2x stock, $40K in bonds .. and again have $1M of long stock exposure. And so on, $880K 1x, $60K 2x, $60K in bonds in the third year ... etc. All else being equal after 25 years we'd be holding $0 in 1x, $500K in 2x, $500K in bonds (and still $1M in total long stock exposure).

If we spend the 'bond' value i.e. our income then that's securing debt at the cost leveraged funds pay to borrow, relatively low cost. In the above case the portfolio is generating a $20K/year income from a constant $1M portfolio value. 2%/year. In practice likely stock values would rise and if being AIM'd that would likely see some of stock exposure being reduced to add to 'cash', which in turn might reduce how much might be needed to be held in 2x long stock exposure.

More often, over 25 year periods stocks tend to yield higher rewards than bonds. Even without any reduction in long stock exposure and assuming all else being equal, a constant $1M of stock exposure compared to a progressive rise from $20K initial bonds up to $500K total bonds ('debt') over 25 years would tend to see the $1M constant stock exposure more than compensate in real terms for the progressive cost of $500K final bond (debt) ... average $250K of debt over the 25 years. Quite likely by a relatively wide margin.

The above loses the step-up main objective of such 'income via debt' approach as we're actually selling (transferring) capital around, but in respects of AIM and income provision is quite a novel idea IMO.

Clive

PS Biden has gone down like a brick in water over here (G7). Media are suggesting otherwise but the broad public opinion isn't good. Very much a sense of Biden having been very insulting and rather than 'strengthening special relations' has driven a even bigger wedge in. Bojo with his US family history is being very polite and up-talking so his support is likely to also collapse. But that drifting apart trend has been noticeable in the last few years anyway. We used to be able to buy US ETF's directly for instance, but no more. Just a further death knell for capitalism I guess in blindness of the alternatives.