How I'm going to use IBKR

I have recently opened a brokerage account with Interactive Brokers (IBKR), which is now listed on this website. I did so mainly due to peer pressure, as a few friends and family use IBKR and have constantly told me how good it is. I have used a range of online brokers for a number of years, so I thought that I may as well give IBKR a try.

My main concern with IBKR is that you don't actually own the securities you buy. The securities are registered under the name of the broker, rather than directly by the investor. The broker (IBKR) is protected by the Securities Investor Protection Corporation, and is registered here in NZ with the Australian Securities and Investment Commission. IBKR is the legal owner of the asset, and the investor is the beneficial owner. This is actually quite common among most online brokers. The brokerages where you own the securities in your name, rather than in the brokerages name, will typically be full-service brokers like JP Morgan, Craigs Investment Partners and JB Were. Also, more expensive online brokers like ASB Securities and ANZ Securities issue you share certificates in your name. Your funds should be protected up to a certain point though. With IBKR your funds will be protected up to $500,000 USD, although the exact amount may be less in NZ or Australia. As IBKR is very well established, with a market cap of $119B, it is highly unlikely that they will become insolvent though.

There are a number of advantages that IBKR have over other brokerages, namely that they have a large variety of investment options and the lowest trading commissions. There is a danger for most investors of having too many options though, as they often will trade too much and ultimately lose money by buying high and selling low. A lot of top investors will tell you that the best money is made in the waiting. By this I mean that you don't often make money by buying and selling, but by letting the gains compound upon themselves. This is why a lot of people nowadays simply buy index funds and sit on them throughout the booms and busts. The problem with this though, is the timing risk. If you brought the S&P 500 in early 2000 or 2008, you would have been sitting on a losing position for a number of years.

Aside from 2022, which saw a 27.5% top-to-bottom market decline, we haven't been through a significant bear market for a while. In 2008, the US market declined 55%; in 1987 the NZ Market declined 60%. I'm talking about the sort of declines that take many years to recover from. Today's investing generation is overly weighted to risky assets like high-growth equities, myself included. A number of years ago I read the Tony Robbins book, Money; Master the Game. In that book he interviewed billionaire investor Ray Dalio. He asked him how be would design a portfolio that protects you in downturns, while also doing well in good times. Mr. Dalio said that he had already done so and had allocated all of his family's assets to this strategy. He points out that the economy has four different periods: inflationary, deflationary, economic expansion and economic contraction. What you need is assets that can do well in each economic period. He named this portfolio, The All Weather.

It is made up of 55% bonds, 40% long-term and 15% intermediate-term. It has 30% equities, 7.5% gold and 7.5% broad commodities. The assets are weighted according to risk, with commodities being the riskiest, and long-term bonds being the least risky. How this weighting helps the portfolio is shown by its reduced risk of severe drawdowns. In 2008, while the S&P 500 fell 55%, the All Weather portfolio only fell 17%. Over the last 50 years, this portfolio has produced annualised gains of 9.5% after tax. Importantly, distributions on Treasury backed securities are not taxed for non-US citizens. For context, implementing this portfolio strategy will result in a doubling of your returns in 7 years and 8 months.

The way I can get the benefits from IBKR (lots of options), while minimising the possible downsides (too much trading) is to implement the All Weather portfolio strategy. I'm not going to put all my money into it, as my portfolio as it is currently structured is operating well. And I appreciate that I have stock certificates in my name for the majority of my shareholdings. But I have a Term Deposit maturing in December and I will be using my new IBKR account to create this portfolio. The way I can do so is to put 40% into the iShares 20+ year Treasury Bond ETF (TLT), 30% into the Vanguard Total Stock Market ETF (VTI), 15% into the iShares 7–10 year Treasury Bond ETF (IEF), 7.5% into the gold shares ETF (GLD) and 7.5% into the commodity index tracking fund (DBC). With no other broker that I use, would I have access to all these different funds. This is a passive portfolio strategy, where I can let the gains compound upon themselves. I can rest easy in the knowledge that this strategy has been back tested and will perform well in good times and hold up in the bad times. So, when the downturn comes, and it will, having this portfolio set up in my IBKR account will give me some peace of mind.