PLOC vs Margin: Guardrails or Flexibility?
There has been a lot of talk about Wealthsimpleâs new Portfolio Line of Credit and using it instead of a regular margin account. I even saw a post from someone saying they didnât like margin because they felt it encouraged speculation and day trading, but they liked the Portfolio Line of Credit. The thing is, they are both forms of margin lending.
Both allow you to borrow against your investments. Both charge variable interest. Both use your investments as collateral, and both can eventually result in restrictions or forced selling if the value of your portfolio falls too far.
Wealthsimple even says this directly in its FAQ: âYour portfolio line of credit is a margin loan, but with a more conservative limit.â
What I found more interesting was their explanation for why they consider the PLOC less risky. Wealthsimple says people typically use the Portfolio Line of Credit to withdraw cash for everyday needs rather than using the borrowed money to buy more investments, so investment losses are not magnified by additional leverage.
The biggest difference between the PLOC and a regular margin account is how much Wealthsimple allows you to borrow.
With the Portfolio Line of Credit, Wealthsimple allows you to borrow up to 35% of the value of your eligible collateral. Think of this as guardrails. Wealthsimple is intentionally limiting how much leverage you can take.
With a regular margin account, borrowing power depends on the margin requirements of the investments you own. For example, an investment with a 30% margin requirement can support borrowing of up to roughly 70% of its value.
This is where I think the difference between the two products becomes interesting. The PLOC gives you behavioural guardrails. It stops you from borrowing too much in the first place. A regular margin account gives you much more room, but it is up to you not to use that room.
Let's use a simple example.
Two investors each start with $100,000.
Investor one uses the Portfolio Line of Credit.
Investor two uses a regular margin account.
Both borrow exactly $30,000 and invest the money, giving each investor $130,000 invested with $30,000 of debt. Both investors are now at roughly the same loan-to-value: $30,000 á $130,000 = 23.1% LTV
So at this point, there really isn't much difference. They both have $130,000 invested, they both owe $30,000, and they both have $100,000 of equity. For this example, we are assuming the investments used as PLOC collateral remain eligible for the full 35% borrowing limit and the investments in the regular margin account maintain a 30% margin requirement.
Now let's crash the market and assume both portfolios fall 36%.
The $130,000 portfolio is now worth roughly $83,200. The debt didn't fall with the market. Both investors still owe $30,000. That means the loan now represents about: $30,000 á $83,200 = 36.1% LTV
This is where the two accounts start behaving very differently. The Portfolio Line of Credit has now moved slightly beyond its 35% borrowing limit. The investor would need to bring the account back within Wealthsimple's requirements. This does not mean the investor is automatically liquidated. It means they need to repay enough of the loan or add enough collateral to bring the account back within the limit.
The regular margin account holding investments with a 30% margin requirement is in a very different position. The portfolio is worth $83,200 and the investor owes $30,000, leaving $53,200 of equity.
At a 30% margin requirement, the account only needs about $24,960 of equity to support that portfolio. The investor therefore still has roughly $28,000 of excess margin room.
Same $100,000 starting capital, same $30,000 borrowed, invested into the same investments, and both suffering the exact same 36% market crash. But one investor is already running into the borrowing limit while the other still has a significant amount of room before reaching a margin call.
This does NOT mean a regular margin account is automatically safer. In fact, the exact thing that gives the regular margin account more room is also what can make it much more dangerous. The regular margin account will allow you to borrow considerably more money. If the investor looks at all that available buying power and actually uses it, that safety buffer disappears very quickly.
This is why I think the biggest advantage of the Portfolio Line of Credit is behavioural. It protects the investor from themselves. The PLOC puts a limit on how much leverage you can take. A regular margin account gives you much more flexibility but requires you to create your own limits and actually stick to them.
So I wouldn't really describe the PLOC as safer than margin. I would describe it as margin with guardrails. The PLOC can be safer from the investor because it limits how much leverage they can take. A conservatively used regular margin account can potentially be safer from the market because, if you borrow the same small amount and leave all of that additional borrowing capacity untouched, you have considerably more room to absorb a major market decline.
The important part is the phrase leave it untouched. If you are a disciplined investor, oftentimes a regular margin account can be the better option because it gives you more flexibility and a larger buffer if you choose not to use all of the available borrowing room.
If you are new to investing, prone to rushing into things, have extreme FOMO, or know that seeing a large amount of available buying power would tempt you to use it, then the PLOC might be the better option because the guardrails are already built in. Though, if you are already thinking you need guardrails to stop yourself from overusing leverage, it might also be worth asking whether margin investing is something you should be getting into at all. But that is probably a different conversation altogether.
