I strongly disagree. If you have the self control to manage the extra 50K within your margin loan (via maintaining a lower LVR than normal, and treating the 50K as if it was not there), you are in a much safer position.
That's not the point I am making. People who can afford to keep $50K under the mattress are thinking at a much more sophisticated risk mitigation level, and probably have investments at couple of orders of magnitude higher than the average.
In the events described, prices often gap down, spreads widen, stops are taken out and margin calls are made, sometimes all within a few minutes before the market massively rebounds. If you have your reserve 50K stashed elsewhere you have no time to save your positions. It takes hours to transfer money.
I described 2 scenarios. You've addressed only one of them. And then only put a highly conditional scenario on it.
The 1st risk that is being mitigated is the broker going broke - see
MF Global as a recent example.
In late October 2011, MF Global experienced a spectacular meltdown of its financial condition, directly caused by improper transfers of over $891 million from customer accounts to a MF broker-dealer account to cover losses created by trading losses.
....
the losses incurred by customers of MF Global stood at $1.6 billion
....
In January 2013, a judge approved a settlement that would return 93 percent of customers' investments
....
In 2014, all MF Global customers who had not sold on their debt claims were repaid in full
So you could be without access to any of your $$$ for an extended period.
The 2nd one which you do address is dependent on 2 things. Firstly, that the market bottoms exactly somewhere between the two margin call levels (X and X+$50K), and secondly that $50K will make a significant difference. If the ML is well into 7 figures, then $50K will be insignificant.
As an example, assuming a $6M portfolio with LVR of 50% (ie loan of $3M) a market fall of 29.7% with cause a margin call. However, having a ML of $50K less (ie same figures, except for $2,950K loan), a market fall of 28.5% will cause a margin call. The scenario you are proposing to mitigate is that the market will fall somewhere between 28.5% and 29.7%, before it bounces.
Of course, I acknowledge that in the scenario where the fall is exactly between 28.5% & 29.7% then your risk mitigation strategy will cover it without any further action being required (however see below).
So really, there is no benefit to keeping the money outside the margin loan unless you don?t trust yourself to not use this cash buffer as margin, or if you get better returns with the cash elsewhere (not in this case).
As redwing has mentioned, some margin lenders give you till 2PM the next business day to top up or sell. And the majority of investors who have acquired sufficient net worth to be able to keep $50K cash equivalent, also have sufficient self control to not use it as margin.
It just costs you money (thousands in this case), and puts the portfolio at higher risk.
The difference in IR between a ML & LOC/offset a/c is less than 200bps. So $1Kpa is cheap insurance on a $6M portfolio.
If you have to start again from nothing or if funds are frozen for 3 yrs while the legal processes grind on, then $50K in cash will be invaluable - the alternative is $0. And the first $50K is the hardest.
Of course, if you have a $200K portfolio, then it all changes. You don't have the luxury of mitigating certain risks by keeping 6 months living expenses in cash equivalents.