Time To Start Investing On Margin?

By: ispeculatornew
Date posted: 05.21.2013 (3:00 am) | Write a Comment  (0 Comments)

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In my quest to become financially independent, I’ve been looking at many different ways to increase my net assets. One method that is often used is leverage. In some cases such as students, it’s unfortunate and is actually a worrying trend, just look at this chart from the Wall Street Journal:

debt

 

What I’m considering though is something I’d personally consider less risky. I’m thinking about borrowing some money in order to invest it in the markets, what many would call investing on margin. It seems like many others are doing it these days:

leverage

 

Why Would I Do This?

It’s fairly simple in fact. If I’m able to pay 3% or so on my mortgage for example and expect to make more than that in the markets, it would make sense to increase my assets by borrowing more. Over a few months or even 2-3 years, the stock market returns might not outperform whatever debt I’d pay. But as I increase the amount of time that I do this, it becomes more and more likely that I will be making money out of this strategy.

When I met financial advisers a few months ago, this was one of their primary recommendations. Why? Because they said I had the right profile. Look at the result of investing $100,000, paying 3% and making 4.5% over 25 years:

margin

 

$91,000 is significant. The results would certainly be different (could be better or worse), but I don’t think it’s unreasonable to expect to make 1,5% more on the investments than what is paid on the margin over 25 years, right?

Is This For Everyone?

I’m sure that any of you could answer this question. No, of course not. There is obviously risk involved in such a strategy so this would be a good strategy for investors that:

Can and are willing to support above-average risk (being young, having decent revenues and assets are some of the factors)
Understand the strategy (I understand that my investments could decline over 1, 2, 5 years and maybe even longer)

The benefits are significant though as I would be using other’s people money (OPM) to increase my own assets.

How Would I Do This?

I will likely start doing this later this year. At first, I will probably take some money I had expected to pay back my mortgage with and reinvest it. My business partner told me this was not really leverage and I guess technically he is right. But if I had planned to pay back $20,000 of my mortgage later this year and reinvest it instead, I will be more “leveraged” than I had anticipated.

Over time, I might start investing on margin. For example, my investing accounts are margin accounts, so I could technically invest more than what I have in the account. I’ll have to get a better idea of the interest rates involved.

What Kind Of Investments?

It’s unlikely that I’ll be making riskier investments with this strategy for now. I’m much more likely to buy dividend stocks or ETF’s than doing picks such as my long term speculative stock picks. I certainly could but for now I’m trying to give myself the best odds of coming out ahead using this strategy.

Do any of you invest on margin? If so, how long have you been doing it and what types of investments do you do?

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