I noticed on one of your recent posts that you had reported using about 3% margin. I am curious why you don’t utilize a greater percentage of margin to help supplement portfolio returns. I have been utilizing my margin over the past couple of years with good results. With such a great long term track record why wouldn’t you pay 6%-7% margin interest when you can significantly beat that with market returns? Over time that compounding difference can be huge. Shelby Davis was a big user of margin with great success. My thought is that if used appropriately with a well diversified portfolio and at a level under 50% of portfolio value then it can be a good tool to boost returns.
I do not have anywhere near the investing experience that many on this board do so I would appreciate thoughts or “lessons learned” on this topic.
Thanks so much for this board! I have been a lurker around here since its start and have learned an exceptional amount. I really enjoy the active community and the different perspectives.
Not Saul but a member of Margins Anonymous.
Margin is leverage, it boosts your portfolio in bull markets and shrinks it in bear markets but with a twist. It won’t hurt you in bull markets but it can crash you entirely in bear markets if you can’t cover a margin call with cash. The margin call will allow the broker to sell anything in your account to cover the deficit. But it leaves you fully exposed and any drop will cause the next margin call until you are wiped out. It was leverage that caused the 2008 meltdown. Reckless leverage. Funds and others were forced to sell to cover covenants. (And helpful government regulations – mark-to-market – made it worse. But later the Fed bought the worthless junk at par, go figure!)
I’m not saying not to use margin but nowhere near the “50% of portfolio value” that you mention. Maybe 10% max.
With such a great long term track record why wouldn’t you pay 6%-7% margin interest when you can significantly beat that with market returns? Over time that compounding difference can be huge.
If one is willing to use margin and has excess equity in a real estate holdings, then it would be better to take a mortgage at <4% and use that cash for investing. The interest on an investment property is tax deductible against short term capital gains and dividends. In today’s low interest rate environment there’s an opportunity to lock in low interest debt for 30 years.
I tried to take equity out of my home recently to get more for investing but found that mortgage interest deduction is provided only for upto $1M of debt. SO one need to watch out for that. But other than that I think it is a great idea.
The other way to use margin is indirectly. For example, I keep enough investible cash aside to cover all my margin so some might say I am not leveraged at all but at the same time my investments would be less if I did not have the margin as I like to keep the cash cushion for sudden deployment into the market on unique and temporary opportunities just like a credit card for emergencies. I am leveraged 62% in one of my accounts but all of that margin is interest free since it is for selling naked puts mainly.
margin is interest free since it is for selling naked puts mainly
Yes, selling deep in the money puts can be used as as a substitute for buying shares and it is a great way to use margin on stocks that you have high conviction about and you believe to be undervalued.
You need to contact your broker and get a lower rate of interest for margin. I currently am paying LIBOR plus 1.5%. I also believe investment interest is deductible if you itemize on your return although I am not a tax professional or adviser so check with your CPA first.
I noticed on one of your recent posts that you had reported using about 3% margin. I am curious why you don’t utilize a greater percentage of margin
Hi 2020 Investor,
The majority of my assets are in IRA’s. I can’t use margin in an IRA. The smaller accounts where I do use margin have larger percentages, but I try to keep the percent margin very small compared to what I’m allowed, knowing how you can get killed with margin in a sinking market.