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Percy writes, “Is it ever justifiable to use margin short term until you can inject necessary dollars in order to take advantage of a great buying opportunity?”
Margin is when you borrow money against the value of your brokerage account. You’re just borrowing money, and paying interest to your broker (instead of some banker). Some investors, but mostly traders, use margin in order to buy even more stocks than
they normally could afford.
In general, we counsel strongly against it at The Motley Fool. You’re going to borrow more money than you have, in order to put that into stocks, and in our experience most people (I’m going to say 89%) who do that are motivated by a gambler’s mentality. If and when that stock doesn’t work out, they’re really in trouble at that point; low on both dollars and credit, they end up having to sell out some other good positions to pay back their margin loan.
So no, we don’t generally advise using margin.
That said, it can be an effective tool when used dispassionately by people with experience and deeper pockets. For example, if in your well diversified portfolio you fully own all the stocks and cash in it and then borrow a small amount against that (say, 5% of the account’s total value), you are not substantially endangering individual positions or the account at large…. Are you doing so conservatively, and to further diversify the portfolio (as opposed to load up on one position)…? Are you extremely confident you will not be swayed by exaggerated up or down cycles in the markets?!
If so, this approach would juice your long-term returns through most market environments, and almost certainly over the course of a lifetime of investing. It’s simple math.
Dear reader, look again at Percy’s question kicking off this short essay: Which type of investment do you think Percy is contemplating? Which type of investor above is Percy?
(Do you see that phrase “short term”?)
That language to me is suspect. Percy, I don’t know you personally, but I’m guessing I’d count you among the 89%….
Percy writes, “Is it ever justifiable to use margin short term until you can inject necessary dollars in order to take advantage of a great buying opportunity?”
Margin is when you borrow money against the value of your brokerage account. You’re just borrowing money, and paying interest to your broker (instead of some banker). Some investors, but mostly traders, use margin in order to buy even more stocks than
they normally could afford.
In general, we counsel strongly against it at The Motley Fool. You’re going to borrow more money than you have, in order to put that into stocks, and in our experience most people (I’m going to say 89%) who do that are motivated by a gambler’s mentality. If and when that stock doesn’t work out, they’re really in trouble at that point; low on both dollars and credit, they end up having to sell out some other good positions to pay back their margin loan.
So no, we don’t generally advise using margin.
That said, it can be an effective tool when used dispassionately by people with experience and deeper pockets. For example, if in your well diversified portfolio you fully own all the stocks and cash in it and then borrow a small amount against that (say, 5% of the account’s total value), you are not substantially endangering individual positions or the account at large…. Are you doing so conservatively, and to further diversify the portfolio (as opposed to load up on one position)…? Are you extremely confident you will not be swayed by exaggerated up or down cycles in the markets?!
If so, this approach would juice your long-term returns through most market environments, and almost certainly over the course of a lifetime of investing. It’s simple math.
Dear reader, look again at Percy’s question kicking off this short essay: Which type of investment do you think Percy is contemplating? Which type of investor above is Percy?
(Do you see that phrase “short term”?)
That language to me is suspect. Percy, I don’t know you personally, but I’m guessing I’d count you among the 89%….