Borrowing to invest

Basically all online stock brokers offer what they call “Margin” which means that you can borrow money from them to buy more stocks or ETFs or whatever you want.  Of course this isn’t free!  Brokers charge interest ranging from extremely low (ie: Interactive Brokers) to extremely high (will remain nameless).

The reasons to not do this include “margin calls,” which is when you borrow too much money relative to the amount of actual money that you have and then your stocks go down and you’re forced to sell to maintain the proper ratio of money/debt.  And you sometimes don’t have a choice about when/what to sell and the broker just does it automatically, which obviously can lock in huge losses for you.  Another reason not to do it is when the interest rate on the debt is high and it will be very hard for you to make that up through your investments.  And finally, someone like “Dave Ramsey” LOATHES debt, so if you feel the same, this really isn’t for you.

However, I borrow money to invest for the following reason: I’m with Interactive Brokers, which currently has an extremely low rate of 1.58%.  Almost all of my investments earn more than that in dividend payments.  For example: PFF currently pays a dividend of 6.33%, NLY=10.5%, JNK=5.9%.  So basically take those numbers, subtract some money for taxes (around 15% depending on a variety of things), subtract 1.58 and I still come out ahead.

However, I use this with caution and currently am borrowing less than $10 000.  I’m comfortable borrowing up to 50% of the money I have invested.  Right now, I have around $110 000, so would potentially borrow up to $55 000. The reason why I’m currently borrowing so little is that the stock market is seriously over-bought and is due for a correction within the next few months or a year.  For the past year, I’ve just been collecting my dividends, and adding more money to my account from my day-job which has reduced the margin.  I’m waiting for a crash so I can buy lots of good stuff on sale.

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