Margin Loans and Mr Market

Borrowing Against Yourself

With dirt-cheap interest rates, this might seem like an ideal time to borrow from your investment portfolio. It might also be a dangerous time.

.. "Margin loans" allow you to borrow against the value of your brokerage account to buy additional securities, at rates often below those you could get on other debt secured by your own assets, like a home-equity loan. Rates range from roughly 6% to less than 1%. "Margin-interest rates are extraordinarily low right now, and you don't have to get past a committee" to approve your credit-worthiness, says Owen Murray, director of investments at Horizon Advisors in Houston. "If you want to do it, you just do it."

... When you use margin, you merely appear to be borrowing from yourself. Instead, you are borrowing from one of the most unstable and unreliable lenders imaginable: Mr. Market, that personification of investors everywhere, sometimes euphoric, sometimes miserable, never predictable.

... If Mr. Market trashes your investments in a sudden panic, your margin debts may be "called," forcing you to sell some of your assets to sustain the minimum account values you committed to under the terms of the loan. By definition, margin calls are most likely to come just as the prices of the holdings you borrowed against are in free-fall.
Comment: I've been tempted. But I have resisted investing on Margin Loans. If I have money to invest and the investment looks well-priced, I invest. If I don't have money to invest ... I wait. More on Mr Market here and here.

1 comment:

  1. Have just heard about that margin loans. I wonder how much will I be able to borrow if I do apply for that type of loan. Planning to apply for that sooner or later.


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