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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76079  
Subject: Re: Leveraged investing Date: 2/28/2011 6:12 PM
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I have decided to leverage only about 15-20% of my portfolio.
That should be reasonably safe. Ya gotta be real careful though--buying on margin is sorta like eating ONE potato chip. There is a stong temptation to eat just one more.


But what I see you guys missing is;
Im using funds not stocks. Funds are less volatile then stocks....Due to volatility factors and it is harder to make two funds tank then it is to make one tank.


You wish. In fact, we all wish. Not true though. Not true at all. Worse yet, when the market tanks, the correlations go to 1.

Take a look at this: Vanguard Large Cap & Small Cap, VV & VB. Take special note of what happened in October 2008. I well remember Oct'08. We were on a 3 week cruise and the market lost 20% while we were gone.

http://finance.yahoo.com/echarts?s=VV+Interactive#chart1:sym...

Hope it shows up okay, Yahoo is screwing around with links again. Anyway, it's the 5 year chart of VV compared with VB. Add SPY or DJIA or whatever to the comparison and you'll see that everything tanks at once.

That said, a small amount of margin is pretty safe. So then you've got to factor in the 2nd-order killer---margin rates. If you are paying 8% interest on your margin it's damned hard to get ahead. FWIW, etrade is 8.14% on margin balance less than $25,000.
The cheapest rate I know of is IB, who charges about 1.6%. However, I would NOT recommend IB to a newbie. They are totally geared toward highly experienced active traders.

small consistant gains Yeah, that's what everybody is looking for. Only place I knew where you could get that was with Bernie Madoff.

S&P500 long-term average is about 10.5%. That's about the best average you can reasonably plan to achieve. Paying 8% interest to get a 10% gain is of questionable benefit. You net only 2% but the 10% gain is lumpy while the 8% cost is steady.

Here's a suggestion. When you decide on a stock/fund/etf, download the historical monthly quotes for the last 10-20 years into a spreadsheet and then see what the month-by-month gains/losses would have been, both without leverage, and with 15%-20% leverage. Pick a reasonable starting value, maybe $10,000, or whatever amount works for you, and compute your month-by-month account balance. Don't forget to subtract the margin interest you'd have paid each month.
(When I do this for myself, I generally ignore taxes & dividends, figuring that they roughly cancel out each other.)

Then look at the monthly figures and the final total and see what you see. Did the margin help? What's the closest you'd have come to a margin call? How much total interest did you pay the broker? Did you wind up giving the broker the bulk of your extra gains?

Truthfully, I don't know what this spreadsheet would show, so I'm kinda looking forward to you doing it and then posting the results.

---------------
Oh, the reason that so many people are telling you not to use margin is that many many many of us got burned with margin. My wife still reminds me of the dinnertime phone call I got from my broker telling me to wire them $7000 by the next day, to meet the margin call. Not fun!
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