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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76079  
Subject: Re: Leveraged investing Date: 2/26/2011 7:46 PM
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I've been looking at Margin accounts and seeing how they can accelerate my investing.

Yes, and they can just as easily accelerate you LOSSES!

IMO leveraged investing is OK for those who can take the risk: both financially as well as emotionally. Once you lever up, it would be my advice that you monitor the account frequently due to the additional exposure. OF course watching it more frequently means even on the down days, which can be painful.... painful.... On the other side the good days are very enjoyable.

If you are doing this in a "margin" account you need to worry about the downside risk and the liquidity issues associated with capital calls. Which to me is like a knife in the back of some one who just got stabbed in the somach. If be some chance your stocks/funds do go to zero - remember that you will still owe the borrowed capital.

My advice would be to first try out some of the leveraged ETF's that are available. You were alluding to funds being safer than stocks because of the diversification. You can get the same diversification in an ETF as well as the additional leverage and it is at reduced costs to you. Both in the fees to the funds which are usually more than for an ETF (some leveraged ETF's have hefty fees too)as well as the borrowing costs that you are paying because the fund gets a much better rate than you probably will.

Draw out in your mind what you beleive is the realistic market crash scenario (how low will you go before you exit or do you have the stomach to ride it out) and then design your portfolio so that if it happens you have at least set some expectation of what will happen and that you can decide if you want to accept the risk. And put it in dollar terms - not just percentage. Example on a 1MM portfolio - It is easy to say "oh ya I can lose 60% of my portfolio" but if you say "I can lose $600,000" just seems to put on a little different flavor.

d(leveraged)/dT
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