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I'm not totally sure I got this completely right, but here's what I get
for S&P500 monthly for the past 25 years, Jan-1985 thru Dec-2010.

Initial investment $10,000 on Jan 31, 1985, ignoring dividends, taxes, fees, and commissions. No additional money put in, no money taken out.

No margin:
Final value: $70,013 (That's about 8.1% CAGR w/o dividends, so it passes the smell test.)
Highest value: $86,254

Initial margin: 25% ($2500), rate 5% (we should be so lucky!). Margin interest allowed to accumulate and compound.
Final value: $78,405
Highest value: $100,171
Total margin interest: $6610

The value is the stock value (started out at $12,500) minus the current margin amount (which is $2500 plus the total accumulated margin interest).

At a more realistic margin rate of 7%:
Final value: 72,257
Total margin interest: $12,760

===================
So you get an idea of why people here aren't terribly excited about margin leverage. You made an extra $2200 and the broker made $13K.
Or you made $8400 and the broker made $7K. You took on additional risk but the broker got the lion's share of the benefit.
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Initial investment $10,000 on Jan 31, 1985, ignoring dividends, taxes, fees, and commissions. No additional money put in, no money taken out.


good choice of Date ...three 'crashes' in that interval(the *i* know of)



Initial margin: 25% ($2500), rate 5% (we should be so lucky!). Margin interest allowed to accumulate and compound.



does margin interest rate vary with other interest rates?

JFG, checked my borker's (Schwab) rates -- a sliding scale from 6 to 8.5% (depending on balance) right now being a time of REALLY low rates on everything else.
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good choice of Date ...three 'crashes' in that interval(the *i* know of)

Also would be interesting whether those crashes might have resulted in a margin call resulting in a "sell low, get taxed" act. Really interesting look at this. Thanks!

Hockeypop
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good choice of Date ...three 'crashes' in that interval(the *i* know of)
Actually, I just picked 1985 because that gives us 25 years of history. More-or-less representative of the length of a person's "investing lifetime". Ten years is clearly not long enough, what with the "lost decade" and all. Thirty or 40 is perhaps too long and too easy for people to dismiss as "ancient history, before I was even born". Before 5/1/75 there was (high) fixed commissions.

does margin interest rate vary with other interest rates?
Yes. It's usually X.X% over LIBOR or some similar index. The X.X is usually on a sliding scale, with balances under $25K-$50K in the highest tier.

A very accurate spreadsheet would take into account actual historical dividends and margin rates. I suspect that the results would not be much different than the SWAG method I used.
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Oh for heavens sake! Only an idiot would buy and hold Jan-1985 thru Dec-2010. And certainly not on margin.

The example is an exercise in stupidity, margin or no margin.
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>> I'm not totally sure I got this completely right, but here's what I get
for S&P500 monthly for the past 25 years, Jan-1985 thru Dec-2010.

....

So you get an idea of why people here aren't terribly excited about margin leverage. You made an extra $2200 and the broker made $13K.
Or you made $8400 and the broker made $7K. You took on additional risk but the broker got the lion's share of the benefit.
<<

This also doesn't account for the possibility of losing your shirt with a margin call in any of the three market crashes in that period (1987, 2000-02, 2008-09).

#29
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<II> good choice of Date ...three 'crashes' in that interval(the *i* know of)

Actually, I just picked 1985 because that gives us 25 years of history. More-or-less representative of the length of a person's "investing lifetime".


that occurred to me right after i posted ...

in which case --rather interesting that those of us who've been investing that length of time have seen 3 'crashes' --Scary times that we had to deal with


A very accurate spreadsheet would take into account actual historical dividends and margin rates. I suspect that the results would not be much different than the SWAG method I used.


don't know ...would certainly be a pain <g>

just that if margin rates track, and we're at historic lows for other rates ..your margin rate assumption might be very optimistic


=
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Or you made $8400 and the broker made $7K. You took on additional risk but the broker got the lion's share of the benefit. <<
------------
This also doesn't account for the possibility of losing your shirt with a margin call in any of the three market crashes in that period (1987, 2000-02, 2008-09).



i thought the assumption of low leverage would cover that ...


10,000 real money in and 2,500 margined .. 125 sh of XYZ @100

you don't get a margin call until the stock hits 40 (**IF* i understand correctly) --that's a huge drop ... for an overall index /fund
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At a more realistic margin rate of 7%:
Final value: 72,257
Total margin interest: $12,760




:) late 80's - 3 month LIBOR - 7% <g>

(^^^)

Swimming with sharks!!
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:) late 80's - 3 month LIBOR - 7% <g>


+++
+++

Interesting times:

http://bigpicture.typepad.com/comments/2008/09/all-time-high...



sunray
a man who survived then too
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