Free Margin - Hypothetical Scenario for this market

Ok so this hypothetical scenario isn't hypothetical for me, my parents are well off and have offered to loan me any amount of money up 100% of what my current portfolio is worth under the stipulation I pay it back within 10 years and pay off at least 3% of the total borrowed each year at year end. There is no interest at all so it is basically free debt.

What would you all do? On one hand its an amazing deal since my capital is highly limited and I spend an incredible amount of time managing my portfolio and researching investments (I've had to give up great investments for even greater ones) but on the other hand the market is so high right now I;m terrified to be 200% invested in this market with these high valuations.

Any advice? What would you guys do? Remember we are assuming very limited capital. The transaction costs literally limit me to owning 10 or so stocks before they begin to represent a substantial cost (as a %) of each transaction. In other words when I buy 700 in stock I am automatically 1% down from the 7 dollar transaction fee (that's hypothetical its actually 5 dollars per buy or sale).

Comments (5)

Jan 16, 2014 - 11:06am

I think it depends on how much we're talking about, if your portfolio is $7,000 and they're giving you 10 years to pay off a loan of another $7,000 then yeah sure go for it. If we're talking $250,000 or $100,000 etc then it may be a slightly different story.

Also, technically if you have a margin account at your broker you can get 2 to 1 margin on your money. So with just your money you can be 200% invested, if you add in your parents you can be 400% (of your own original capital) invested.

Give me a kid whose smart, poor, and hungry...............
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Best Response
Jan 16, 2014 - 1:10pm

I'm assuming that you are paying back the 100% you borrow regardless of whether you blow up or not.

It comes down to a confidence factor in yourself and how good you are in the market. Maybe more importantly, though, are you able to re-size your trades for a doubling of capital and not start lowing your standards for investments and swing for the fences because you can.

I've found that having somewhat limited capital can really help in forcing you to focus on a couple specific investments and do a better job managing them than simply having a massive portfolio with stocks all over the place. Obviously, more capital is not a bad thing as long as you can manage it in a way that is consistent and worthwhile. I would encourage you to think less in dollar allocation and more in percentage allocations.

Apr 14, 2014 - 12:28pm

If you are comfortable with it, I'd say take the money. I would be cautious investing it though and keep a portion of it as your "rainy day" funds for the day when the market gets a pull back and you are well capitalized to pick up great companies at great prices.

You sound like you have a strong enough background to be smart with the money, but again, I think if you are tight on capital, this would be a great resource to get more exposure to your researched companies as well as keep cash available to buy at discounts when the market goes down.

Best of luck

Jun 26, 2014 - 5:42pm

Probably a great deal and experience as you really start out. You'll be very conservative in your risk levels, you'll do stringent research & actually plan out trades and stick to that plan. This will pay off tremendously in the long run as it will ingrain strategic risk into your tactical investment decisions.

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Jun 26, 2014 - 5:46pm

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