Using margin in long term account?

So I have been researching this on my own, and am hoping someone here can poke holes in my idea / tell me why it won't work.  

I grabbed daily data on S&P 500, and found that if for every dollar you invest you borrow 35 cents on margin to increase investment, you'd never theoretically get a margin call dating back to the 1980's.  I've called a few brokers and found the best rates to be around 3% (I know you can get better rates on WeBull and Robinhood, but I don't trust them enough to put any significant money with them).  My assumptions were that I would rebalance (borrow more) whenever the equity position got close to 80% to get back to original D/E ratio, and make usual monthly contributions.  Why don't people do this? 

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Comments (5)

Aug 24, 2021 - 11:44am

It's one thing to have a working backtested strategy. It's a completely different beast to try to execute it with your own savings consistently through market crashes. It requires a very high level of trust and commitment to your strategy.

Generally speaking it makes sense to lever up and take on higher risk when you are younger and delever as you age. 

Aug 24, 2021 - 12:26pm

I was looking at this more so strictly from the perspective of getting  a margin call as I have full faith that in the long term the American economy will continue to grow (at least while I'm alive). I'll have my house paid off within ~18 months and I don't really spend much money so I don't think I'll panic in the sense of a market crash and sell, unless the broker forces me to.  Based on historical "black swan" events it doesn't seem to have any statistical likelihood, but who knows going forward as always :/   

Is it common for a broker to radically increase margin requirements when the market crashes?  I noticed a lot of the documentation I received noted that they reserve the right to change the agreement at any time.  

  • Analyst 1 in IB - Gen
Aug 24, 2021 - 12:35pm

I was actually looking into this as well. I think an even more logical choice would be to use dollar for dollar margin on an ETF called NUSI. You can look into but essentially a covered call ETF of NASDAQ but with a protective OTM put. During the COVID crash the index only dipped around 11% and rapidly came back up. Assuming a low interest rate on margin holds of around 2% I think it's the safest yielding around 12% you can get in the entire market. 

I think the only real downside is in a multi month downturn where the index continually goes down where the puts will eventually become more expensive than the calls being sold and this will erode the NAV, but for crashes its nearly impossible to get a margin call unless the NASDAQ were to lose more than half of its value suddenly.

Personally would prefer to just buy the regular index VTI or VOO, but there's safe yield if you want it

Aug 24, 2021 - 12:37pm

Very interesting, I'll have to look into this ETF, I've noticed a lot of ETF's that seem really basic hold hyper complex securities (at least to me) like equity swaps and that makes a bit nervous because of the introduction of counter party risk.  

  • Analyst 1 in IB - Gen
Aug 24, 2021 - 12:48pm

Sit quia ut quis et omnis error. Sit aspernatur id quam et corrupti. Et cum est autem ab.

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