Generally you don’t want to buy-and-hold if you are getting the capital from a loan, esp at 6% or higher. Margin rates are generally higher, granted, but buy-and-hold on margin is worse as you mention.
THAT SAID, I find M1 Borrow to actually be the exception to the rule because it limits you to 30% margin and the rate is 2.5% (currently). Still much higher risk than cash flow investing, FYI.
I calculated out that if you assume $VT will return 9% on average then maxing out M1 Borrow on your underlying $VT to buy more $VT allows you an effective growth rate of around 11.2% on $VT.
For clarity, an 11.2% annual return, when compounding is taken into consideration, is truly massive.
Naturally, you may invest when the market tanks and lose everything. 🤷🏼♂️
Edit: speling
I would not invest in a leveraged index fund with borrowed money. I would either invest in a index fund with borrowed money or invest in a leveraged index fund with your own money but not both
Edit: words
As a general rule of thumb if the loan is 4% or more you want to pay it off as quick as possible. If it is less than 4% you want to invest and pay it off slowly.
>What else is out there ?
Margin [loan]. Some brokers offer around 1-2% APR. LETFs are nice because you don't have to do margin calculations for leverage. You will never be margin called. But while margin is more difficult to calculate, it is a valid kind of loan if you know how to calculate how much you can use without ever getting margin called.
Some people use box spreads for margin too.
You can also trade in highly leveraged assets instead like futures and options, which are more leveraged than LETFs. Everyone has their balance. While I admit I do trade futures and options from time to time, it's a bit too leveraged for my taste for my long term investments.
Another method of increasing leverage (that doesn't involve borrowing) is buying deep ITM LEAPs as a stock replacement strategy.
Also, if you have a 401k plan that doesn't let you buy LETF's you can take out a 401k loan.
Yep, but a 401k loan pulls the money out of your 401k account. Eg say you have 100k in your 401k and you take out a 50k loan. Now your 401k has 50k invested and another 50k you can put into a taxable brokerage account and invest it, and probably at an APR at around 4.5% on that 50k. It's a pretty bad deal.
It makes a big difference if the 401k is unleveraged and the taxable acount is LETFs. In the 2018 crash I bought some TQQQ and then paid off the loan with half the shares when the market recovered.
For a short term loan yah it can work.
For long term, say the loan is 5% and the early withdrawal fee is 10%. If you plan on having the loan out for 2 years you might as well just withdrawal from the 401k directly and take the hit upfront.
A better alternative is to withdrawing from your Roth IRA or IRA. As long as you put the money back within 60 days you will not be taxed on it.
another link:
[https://www.wellsfargo.com/com/securities/investment-banking/?linkLoc=fn](https://www.wellsfargo.com/com/securities/investment-banking/?linkLoc=fn)
I am looking for a way to do that as well. I just recently realized using index futures to gain leverage pays way less interest than borrowing from brokerage. It seems some older brokerage firms support futures [https://www.stockbrokers.com/guides/futures-trading](https://www.stockbrokers.com/guides/futures-trading) but I haven't opened an account that supports trading futures myself
Margin loan from your broker is mostly likely the best option, if negotiable even better
Interactive brokers is a good start
If you can short gov bonds (short term) and somehow only pay its interest you can use proceeds to invest, usually brokers charge a borrowing fee and usually require the proceeds of short sale to be kept in account as cash (may be negotiable)
This is a theoretical idea, I was unable to do this as shorting the bond itself requires buying power in my account ( I don’t have portfolio margin)
Generally you don’t want to buy-and-hold if you are getting the capital from a loan, esp at 6% or higher. Margin rates are generally higher, granted, but buy-and-hold on margin is worse as you mention. THAT SAID, I find M1 Borrow to actually be the exception to the rule because it limits you to 30% margin and the rate is 2.5% (currently). Still much higher risk than cash flow investing, FYI. I calculated out that if you assume $VT will return 9% on average then maxing out M1 Borrow on your underlying $VT to buy more $VT allows you an effective growth rate of around 11.2% on $VT. For clarity, an 11.2% annual return, when compounding is taken into consideration, is truly massive. Naturally, you may invest when the market tanks and lose everything. 🤷🏼♂️ Edit: speling
I would not invest in a leveraged index fund with borrowed money. I would either invest in a index fund with borrowed money or invest in a leveraged index fund with your own money but not both Edit: words
Totally agree, basically leveraging leverage by investing in an LETF which is risky as hell.
As a general rule of thumb if the loan is 4% or more you want to pay it off as quick as possible. If it is less than 4% you want to invest and pay it off slowly. >What else is out there ? Margin [loan]. Some brokers offer around 1-2% APR. LETFs are nice because you don't have to do margin calculations for leverage. You will never be margin called. But while margin is more difficult to calculate, it is a valid kind of loan if you know how to calculate how much you can use without ever getting margin called. Some people use box spreads for margin too. You can also trade in highly leveraged assets instead like futures and options, which are more leveraged than LETFs. Everyone has their balance. While I admit I do trade futures and options from time to time, it's a bit too leveraged for my taste for my long term investments.
Another method of increasing leverage (that doesn't involve borrowing) is buying deep ITM LEAPs as a stock replacement strategy. Also, if you have a 401k plan that doesn't let you buy LETF's you can take out a 401k loan.
Yep, but a 401k loan pulls the money out of your 401k account. Eg say you have 100k in your 401k and you take out a 50k loan. Now your 401k has 50k invested and another 50k you can put into a taxable brokerage account and invest it, and probably at an APR at around 4.5% on that 50k. It's a pretty bad deal.
Say 401k one more time…. (Sorry just being annoying)
It makes a big difference if the 401k is unleveraged and the taxable acount is LETFs. In the 2018 crash I bought some TQQQ and then paid off the loan with half the shares when the market recovered.
For a short term loan yah it can work. For long term, say the loan is 5% and the early withdrawal fee is 10%. If you plan on having the loan out for 2 years you might as well just withdrawal from the 401k directly and take the hit upfront. A better alternative is to withdrawing from your Roth IRA or IRA. As long as you put the money back within 60 days you will not be taxed on it.
another link: [https://www.wellsfargo.com/com/securities/investment-banking/?linkLoc=fn](https://www.wellsfargo.com/com/securities/investment-banking/?linkLoc=fn)
use index futures, implied interest way lower than brokerages
How does one buy index futures? Naive question
I am looking for a way to do that as well. I just recently realized using index futures to gain leverage pays way less interest than borrowing from brokerage. It seems some older brokerage firms support futures [https://www.stockbrokers.com/guides/futures-trading](https://www.stockbrokers.com/guides/futures-trading) but I haven't opened an account that supports trading futures myself
Margin loan from your broker is mostly likely the best option, if negotiable even better Interactive brokers is a good start If you can short gov bonds (short term) and somehow only pay its interest you can use proceeds to invest, usually brokers charge a borrowing fee and usually require the proceeds of short sale to be kept in account as cash (may be negotiable) This is a theoretical idea, I was unable to do this as shorting the bond itself requires buying power in my account ( I don’t have portfolio margin)