facebookIs it wise to go into margin (borrow money from brokers) to invest in SP500 index funds (CSPX, VOO) but holding it for long term? - Seedly

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Anonymous

29 Aug 2020

General Investing

Is it wise to go into margin (borrow money from brokers) to invest in SP500 index funds (CSPX, VOO) but holding it for long term?

The rationale is if SP500 can grow 7-8%, and margin rates is only 1% (Interactive Brokers has such low rates!). I understand the collateral risk, but would like to hear other opinions- why and why not?

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Aidan Neo

29 Aug 2020

Financial Services Consultant at Manulife Financial Advisers

But none of these returns nor rates are guaranteed. Consider this situation where S&P 500 ETF had a poor performance year but the margin rate was increased substantially. Your situation would be magnified negatively.

Brokers can adjust their margin rates as they deem fit. As a result, your investment returns are impacted. Even if you profit over the long term, your real returns are eroded as you have to pay a higher interest on the amount you borrowed. If you were to lose, the impact is gonna be absolutely devasting with negative losses + higher margin rates. All and all, might be something that you cannot afford to unless with astronomical liquidity and resources.

So there's always some sort of risk-reward kind, but always ask yourself if you are ready for such tolerance when it happens. Don't believe it won't, cause that's where it hurts the most when it happens.

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