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Anonymous
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
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Never do this.
Also avoid other things leading to investing hell:
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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.