Why Young People Should Buy Stocks on Margin

[exboyfil]

From Time magazine Barbara Kiviat

"You are advocating that people in their 20s and early 30s take all their retirement savings and buy stocks on margin. Can you explain why that's not as crazy as it sounds?"


Read more: http://www.time.com/time/business/article/0,8599,1982327,00.html#ixzz0lNCSTK5u


I think we can say that a top has been reached. The crazies are out in force. Time to get into an inverse stock fund. The real problem is for retirement savers to diversify away from equity (most bond funds suck and do not act like the underlying bonds). If nothing more hold your age in bonds and the rest in a mix of equity, real estate, and commodities if possible.

[Zynx]

1. What's stupid about this is that margin interest rates will eat away at you if the market stalls.

Let's say that after this rally the market stalls for six months, a highly possible outcome. You could pay margin interest through the nose over that period.

Generally, young people should be more heavily invested in equities than anything. Equities, with reinvested dividends, provide rates of return that really are not rivaled consistently by anything else. However, they shouldn't do stupid things like buying on margin. If you screw up early on, it can cost you a lot of money 30 years down the road.

[exboyfil]

2. Yes but a diversified portfolio

holding your age in MT and LT bonds would have kicked butt the last ten years. You would be selling bonds to buy equities when they were down, and snapping up bonds when they eventually start going down. Off loading some equities after this run up would be a prudent thing to do I think. I missed the top (sold a little too soon). Maybe it will continue up, but I don't think so. Throw in some commodities like gold purchased ten years ago, and you would have done a whole lot better than equities through that entire period.

[Zynx]

3. The last decade, however, was fairly aberrant.

Gold normally is not a particularly good performer. There is no long term trend in the price of gold in the same way that there is for equities. If you look at stocks versus gold since 1980, it's not even close, particularly on an inflation adjusted basis.

I guarantee you this, if people use the last decade as a guide for the next three decades with their investment strategies, they will be in some serious trouble.

[Art_from_Ark]

13. Well, gee, if you look at stocks versus gold from 1968 to date

gold kicks the stuffing out of the Dow.

Gold-- $35/ounce in 1968, vs. $1150/ounce today
Dow-- 841-985 in 1968, vs. 11,205 today

[metapunditedgy]

4. Sure, why not start your adult life in debt to a corrupt system?

That seems to be the American business model these days. Housing, credit cards, the music industry, venture capital... pretty much anyone who has the potential to earn money, there are parasites out there looking to lock them into serfdom.

[notesdev]

10. Adult life?

Every child in this country is born into $200k of public debt - you were a slave to the debt system before you took your first breath.

[OutNow]

5. Have You Ever Seen A Margin Call?

During the Internet-driven stock boom in the 1990s many of my coworkers, who were educated and should know better than to act like fools, bought the stock of companies that had no revenue and no market plan to ever show a profit. You remember, the Internet changes everything, and all purchases will be via the World Wide Web, You can leverage your money even more by buying on margin. You should quit your good job and become a day trader. Etc.

I was in a meeting at corporate headquarters one day as this nonsense began to unravel. Several folks were having whispering conversations during the break in the meeting. Should they sell? Was the negative direction just temporary? Then a admin person came into the room looking for a mid-level executive. He left and came back 20 minutes later looking like a ghost. I found out later he had a margin call from this broker. Wiped out. Lost 90% of his investment portfolio.

So yes, I believe we are near the top of the current market. I've given free investment advice (it's worth what you pay for it) to younger family members. Rule #1 - save at least 10% of your gross earnings, etc. etc. I'll have to renumber my list and put a new Rule #1 - don't ever buy on margin.

[exboyfil]

6. Can't agree more

If you like to stay at home instead of going to Vegas then buying on margin is not that bad. Just seem like a hell of a place to put your retirement savings. It should only be used for mad money.

I have made 15% a practice since pretty early in my career, and I have been thankful for the advice I got when I was a 20 something - Pay yourself first. That, while it has taken alot of abuse is why I like the 401(k) plans. At the time I started saving that was the maximum amount that could be put away. Folks don't understand that, why maybe stocks inside such plans seem foolish to some and seem unfair to others, makes doing taxes every year a snap. I do not want to pay an accountant to do my taxes (it is a personal beef with me regarding the tax code). Most educated citizens should be able to do their taxes on their own.

[Art_from_Ark]

14. I agree with your new Rule #1

Never buy on margin. It's a sucker's game, and the House always wins.

[jtuck004]

7. Why not suggest they find a business that manufactures something

and buy into that? Better yet, start one. Even a small one. Or get together with some other folks and buy into a farm.

Actually create something of value instead of just trying to suck it off other people's labor like the scumbag
financiers have been doing for decades?

Are stocks going to be a good investement when unemployment is going to stay at 10-12% for 10, perhaps 20 years or more?
I'm not even sure shorting is a great idea, unless you want to just hang in waiting for the next disaster. It could be that
stocks will trade in a narrow range for years and years. Nothing to drive wealth creation.

[phantom power]

8. Wow. What could possibly go wrong?

:eyes:

[sendero]

9. Just more of the huge and ORGANIZED..

.. pump monkey machine talking the hoi polloi retail investor to trust the "markets" so they can get everyone back in for one more scalping.

Why do I say "one more", because after the third scalping even an idiot can figure out the game is rigged.

[OllieLotte]

11. Jeepers...what crappy advice. n/t

[Statistical]

12. Actually if you read the article it isn't that bad of advice.

He isn't saying everyone should use margin all the time but rather young people to "levelize" the difference between early portfolio and portfolio near retirement.

If you look at stock market over last 120 years the average return is 12% which is more than enough to retire on, however there is a lot of volatility in that average. The problem is some people get "lucky" and others don't depending on when they were born (and thus enter and leave market)

If you started investing in 1925 by the time of the crash in 1929 you wouldn't have that much money invested so in nominal terms you loss would be small. You could then go on to invest for next 30 years and have a good lifetime return.

However someone who invested in say 1890 and had had decades of good returns (on small amounts of money) would get anhilitated in 1929 on a large amount of money.

The problem is starting out the portfolio is small (say $10K) and near retirement the portfolio is large (say $1 million).
Years of nice gains on $10K can't offset even one large loss on $1 million.

Diversification helps but even the stock "portion" is unbalanced. Say you are 100% stocks early and 20% stocks at retirement.
Well 100% of $10K = $10K. 20% of $1 mil = $200K still a 20:1 ratio.

By using margin early on you can close that multiple. $10K margined to $20K early on vs $1 mil at retirement and slowly reducing margin and asset allocation could get that ratio down to 10:1.

Of course you need a broker who doesn't rob you on interest rates. Broker can borrow for insanely low rates (about 1% to 1.5% right now) most mark that up 300% to 500% for their retail clients.

If you have a broker who doesn't (1.7% margin rate on balances below $100K) it can work.
http://www.interactivebrokers.com/en/accounts/fees/interest.php