Borrowing on "Margin" - Looking for Advice/Info

[cruiser]

I was talking to my Investment Advisor the other day and the conversation turned towards to investing in stocks by borrowing on Margin.

I will admit I'm an average investor and the main part of my portfolio is invested into Mutual Funds. I do hold a couple of stocks which are doing ok. I have never borrowed on Margin so it's a new concept to me.

Knowing that we have a wide variety of people on this board, I am looking for pros/cons as to taking this step (borrowing on margin). What are the risks, etc associated with such a move? I am doing some google searches and have been reading about if your stock falls, you owe the full amount plus interest, etc.

Do people who borrow on margin go long term (1 year or more), or are you looking for a short term gain?

Appreciate any info/feedback the PERB audience can offer.

thanks,
Cruiser

 

[Dickson]

Hell of a risk to take unless you know something others do not. It is one thing to use your money to take a shot but using others is another. You then own them the money and the interest. YOu broker is not doing this for free either. So if you lose or gain he makes his pound of flesh.

Good luck.

 

[InTheBum]

Sounds like a dumb idea to me...unless you are swinging to hit a home run!? Can you afford to borrow a wack of dough and see it lose 30% plus interest? Can you stomach it?

 

[badbadboy]

I did it in 2000 when I had a "sure thing" and parlayed my $10K investment to a $20K and the profit was $140K on the Nasdaq.

I took a chance and it paid off big time.

In todays market when brokers struggle to get you 5 or 6%, it is irresponsible of them to entertain offering margin for such a low return on your investment.

 

[cruiser]

I did it in 2000 when I had a "sure thing" and parlayed my $10K investment to a $20K and the profit was $140K on the Nasdaq.

I took a chance and it paid off big time.

In todays market when brokers struggle to get you 5 or 6%, it is irresponsible of them to entertain offering margin for such a low return on your investment.

You do sound like you lucked out.

I wil say I'm NOT a major stock player. When I did broach the subject about borrowing on margin, it wasn't as much to do stock speculation but rather to go into a sure thing (Royal Bank, Capital Power, Enbridge, Bank of Montreal, Crescent Point Energy).

I was thinking...borrow some funds and make money off of the stocks that pay dividends....you know that RBC or TD won't go bust....so put money into each of them...and hold it for a year...collect the dividends, and then sell when the stock itself is also above what you bough it for. You will have made money on the stock as well as the profit from the dividends. I've been told that you can also write off the interest against your taxes (correct?)

What are the risks if a person takes this direction with borrowing on margin?

You have a sure stock..(with history)...you know what you can get on dividends...and you can basically get out of it when you want because you know it's in demand.
Cruiser

 

[badbadboy]

I am more conservative these days and own TD, RBC etc. I used to speculate on Nasdaq and did quite well until the bubble burst. Now I put it all in their hands to make me 6% annually. Better than the - 9% the Canadian Exchanges made last year.

I set windows with my broker of the buy price and the sell price. Once I get in, I expect to get out once the sell price upper limit has been achieved.

If I were to speculate these days, I would sink money into some Gold and Silver producers and take profits from those stocks. Precious metals still seem to have legs.

As far as margin, I think its too speculative for the return you will get on a dividend type stock. Unless your financial advisor can offer some good explanation and possible upside tax consideration, I would not borrow to make a few points.

 

[Ray]

Your 'investment advisor' works on commission obviously.

 

[storm rider]

The first rule one should always follow when investing is to never invest in something if one does not understand how it works or how it makes its money.

If your adviser explained this investment idea to you and you did not understand him (hence asking advice of strangers on the internet), it is not the investment for you. And if you understood your adviser's explanation and do not trust his advice, you need a new adviser that you can trust.

Peaceguy....you nailed it on the FUCKIN head....I ran into this 3 years ago.....my accountant was pushing me towards RRSP's since I had never contributed...so I did it.....I slammed in a lump sum over payment one day and I was paying attention to the markets....Fording Coal Trust caught my eye as the company had not set their price per tonne of coaking coal for the year but their competitors had and the price tripled from the previous year from $95 a tonne to $300 a tonne.....I talked about this with a friend of mine and his response was "well you dont want to invest in coal with the shift toward a cleaner environment"....I then explained that it was steel making coal and then that guy clued in and said "yeah that is a smart play"......I mentioned Fording Coal to my accountant and he went stupid over it.....first thing he said is that the company was an income trust and that I would have to pay taxes ......you dont pay taxes on ANY income trust that is held within an RRSP.....he then suggested I invest in what he was pushing....I asked him what it was....specifically what it was...the answer I got was "it is insurance based"....well I did not buy in....but he did push me off Fording Coal.....had I stuck to my gut instincts that were backed by some research as well as common sense.....I would have 1.9 million in my RRSP and I would be retired now.

If your financial advisor pushes you towards something it is most likely in HIS/HER best interest and not YOUR best interest.....best advice I can give is dont EVER have someone giving you financial advice/direction if they are going to profit from it.....because they care about the profit and not about you.

Had I followed my insticts......aw fuck I would be wintering in Thailand right now....living like a king on $8000 a month whilst playing golf every day as well as fucking my brains out....and never seeing a snowflake again for the rest of my life.

SR

 

[wilde]

Peaceguy....you nailed it on the FUCKIN head....I ran into this 3 years ago.....my accountant was pushing me towards RRSP's since I had never contributed...so I did it.....I slammed in a lump sum over payment one day and I was paying attention to the markets....Fording Coal Trust caught my eye as the company had not set their price per tonne of coaking coal for the year but their competitors had and the price tripled from the previous year from $95 a tonne to $300 a tonne.....I talked about this with a friend of mine and his response was "well you dont want to invest in coal with the shift toward a cleaner environment"....I then explained that it was steel making coal and then that guy clued in and said "yeah that is a smart play"......I mentioned Fording Coal to my accountant and he went stupid over it.....first thing he said is that the company was an income trust and that I would have to pay taxes ......you dont pay taxes on ANY income trust that is held within an RRSP.....he then suggested I invest in what he was pushing....I asked him what it was....specifically what it was...the answer I got was "it is insurance based"....well I did not buy in....but he did push me off Fording Coal.....had I stuck to my gut instincts that were backed by some research as well as common sense.....I would have 1.9 million in my RRSP and I would be retired now.

If your financial advisor pushes you towards something it is most likely in HIS/HER best interest and not YOUR best interest.....best advice I can give is dont EVER have someone giving you financial advice/direction if they are going to profit from it.....because they care about the profit and not about you.

Had I followed my insticts......aw fuck I would be wintering in Thailand right now....living like a king on $8000 a month whilst playing golf every day as well as fucking my brains out....and never seeing a snowflake again for the rest of my life.

SR

Your accountant should not be pushing towards anything other than sound tax and accounting advice. You should have reported his ass to his professional association (assuming your accountant has a professional designation).

 

[tunatacoeater]

The best advice that can be given to an average investor when it comes to margin borrowing is; DON'T, under any circumstance do it.

 

[newtothis]

wilde is right, don't take investment advice from your accountant; that's not what they do. It would be like asking your car mechanic about fixing your boat... they might be in very much 'like' industries and may have some crossover knowledge, but it's not their specialty.

Also, if you're concerned about your investment advisor (and don't mix this term up with financial advisor or broker; they're very different), ask them about fiduciary duty. If they don't know what you're talking about, run (don't walk) away

 

[Horse99]

don't take on any unnecessary debt....you have to be able to sleep at night, not worried about whether you can make a margin payment or not....no one can predict the future, esp when it comes to the markets, so play it safe.

 

[Dredger]

The only way you should borrow on margins is if the investment is going to pay more than your borrowing fee. Typically you can borrow, margin, at 1 over prime which would be about 4%, give or take, if you are CERTAIN that you can make more than 4% then its maybe a good deal. Another good rule is only invest that if it doesn't work, it won't be a financial disaster for you.

 

[cruiser]

Had I followed my insticts......aw fuck I would be wintering in Thailand right now....living like a king on $8000 a month whilst playing golf every day as well as fucking my brains out....and never seeing a snowflake again for the rest of my life.

SR

Could you tell me how you calculate that you would be making $8,000 per month based on 1.9 million in your RRSP? That's over 96,000 per year.

What would you have your "windfall" invested in to have those kinds of returns after you made 1.9 million?

 

[DiscreetOG]

cruiser, right now RBC ads say your return per $100,000. in a RRIF would be in the low $ 600.00 per month. Even if you use the more conservative amount of $500.00 per $100,000. of funds, it would work out to $ 9,500.00 per month.

 

[cruiser]

cruiser, right now RBC ads say your return per $100,000. in a RRIF would be in the low $ 600.00 per month. Even if you use the more conservative amount of $500.00 per $100,000. of funds, it would work out to $ 9,500.00 per month.

My only thing is how about if your money is NOT in a RRIF. If a person has that kind of money and they aren't retirement age, what other investments can they have their money in to make that kind of investment?

 

[longjohn258]

Do not even think about this idea. I've done that. It helped me out during 2008 and early 2009 because I bought on margin. Then I sold a couple of stocks in summer of 2009 and repaid all debt with nice profits. The only problem is the stocks I sold kept going up in value--mistake one. Then I wished I had never sold them like everyone would. Regret leads to bad decisions. I bought in again in 2010 and now I am underwater again--mistake two. Although I know I'll be very happy 10 years from now because I take a long position today mostly in US banks, but the point is margin accounts make you wanna do some trading everyday and affect your emotions. When you are emotionally attached to stocks, you WILL make bad decisions.

Anyways, margins can help you in the bear and bull market a lot as long as you bet on the right direction. With the interest low, you could probably take 30% loan then buy HIGH quality stocks that pays dividend (eg. JPM at 30 which yields 3.33%, EXC 40 which yield 5.2%, CVX at 90 at 3.6%). The dividend will cover your borrowing costs, which is low right now; you get a portfolio with low volatility value stocks; and you get to keep the capital gains in the future, which should happen in the long run. If you don't recognize at least 2 tickers listed above, DO NOT OPEN A MARGIN ACCOUNT.

However, I would never recommend margin account because of two scenarios: It's like gamble, if you lose small amount, you wanna doubled down, which may lead to further loss or gain. If you return is magnified by margin (by luck or skill), so is your ego. You will continue borrowing and making more until next recession hit, which will send you back to where you started or worse. So for your sake, DO NOT OPEN THE MARGIN ACCOUNT. If your financial advisor advise your to take on margin, he's not qualified to be your advisor. He just wants to make more money from you. He has put his own interest ahead of yours, which is a violation of his fiduciary duty to you. Find somebody else and thank me in 10 years.

Finally, if you are an average investor, DO NOT OPEN MARGIN ACCOUNT. Think like a business man, would you venture into a car repairing business with average knowledge? then again, who am I kidding? This is a escort review board. Save your money, spend it on women recommended by members of the board and leave no regrets.