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Brokerages like IB has pretty low sub 2% interest rate per year while index fund grows 10%. Is using borrowing/margin to amplify and purchase more shares of stable growth stocks like snp500 index fund a good strategy as long as you don't borrow too much where a 50% drop would cause you to cover?

I would want to do this long term buy and hold type of strategy.

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  • You would have to cover long before a 50% drop because of the maintenance requirement. Commented Nov 17, 2021 at 2:03
  • also depends how much you borrow no? If I have 50k and borrow 10k i can still withstand a 50% dip.
    – Lightsout
    Commented Nov 17, 2021 at 2:19
  • Yes, it would depend on how much you borrowed. At 10% you'd be safe. The maximum amount you could borrow to withstand a 50% drop would be something like 62.5% margin if you were subject to a margin maintenance requirement of 25%. Commented Nov 17, 2021 at 13:50

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I've considered the argument listed in Lifecycle Investing, a book by Ian Ayres and Barry Nalebuff. The argument is that certain investors (who meet certain criteria, such as having a stable income) should lever their stock investments to over 100% when they are young, over time de-lever to 100% stocks, then gradually buy bonds to reach their desired retirement stock/bond ratio. If you are seriously considering this, I recommend reading their book or at minimum watching this Youtube video for a summary.

Currently, I am not levered as I still have student loans, and the value of my loans relative to my investments mean that I already have effective 2:1 leverage. After that, I intend to lever up using deep in the money call options on VOO or VTI.

Why options over margin? Margin has certain risks that options do not. If interest rates go up overnight, IB will likely raise their rates as well, where the implied interest rate of a call option is baked in (though changes to interest rates would change the value of your option, as will the loss of time value if you hold the option close to expiration). Margin also has the maintenance requirements which could lead to a forced sell at the worst time (when your investments go down). Options also have the ability to be traded within IRAs and some 401Ks, while neither supports margin

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  • Are you affiliated with lifecycleinvesting.net?
    – Flux
    Commented Nov 17, 2021 at 3:17
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    @Flux no I am not. I've never met or spoken to the authors, nor do I have any financial ties to the website or their affairs Commented Nov 17, 2021 at 3:34
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    High delta long dated LEAPS with reasonable implied volatility are a better approach for investors than margin. The premium cost (extrinsic value) is nominal and the catastrophic risk is lower than owning the underlying. Increasing interest rates would benefit the call owner but it would not be significant. Search here or google for "Stock Replacement Strategy". Commented Nov 17, 2021 at 13:56
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    "I still have student loans, and the value of my loans relative to my investments mean that I already have effective 2:1 leverage" - this is an interesting perspective. Given the ubiquity of student debt, most young investors are thus, already, following the 'lever up' advice, Commented Nov 17, 2021 at 17:06
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You don't need to borrow or go into margin to leverage an index. There are already leveraged ETFs. For example UPRO is the same similar as 3x leverage on the S&P. Of course it is not a perfect 3x at all times, because of how the fund actually works. But then you get the advantages of not actually borrowing any money yourself. You can examine yourself how these leveraged funds do in practice:

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There used to be even 10x S&P ETFs, but then the market crashed, and... Well, that brings us to your other question:

Yes it is a good strategy when the index is going up. It's not so good if it goes down.

Really it depends on your investment goals. Presumably you have some amount of money you are expecting to make, and some level of risk you are willing to accept. When an asset has the right balance of risk/reward, but the magnitude is just too small, you can multiply both by using leverage. But that's assuming you are a sophisticated enough investor to know what risk and reward you want.

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    I heard there is a decay factor in those kind of index like the performance is worse over a long period. I would like to do this for a couple years ideally and hold.
    – Lightsout
    Commented Nov 17, 2021 at 4:30
  • Beta slippage and volatility are a leveraged ETF's enemy because they have to rebalance daily. OTOH, if the underlying trends in your direction, it's less of a factor and the leveraged ETF may meet or beat its benchmark. Commented Nov 17, 2021 at 13:38
  • @bakalolo True, there are some caveats to it. I've edited the question to show an example. However, I think a much bigger concern for you is that once you leverage, regardless of how, you now have a risk of being wiped out. Holding S&P has the nice property that it's unlikely to go to 0, so you can expect an eventual recovery from downturns. But once you are leveraged, it becomes more likely.
    – Money Ann
    Commented Nov 18, 2021 at 3:37

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