Comment by mamonster
4 days ago
At IB you can get margin interest rates of like 6% I think? SP500 total return is like 9.5% already this year, 25 and 26% in 2024/2023. You get paid to borrow like crazy. Exactly why Dave Ramsey is the worst financial youtuber of the 10s: When rates are close to 0, you only need a 1% return to pay the carry. You should be borrowing like crazy.
Yeah back when margin rates were close to 1% it made a ton of sense to use margin. I was pretty cautious with it but bought a bunch of blue chip dividend stocks- altria, vz, etc at 1% rates and collected 5% dividends. For awhile I could even deduct the margin interest from my income.
At a 6% rate though, this is very risky. Your hurdle rate is just below the average market return rate. There are better ways to gamble on the market if that's what you want to do-UPRO and TQQQ come to mind, as well as options.
>You should be borrowing like crazy.
Right up until the moment you shouldn't. And for utlra-wealthy people, corporations, and VC firms they can weather that storm. You can't.
Have fun when the AI bubble pops and SP500 has a negative 20% return and you are `borrowing like crazy' at 6% interest if you dont get margin called.
And if it doesn't pop? I mean I don't even disagree with there being massive bubble risks, but like my comment was more aimed at the fact that high margin debt doesn't mean anything without knowing the return of the asset you buy with debt and the debt cost.
Let's not even get into the fact that in jurisdictions with wealth taxes and interest deductions from income levering up actually "cuts" your tax bill.