With interest rates so low, am I a sucker for not leveraging my portfolio?
The math:
(Using Canadian values)
Cost of borrowing = 1.5% + benchmark -- gets lower over $100K
CAD benchmark rate = -0.0037% [0] -- fluctuates daily
Margin requirement = 30% to 50% [1]
Max S&P drawdown in a given recession: 56% (2007) [2]
So, with expected gains at 7%, and borrowing costs at ~1.5%, isn't this a no brainer?
Leverage your portfolio to 1.5-2x, and enjoy 78% (7%/(7%-1.5%)) higher returns as long as you can hold onto the position.
Risk:
Having margin requirement raised. Happened during the recent US election. Could push you into a margin call. Only about 1 week notice.
IB will just liquidate you without warning.
A recession could wipe you out if your leverage is at or over 2x if it's as bad as 2008.
Other things:
Potential to earn income for lending out hard to borrow shares (not much)
Monthly fee of $10 and transaction fees
Will be earning money through work to reduce leverage, even in the event of recession (assuming no job loss) so may be able to hold onto position for longer.
[0] https://www1.interactivebrokers.com/en/index.php?f=46383&p=m
[1] https://www.interactivebrokers.ca/en/index.php?f=202&p=overview
[2] https://www.investopedia.com/a-history-of-bear-markets-4582652
Note, I'm not affiliated in any way with IB, but they seem to have the best rates and the numbers don't work with any other lender unless you have millions.
QuestTrade is also interesting because it allows you to use your TFSA as buying power for margin requirements, but it's SO expensive.
I'm asking here because I was searching everywhere for people who were doing this and I couldn't find anything. Maybe I wasn't using the right words? Idk.
TL;DR: Borrow cheap money to buy S&P?
Submitted November 18, 2020 at 10:32PM by CRA_ate_my_lunch https://ift.tt/38WUfhy
