Sam Harris
Space Systems Engineer
- Joined
- 9/27/07
- Messages
- 50
- Points
- 16
I know we usually talk about getting jobs or the industry in general, but I thought I'd ask a simple investing question I've been pondering since starting my education in finance.
In the housing market, it is not uncommon to use 3:1 leverage for buying some rental properties and trying to get the rental income to cover expenses. I've been doing this with some effectiveness since 2002.
What about stocks? I currently max out my IRA and 401(k) plans and put the proceeds in a simple collection of index funds that mirror an appropriate asset allocation for my age and risk tolerance. What if I used leveraged capital instead? Short low-interest bonds and use the proceeds to buy index funds, and use those as the collateral in my margin account, then use my usual investment capital to make the interest payments. Sure, the collection of index funds could go down, but over the long run they would go up, and at a rate of 8-12% on the borrowed money. This wouldn't be my actual investment, since my only real investment would be the interest payments on the shorted bonds yielding very high actual returns.
I'd have more than enough of the index funds to cover my margins on daily fluctuations, and so long as I used long term bonds, I could be relatively isolated from bond price movements because I wouldn't have to sell and buy them very often. What am I missing? I don't even have a margin account at my brokerage right now, so I don't even know the logistics of making this a reality, other than filing out an application for a margin account.
Thanks in advance,
Sam
In the housing market, it is not uncommon to use 3:1 leverage for buying some rental properties and trying to get the rental income to cover expenses. I've been doing this with some effectiveness since 2002.
What about stocks? I currently max out my IRA and 401(k) plans and put the proceeds in a simple collection of index funds that mirror an appropriate asset allocation for my age and risk tolerance. What if I used leveraged capital instead? Short low-interest bonds and use the proceeds to buy index funds, and use those as the collateral in my margin account, then use my usual investment capital to make the interest payments. Sure, the collection of index funds could go down, but over the long run they would go up, and at a rate of 8-12% on the borrowed money. This wouldn't be my actual investment, since my only real investment would be the interest payments on the shorted bonds yielding very high actual returns.
I'd have more than enough of the index funds to cover my margins on daily fluctuations, and so long as I used long term bonds, I could be relatively isolated from bond price movements because I wouldn't have to sell and buy them very often. What am I missing? I don't even have a margin account at my brokerage right now, so I don't even know the logistics of making this a reality, other than filing out an application for a margin account.
Thanks in advance,
Sam