Re:Robinhood Traders Discovered a Glitch That Gave Them ‘Inf...
by perl4ever on Wednesday November 06, 2019 @11:44PM
(#21470462)
I spent some time thinking about leverage and margin, and my thinking was
- I don't want to invest on margin unless the interest rate is significantly lower than stocks generally return
- as a rule of thumb, 7% is a conservative estimate for stocks in the long run, while a typical broker charges close to 10%. So it seemed like a non starter.
- however, it is possible to find rates as low as 3-4%, so then the question becomes how much leverage to use?
- my logic was, what kind of drawdown is plausible if you invest at a market peak? It appears based on known history that -70% could happen. Therefore it would be best to limit leverage so that more than a 70% decline would be needed to cause a margin call.
- which seems to lead to borrowing no more than 25-27% of one's equity.
- I don't want to invest on margin unless the interest rate is significantly lower than stocks generally return
- as a rule of thumb, 7% is a conservative estimate for stocks in the long run, while a typical broker charges close to 10%. So it seemed like a non starter.
- however, it is possible to find rates as low as 3-4%, so then the question becomes how much leverage to use?
- my logic was, what kind of drawdown is plausible if you invest at a market peak? It appears based on known history that -70% could happen. Therefore it would be best to limit leverage so that more than a 70% decline would be needed to cause a margin call.
- which seems to lead to borrowing no more than 25-27% of one's equity.