How do I maximise my returns when using margin in my brokerage account?
Suppose I have an investment account with ,000 in it. I have a margin rate of 10% per year. For a total of .7 interest per day, or ,000 per year.
I can invest in a high risk ETF with returns of 25% per year, or safer investments that are from 10-15% per year.
I know that if I don't use margin, my investments are a straightforward calculation. If I leverage my portfolio and use margin, then potential profit calculations become more complex.
Question
Given a margin interest rate of X, and Y dollars on margin, what must my % return be in order to beat the straight non margined investment?
My intent is to prove that buying treasury bonds on margin is probably a bad idea, and figure out how much of my portfolio I should put into an ETF that is likely to beat 15% YOY return
This is not a homework question. The specific funds I'm looking at are EZU, IWC, SCHC, SCHX, SCHA, XLF, and XSD.
(1)1 Comments
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Margin interest is deductible on Sch A. So my first warning is that if you don't itemize, the deduction is lost.
Assuming you already itemize, it adds to your itemized deductions. If your gains are short term, they are taxed at your regular rate, i.e. your marginal rate same as earned income. If your return is higher than the margin rate, you are in the black. If bounced off long term gains, the numbers change slightly, as the gain may be taxed 15%, but your margin interest is offset 25%, for example.
My comment question was to try to understand the intent. A 10% margin rate is certainly a deal killer. I have a 2.5% equity line, and am not considering using it to buy stocks despite the 10% long term gains in the market. In your case, a 20% drop would cost you 40% of your equity. Buying on margin is not recommended for most investors, let alone those just learning.
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