What is your "margin investing" threshold?

[Tabaxus]

This article made me think through my thoughts on margin investing/whether, in hindsight, I actually regret having paid off my ~$170k of student loans at ~6% interest from 2011 - 2013.

http://money.cnn.com/2014/12/11/investing/dont-pay-off-your-student-loans/index.html?iid=obinsite

Here's what I said in another thread on this:

As for the original article:  There is nothing earth shattering there.  He essentially invested on leverage, but rather than borrowing new money to invest with, he chose to forgo repaying a loan.  It's the exact same thing anyone does when they invest rather than pay off a house more quickly.  It's an incredibly easy calculation:  cost of leverage vs. your investing returns and your risk tolerance.  Obviously every single person who has paid a penny on non-CC debt over the last few years made a huge financial blunder, if all you're doing is looking at it with hindsight; same could be said for paying off debt rather than buying a house given the runup in house prices and the fact that the low interest rate window is closing.

I am in that group, having paid off $170k in loans averaging at ~6% from 2011 - end of 2013 instead of (a) buying a house in 2011 or (b) investing.  Massive, massive mistake in hindsight.  Do I regret it?  Sure, when I think of where I'd be financially today if I had been more aggressive.  Anyone who says they don't wish they had the ability to go back and apply their financial knowledge from time X at time X-[any period of time long enough to put in a trade] doesn't understand the instant and unfathomable wealth that would come from such a power.

But then I ask myself:  would I really invest on margin?  I haven't even looked into the margin rates I could get at this point, but if someone offered me a 6% loan today, would I take it and use the proceeds to invest?  NOPE.  At 5%?  NOPE.  At 4%?  Maybe, though it would be world war with my spouse (who is more conservative than me).  At 3%, I'd fight my spouse harder than at 4%. At 2%, I think my spouse would be on board, at 1%, I'd do it without asking my spouse (not really, but you get the point), and at 0%, well duh.  But 0%--hell, even -1%--still has risks, because if the market declines significantly, what happens if your debt comes due?  Whoops.  So do I really regret buying out my massive student loans early?  Rationally, I certainly should not, because I wouldn't put myself back in the same place on the balance sheet intentionally. And the psychic benefit of having "murdered that [insert string of expletives] Sally Mae" has a value too.

So, what do others think?  Was I objectively a fool (or at least a financial wuss) from 2011 - 2013?  Was investing (and/or saving money for and buying) a house the obviously correct move and the fact that I paid off my loans instead mean that I a financial lightweight?  I think my professional background probably influenced the choice a bit, but not a huge amount;  I'm fully aware of both the magic and the curse of leverage.  What are other peoples' "margin figure"?  Have you actually done the work to see if you DO have that margin figure available to you today?

[Sid888]

In my conservative investing opinion, you did the right thing.  I'm seriously considering paying off a mortgage (the principal is significantly higher than your loan debt/12 of 15 years left/3% interest) primarily because it's a guaranteed ROI.  My lifetsyle won't change, so I will begin accumulating anew for a new investment without the drag of a mortgage payment.  It will be easier for me at that point - since my risk tolerance is low - to take more risks with this "post-mortgage" accumulation period of my life. 

Hindsight is 20/20.  Every now and then, I regret not having invested in real estate in the 1990s because I was paying off student loan debt.  However, when in doubt, pay off debt - especially student loan debt.

Good investment opportunities will present themselves - and, if you maintain your MMM lifestyle, you will have more capital now that your loans are paid off to pounce on the next opportunity.  It's a lot easier to deal with financial problems (caused by illness, unemployment or bad investing decisions), if you don't have student loan debt (that cannot be erased in a BK) hanging around your neck.

[J Boogie]

I find it interesting you use the term "financial lightweight" and I kind of agree with it.

However, some the richest investors have utilized the conservative "sure thing" strategy and others like to push it to the limit.

When you think of financially pushing it to the limit and leverage, taking those risks is usually motivated by greed and power, not a desire for FI.  Because those who desire FI don't like to let the dice roll dictate their future any more than necessary.  Calculated risks are the backbone of FI.  Without risks, it wouldn't be possible.  Too risky, and you leave your future in the hands of a dynamic and often unpredictable economy.

That being said, I get a 15% discount on company stock that I'm not quite fully utilizing (largely because of the student loan and the emergency fund that needs to grow)  so this has given me food for thought. 

[kaizen soze]

I feel like you've already answered your own question.  No one is a fool for going after a sure 6%.  Unless you lock in your gains by selling, the stock market can go down, but your loans can't magically reappear.  With that being said, my own strategy with debt repayment is to hedge.  I pay back more than I have to, but less than I can.  That way, I don't miss out on stock market gains, and I don't kick myself for not repaying my loans.  Both strategies will work in the end.

[sirdoug007]

I'm sorry but this guy got lucky. 

Giving advice that paying your 6% student loans is for suckers is irresponsible.  Had he graduated in 2000 his results would have been VERY different!

[MooseOutFront]

It's a topic I think about.  Our student loans are at 2.75% before any tax deduction so I don't even consider paying them early.  However I hate that $375 per month that has to go to them, especially when running numbers for monthly budget needs in early retirement.  I don't think I'll ever pay these early even with a windfall that would cover them, but I'll always kind of want to.  If that rate was 4% plus then it would be a no-brainer; I would pay them early.

[Terrestrial]

This article made me think through my thoughts on margin investing/whether, in hindsight, I actually regret having paid off my ~$170k of student loans at ~6% interest from 2011 - 2013.

That's the key, in HINDSIGHT.  All of us in hindsight should have leveraged up to the hilt and rode that bull to millionaire status.  But nobody ever knows what the market will do over the next 2-3 years.  When we look on Feb 12, 2018 the S&P could be at 1500, or 2100, or 3000...none of us know.  Personally I plan around hitting the long term averages and call it a day, and in that regard I would almost always get a guaranteed 6% from paying down debt rather than the 'variable/uncertain' 8% that I project.    Now, interest rates on debt in the 2-4% range, especially those tied to tax deductions, much more willing to invest in the market instead.

[gimp]

I would always pay off 6% loans first. Hell, I'll even pay my 3.5% or whatever just to get them off my back even though technically it'd be better to pay minimum and invest. (I might change my mind in 2 years...) 6% guaranteed ROI is solid. Unless your other opportunities are pretty much guaranteed...

[neil]

The best action is not necessarily the correct action.  Over shorter and shorter time periods, it is more likely for unsustainable investment strategies to make the most money.  Conversely, good strategies can fail.

It's easy to say that keeping the $170K loans and investing was good for 2011-2013.  But if you presumably thought it was a good idea to build investments rather than reduce installment debt in 2011, you probably wouldn't have used your larger investment balance to wipe the installment debt in 2015.  If you put the $170K on a long repayment plan (say, 15 years) and planned to pay the minimum until it was extinguished, there's still a good chance you don't actually end up better off.  2026 is a long time from now.

Furthermore, having that much installment debt may affect your ability to qualify for a mortgage or have some other consequence.  I am not a banker but I would imagine there is an impact.  If you don't care about your credit rating, that's fine.

Unless you are entertaining the idea of taking on debt for the purpose of investment today, the point is moot.  You paid off the debt and are now building a stash.  I don't see the point of dwelling on it.

[jmusic]

Actual market floating margin rates are under 2% so for that reason alone, a floating 6% loan is not a great deal. That doesn't mean you should direct money toward a 6% floating loan that you have though. Instead, you could direct that money toward investments and then get a loan at less than 2% secured by those investments, and then use that loan to prepay the 6% loan -- effectively refinancing your 6% loan into a 2% one.

I understand your point, but you're trading a fixed interest rate for a VERY short term rate that happens to be lower right now.  Granted it seems they're still going down (negative rates for Swissie, anyone?), but it's important people understand what you're recommending.

[Mississippi Mudstache]

I haven't even looked into the margin rates I could get at this point, but if someone offered me a 6% loan today, would I take it and use the proceeds to invest?  NOPE.  At 5%?  NOPE.  At 4%?  Maybe, though it would be world war with my spouse (who is more conservative than me).  At 3%, I'd fight my spouse harder than at 4%. At 2%, I think my spouse would be on board, at 1%, I'd do it without asking my spouse (not really, but you get the point), and at 0%, well duh. 

Funny you should mention this today. I just got some of those cash advance checks that credit card companies are always sending out today. Normally I just toss them without even looking at them, but for some reason, I opened them up today. Apparently I can get a 1 year interest-free cash advance for a 1% upfront fee up to $3500 and 2%  upfront fee up to $7500. So I could get $11000 for a year for 1.7% interest. I immediately began thinking if it would be worth it to make a gamble for a year. Still undecided.

[beltim]

The best action is not necessarily the correct action.  Over shorter and shorter time periods, it is more likely for unsustainable investment strategies to make the most money.  Conversely, good strategies can fail.

It's easy to say that keeping the $170K loans and investing was good for 2011-2013.  But if you presumably thought it was a good idea to build investments rather than reduce installment debt in 2011, you probably wouldn't have used your larger investment balance to wipe the installment debt in 2015.  If you put the $170K on a long repayment plan (say, 15 years) and planned to pay the minimum until it was extinguished, there's still a good chance you don't actually end up better off.  2026 is a long time from now.

I agree with your general point, that even good strategies can fail over short time periods.  But the lowest annualized return of the S&P 500 for a 15-year time period over the last 70 years was 4.3%.

That's one way to calculate a reasonable margin threshold: figure out the time period your interest rate is guaranteed, and figure out what the lowest market return has been for that period of time.  Then, add a margin of safety.  So for a 15 year period, for example, the lowest annualized return was 4.3%, so maybe you figure you need a risk premium of 1.5%, in which case you'd do it if you could get a loan at 2.8%.

[SaintM]

Three years ago, I took out $200k on a $600k rental property at 4.25%.  The house was previously paid off.  The proceeds went as follows:  $50k to a 7% yield dividend stock portfolio, $50k to a 4% yield Vanguard municipal bond fund; and $100k to pay cash for our current house.

The entire interest payment is tax deductible without affecting our ability to take the standard deduction.  The interest payment and depreciation combine to make both my rentals cash flow positive but tax free.  The bond fund is tax-free.  The total dividends are taxed at about under 11%.  We live free of a housing payment.

I would call this 4.25% margin investing a success.

[thd7t]

Three years ago, I took out $200k on a $600k rental property at 4.25%.  The house was previously paid off.  The proceeds went as follows:  $50k to a 7% yield dividend stock portfolio, $50k to a 4% yield Vanguard municipal bond fund; and $100k to pay cash for our current house.

The entire interest payment is tax deductible without affecting our ability to take the standard deduction.  The interest payment and depreciation combine to make both my rentals cash flow positive but tax free.  The bond fund is tax-free.  The total dividends are taxed at about under 11%.  We live free of a housing payment.

I would call this 4.25% margin investing a success.

A rental property is an interesting example, here, because you are directly cutting your return on a different investment.  It allows you to weight different types of profitable scenarios.  You also paid cash for a house.  You essentially diversified from a single investment by leveraging it.  Student loans are a pretty different case.