I've used margin for the last 9 years. Overall, its been a success for me. However, its not been without its trials and tribulations.
I started using margin in 2008 as the GFC was unfolding. After all, stocks had already fallen over 20%. That has to be a bargain, and time to load up on leverage, right?
As we all know in hindsight, the GFC kept going deeper. I ended up margin called (twice). These were pretty stressful and painful times, and I had limited skin in the game (total margin loan was about my annual salary, and about twice my annual salary invested).
I could have loaded up more at the bottom of the GFC if I hadn't been investing on margin. As it was, all my spare savings were going in to propping up my margin loans, as opposed to buying bargain stocks.
However, I kept leveraging in as things recovered, and in the end, did well out of it through the cycle. More recent years have seen me working down my leverage, and switching the loans from margin loans (callable), to loans secured against my house (not callable, slightly lower interest rates).
I've been keeping the margin facilities open, as I'd like the flexibility to use them in future. However, I'll only try doing so in another period of crisis. Had I had margin loans at the start of the GFC (as opposed to part way through the decline), I would have hurt a lot more, and probably been scarred enough to dent my asset allocation tolerance for years.
By using margin, you increase the expected value of your portfolio. However, you also increase the quantity of bad scenarios. I haven't done the analysis, but I think when examining the impact of things like this, we should actually look at the change on the median outcome, not the change on the mean outcome.
Long story short:
- Margin worked for me, but in hindsight it was through a pretty fortuitous time.
- I almost came unstuck a couple of times. Only my high income to debt ratio saved me. If I had the portfolio size I have now, I would have been stuffed.
- Its probably resulted in me over-saving. Because I've become accustomed to higher than usual volatility (effectively 200% stocks), I want a lot more buffer than is probably rational. Think extra years of "one more year syndrome".
- Are you sure about your risk tolerance? What we say, vs what we do under duress can be quite different
- <market timing alert> I'd do this again, but only if we were in another crisis style environment. You increase your expected value of your portfolio, but you also increase the probability of downside tail.