I too am excited about the prospects of 20% cheaper stocks and higher probabilities for strong returns. However, I can scroll through historical stock market returns and find examples of when going on margin when 20% down would have worked and when it would not have worked.
*If the 1987 crash is repeating, stocks will fall ~30% over 3 months. We still have about 10% to go which
may would be enough to get a margin call - at the bottom.
*If the 2000 crash is repeating, stocks will fall over 44% across 2.1 years. Definitely not a situation where I'd want to be sweating margin.
*If the 2008 crash is repeating, stocks will fall almost 51% over 1.3 years. Levering up when 20% down would have destroyed your portfolio.
A couple of questions to ask before going long on margin:
*How would you feel holding margined equities if Trump fired the Treasury Secretary and put in a political operative or family member?
*How would you feel if Trump was about to be impeached and used executive offices such as the FBI, Secret Service, or the military to thwart the proceedings or intimidate people?
*The S&P 500's PE ratio is down to 18 but how would you feel if it reverted to its mean of 15.73? Stocks would have to fall another 12.6% to get there.
*Do you know brokerages often change their margin rules in the middle of a crisis? They don't even mention in the fine print that they are opportunistic assholes.
*What if the recession doesn't start for another 6-18 months? This is the typical pattern after yield curve inversions like we're probably about to experience.
*What is your maximum loss (possible and tolerable)?
*We're only down to levels last seen in March 2017.
*Unemployment can only go in one direction from here.
That said, I think it is reasonable to increase portfolio beta during a downturn. There are a number of safer ways to do it than using margin:
1) Shift toward small caps, tech stocks, or highly leveraged companies. E.g. go from an S&P 500 ETF (VOO) to a Nasdaq ETF (QQQ), or from VTI to VB.
2) Change your AA by increasing your % in equities and reducing your bond exposure.
3) Buy LEAPS call options to obtain a leveraged long position with a limited downside. E.g. buy call options expiring over a year out. E.g. January 2021 options on SPY. (But wait for IV to drop back down from today's panic levels. Options are way too expensive to go long right now. When markets recover, the drop in IV may cause calls to fall in value even as stocks rise!). Maximum loss is only 100%, there is no risk of margin call, and you can obtain about 8x leverage compared to 1x leverage with stock on margin. So yes, you could lose the entire amount invested, but you only have to invest about one-eighth the amount you'd need to spend buying stock on margin to get the same effect. However, time decay would be a drag.
4) Enter option spread positions. For example, you could probably enter into a 224/234 bull call spread at the January 2021 expiration date for SPY. I would expect to pay about $550 per spread for a position that will be worth $1000 if the stock market is higher 2 years from now than it is today. There's no guarantee of that, as the bear markets described above demonstrate, but at least your maximum loss is finite ($550) and you could gamble a relatively small amount of cash for what is arguably a probability of generating an outsized return (up to 81.8%). Also, the act of simultaneously buying and selling an option mitigates time decay. Compared to using margin to buy stock, you get a finite loss, a lot more leverage, no margin calls, and no interest to pay.
5) If VIX rises above 40, consider buying puts or bear spreads on the VIX with at least 6 months duration. It is historically unlikely that VIX could remain above 40 for more than a couple months because over time options traders arbitrage away the high implied volatilities that occur during a panic.
>>>Above all, DON'T GET IN A HURRY and NEVER ENTER A POSITION WITH POTENTIAL LOSSES ABOVE 100% like short calls, short puts, or short straddles/strangles. Do not risk your retirement by letting it all ride on one time-bound directional bet.<<<
The ideas above have crossed my mind a half dozen times in the past two months and there has always been a better deal the next week. #3 should be played well into the recovery (i.e. up 5% from what seems to be the bottom) when a falling IV is working against the price of all options. #4 would tempt me most in a scenario where the stock market rout had gone on for a year or more. I'm still trying to understand the probabilities/implications/pricing behavior of #5, so good luck with that! I would not recommend futures contracts. Another thing to think about is you might have to lose money on bearish trades 4 times just to win on the 5th attempt. Do you have that kind of patience and spare capital or would you quit on the 4th failure, or the 8th?
Here's a great visual summary of bear market history. It would be hard to spot a top or a bottom from these data as they were available at any given time. And you can imagine dips where investors got excited and went long too early using leverage or margin.
https://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=4ecfa978-d0bb-4924-92c8-628ff9bfe12d
