There are two types of margin when it comes to your money. One is good; the other is very, very bad. Proverbs 21:5 tells us that, “Steady plodding brings prosperity; hasty speculation brings poverty.” Nowhere is that more true than with your investments. This is MoneyWise Live - biblical wisdom for your financial decisions. <ul><li>What are the good and bad kinds of margin? </li><li>GOOD, IN YOUR BUDGET - A good type of margin is in your budget. Money leftover after paying all of your bills and obligations. Sometimes called discretionary income. You need this margin so that you can save for emergencies and invest for the future. Proverbs 21:20 says, “Precious treasure and oil are in a wise man's dwelling, but a foolish man devours it.”</li><li>BAD, IN INVESTING - Margin investments is really a form of gambling. Margin investing is generally prohibited in qualified retirement accounts, like your 401(k) or IRA which leaves regular brokerage accounts where margin investing is not only allowed, in many cases, it’s encouraged by brokerages. According to Yardeni Research, investors who used margin currently owe around $750 billion dollars. That figure is down from a year ago so the trend is heading in the right direction but that still leaves an enormous risk for margin investors especially with the market’s current volatility.</li></ul>So what exactly is margin investing? <ul><li>Margin investing is when you borrow money from your brokerage to invest MORE THAN YOU OTHERWISE could with your own money. You’re BETTING that the stocks you buy with that margin money will increase in value. If they do, you’re a winner but if they don’t, you’re in for trouble.</li><li>EXAMPLE - You inherit $50,000 from your rich uncle Bob. You can’t put the money in your 401(k) or IRA because you can only fund those accounts with EARNED income. You decide to open a regular Fidelity, Vanguard or Schwab brokerage account. Then you hear about an amazing opportunity to invest “on margin.” The Federal Reserve allows investors to borrow from their brokerage up to 50% of the purchase price of stock. That means you can actually buy $100,000 worth of stock doubling your holdings. IF the stock increases in value, your gains would be TWICE what you’d make with just the $50,000.</li><li>That’s one giant “if” because if the stock declines, you’re on the hook for the losses. In theory, you could lose your entire portfolio if the stock went to zero because your initial $50,000 is collateral against what you borrowed. Don’t think that can happen? In 2000, Enron stock was selling for around $90 a share and then year later after a horrific accounting scandal, Enron stock was selling for 26¢ a share and investors lost billions.</li><li>Why would a brokerage want you to invest on margin? It’s like borrowing chips from a casino to gamble with. A lot of folks would never dream of doing that but investing on margin is the same thing. And brokerages make it easy to do because they charge interest on the margin money they loan INCREASING their revenues. And since your loan is collateralized BY THE MONEY YOU PUT IN, their risk of losing is practically nil.</li><li>You must apply to invest on margin and provide financial details just like you would when you apply for a mortgage but how hard is that? One popular investing platform, Robinhood, has gotten a bad reputation for pushing margin investing too hard and earning 5% interest on the margin money it loans. When the value of stocks bought with this leveraged money goes up, everyone is happy but when it drops, you’re the only loser and potentially, a big loser.</li><li>If the value of the stock bought with borrowed money drops low enough as it certainly did with Enron, you’ll experience what’s known as a “MARGIN CALL.” That’s when your brokerage suddenly DEMANDS more money from you to hold your investment. That will happen automatically when the value of your total $100,000 investment drops to $25,000. That’s the 25% maintenance margin required by law. But many brokerages will issue a margin call well before that. If you can’t come up with the additional funds within what is usually a short time frame, the brokerage can then liquidate your investment meaning they take the money you put in to cover their losses. </li><li>The key to successful investing is to have a well-balanced portfolio and to hold it for a very LONG TIME. Investing requires patience. We can’t urge you enough - never invest with margin because the risk is simply too great.</li></ul>Next, Rob answers these questions at 800-525-7000 or via email at Questions@MoneyWiseLive.org:<ul><li>How should you go about donating I Bonds to a family member?</li><li>If you have 3 credit cards that charge an annual fee but have seen quite a few without annual fees, should you look at switching? <a href="https://creditcards.com">CreditCards.com</a>, <a href="https://bankrate.com">BankRate.com</a>, <a href="https://nerdwallet.com">NerdWallet.com</a></li><li>Is it true that when you're 72, you have to withdraw 20% from your IRA? <a href="https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf">Uniform Lifetime table</a>, <a href="https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds">Required Minimum Distributions (RMDs)</a></li><li>If you were advised at Experian that you have 8 new alerts, should you be alarmed?</li><li>If you're semi-retired and have a 401(k) still in the same account it was with your previous employer and you're concerned about market volatility since, in the last quarter, you lost $110,000 from your previous balance of $754,227, should you consider moving things around or stay still?</li><li>If your husband purchased a "flexible" life insurance policy for $100,000 years ago and you're now that you're close to being retired, premiums have doubled, how can you now if you should you keep paying no the policy?</li><li>If you bought a Series I Bond years ago, is this a good time to cash it in?</li><li>If you retired 5 years ago at age 65 and now you have returned to work and you recently noticed Social Security is still being taken out, will that contribution affect your benefits?</li><li>If you'd like to find a credit card that handles rental car insurance coverage, where should you start looking?</li></ul>7 Qualities of a Disciplined Investor:<ul><li>	Be Humble, Accept God's Wisdom</li><li>	Be Conscientious, recognizing that we should try to grow what God has trusted to us</li><li>	Be Prepared, have a written plan that lays out our investment strategy. Be and Initiator, not a responder</li><li>	Be Content, be reasonable in our financial ambitions</li><li>	Be Diversified - Ecclesiastes 11:2 - Give a portion to seven, and also to eight;</li><li>	Be Patient, stay the long term and aspire to build on the long term</li><li>	Be Accountable, share your plan and seek wise counsel </li></ul>Be sure to check out the rest of MoneyWise.org to connect with a MoneyWise Coach or access our books and our many free helpful resources. You can also find us on Facebook (MoneyWise Media) and join the conversation. Thanks for your prayerful and financial support that helps keep MoneyWise on the air. And if you'd like to help, just click the Donate tab at the top of the page.

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There are two types of margin when it comes to your money. One is good; the other is very, very bad. ﻿Proverbs 21:5 tells us that, “Steady plodding brings prosperity; hasty speculation brings poverty.” Nowhere is that more true than with your investments.

The Perils of Margin Investing

FaithFi | Jul 19, 2022

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