Should I Get a Marginal Loan?

Hey Scott,

There is a lot of uncertainty at the moment and share prices (particularly for the banks) are very low. So I thought of getting a marginal loan for $100,000 and dropping an even spread across the Big 4. It seems a good idea to me, but you warn against it — so is there never a good time to get a marginal loan?

Xavier

Hey Xavier,

A ‘marginal loan’ could be very … marginal.

What you mean is a margin loan, where you borrow to buy shares, using your share portfolio as collateral.

But beware. If the shares go down in value, you’ll get a ‘margin call’ from the lender demanding that you put up more money … or they’ll sell your shares from under you, leaving you with potentially large losses.

Granted, in March as the stock market hit its lows, in this column I urged people to keep buying shares (which the Daily Mail ripped off and ran with the headline: “The Barefoot Investor’s warning on why young people should buy shares NOW”).

Since then, the share market has risen significantly, while — in my view — the economic conditions have got much, much worse.

Bottom line?

I would not be borrowing to invest in this market.

If you do, get ready for some sleepless nights that not even a weighted blanket can help you with.

Scott