You know I don’t think you should be buying stocks on margin, though of course a “margin loan,” being cheap and, generally, deductible, is a heck of a lot better than a credit-card loan. Your after-tax cost of a margin loan, might be 5% versus 12% or 18% or 22% on the credit card.
The problem is that it’s too easy. With no one hounding you to repay it, or even “monthly minimum” payments required . . . you might easily let it slide. And then the market drops and, through the power of leverage, it hits you doubly hard.
So I advise people to avoid buying stocks on margin, and urge them to pay off quickly the occasional margin loans they might take as a convenience. (E.g., your year-end bonus comes in January, but your Christmas shopping can’t wait.)
Many people ignore my advice and carry fairly sizable margin balances. I certainly do from time to time. (Hey: if I followed all my own advice, I’d have nothing to write about. The wild risks I take are the selfless price I pay to amuse you.)
Which brings me to the point. I called my famous “full-service” broker and asked what interest rate they were charging these days. Then I called my deep discounter.
Guess what. It’s not just commissions where a deep-discount broker saves you money.
On anything under $10,000, Mr. Famous You’ve-Seen-All-Their-Ads Full-Service Broker currently charges 10-1/4%, which scales down to 10% up to $25,000, but only really gets good, at 8-1/4%, if your balance is over $100,000.
At my deep discounter, balances under $10,000 are charged 9-1/4% these days — and reach the magic 8-1/4% at $50,000.
(Note that margin interest rates can bounce around without notice, so to make a valid comparison, you need to call each broker the same day.)
Say you were almost as foolish as I am and ran a perpetual $20,000 balance. At Mr. Famous You’ve-Seen-All-Their-Ads Full-Service Broker, that would cost you $2,000 in interest a year. At my Deep Discounter: $1,750.
Assuming you can deduct the interest, the $250-a-year difference is less great. Still, one needs a good reason to borrow at 10% when an 8-3/4% loan is available around the corner.
You may have that reason (or your balances may routinely exceed $100,000, so you get the same rock-bottom rate you’d get from a deep discounter). But it’s one more factor to consider in your choice of brokers.
Now tell me this: the market is higher than it’s been at any time since a superheated gaseous cloud cooled into what we now call Planet Earth (not that I really buy this explanation), and you’re buying stocks on margin?
Be careful!
Love,
Dad
Tomorrow: My Yahoo vs Your Pointcast
