Margin Loans Carry a Big Caution Flag in Retirement

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Margin Loans Carry a Big Caution Flag in Retirement

A sudden dip in the stock market would mean an awful lot of margin calls. More than likely, few folks would have enough spare cash to put up the additional capital requirements. Brokerage firms would then enter sell orders, at market price, to bring their clients’ accounts back in balance. Those massive sell orders would drive prices down further, causing more sell orders, and soon it would be a full-blown crash. Boom! Just like a house of cards tumbling to the ground.

And what happens to the retiree who had invested his life savings, hoping to watch it appreciate while collecting dividends in the process? You know, we old people who bought our stocks with real money, the kind we earned and saved – not the borrowed kind. Our account balances will plummet right along with those of the market speculators. The only difference is that we won’t have the opportunity to recover.

The Solution for Conservative Investors

Retirees and other conservative investors can protect themselves with a multi-pronged approach. First, diversification – a topic Vedran Vuk, senior analyst, and I covered at length in the April 2013 issue of Miller’s Money Forever – will help prevent a total wipeout. And while the market may crash, there are still many solid companies making plenty of money and paying fine dividends. Those companies usually rebound much more quickly from a crash or downturn than speculative investments do.

Second, stop losses can limit the damage. Stocks don’t all fall at the same rate when the market drops. Many big-name companies owned by pension funds pay good dividends and are less likely to be sold, even in a rapid down cycle.

In addition, the Money Forever team also recommends having at least 30-35% of your portfolio in cash and short-term, near-cash instruments. Those contrarians with the courage to buy good companies when others are selling may find themselves in the buying opportunity of a lifetime. If you’re one of these folks and you have the cash to buy, you can profit in a down market.

In short, survival comes down to limiting exposure, allocating capital properly, and controlling our emotions. Panic is our worst enemy when times get tough.

I was 37 when I gambled with that second mortgage, and I have had 35 years to recover from it. Investors near the retirement cusp cannot afford to borrow money to speculate; the risks are just too high. At this point in life, we have learned the hard lessons. For seniors and folks approaching retirement, preservation and return of capital always trumps return on capital.

At Money Forever, we cover almost every topic under the sun when it comes to the financial risks facing retirees and those planning for retirement. Whether it’s margin debt, annuities, reverse mortgages, peer-to-peer lending, under-the-radar income investments, or just finding some good, high-dividend-paying stocks, we leave no stone unturned. Our unique monthly income strategy is being used by thousands of investors and is a good way to start adding to your income stream almost immediately. Click here to find out how you can start it today with as little or as much as you want to put into it.


Article printed from InvestorPlace Media, http://investorplace.com/2013/08/should-you-borrow-money-to-make-investments-2/.

©2014 InvestorPlace Media, LLC

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