Dear DTA,
I’m thinking of buying stocks on margin. I don’t have a lot of money to work with, but I’m confident in my trading skills. Any thoughts or recommendations?
-Jill D.
Hi, Jill.
Thanks for writing in. Great to hear from you.
It’s our aim to educate and empower all of our readers.
That’s why we put out quality, actionable content.
The last thing any of us would want is to see a reader make a bad move and put themselves in a financial bind.
Now, I can only give you my perspective on this matter.
Someone else would naturally have their own perspective.
My perspective has been shaped by and built on a lot of financial success.
I used the markets to go from below broke in my late 20s to financially independent in my early 30s.
Check out my Early Retirement Blueprint to see the exact steps I took.
I’m currently 37 years old. Retired. And living a very blessed life.
The five-figure passive dividend income my FIRE Fund generates on my behalf covers my essential expenses.
Capitalism is a wonderful thing.
The US stock market is a wealth generator almost unlike anything else that’s ever existed.
It’s there for you, Jill, to take advantage of it.
But you have to approach it intelligently.
In my opinion, I don’t think it’s wise to use margin.
I never used margin.
Look, I started investing back in early 2010. The market was a lot lower back then.
Margin, using the gift of 20/20 hindsight, would have allowed me to get to my goal of financial independence even faster.
But does that matter?
I don’t think so.
If you’re approaching personal finance and investing appropriately, becoming wealthy is almost an inevitability.
I’ve never met someone who smartly budgeted and intelligently invested, only to go broke in the process. I don’t think such a person exists.
Taking on a lot of additional risk only to speed up an inevitability strikes me as unnecessary, and perhaps very unwise.
Furthermore, this isn’t 2010 any longer.
Stocks aren’t nearly as cheap as they were back then.
In fact, by some measures, the broader market (the S&P 500) is near record territory in terms of valuation.
Now, I’m not saying you should avoid buying stocks here. I don’t believe in trying to time the market.
But adding leverage to the mix puts you in a needlessly precarious position.
I’ll also note that you’re “confident” in your trading skills, yet you don’t have a lot of money to work with.
That tells me that maybe you might be a little too confident in those skills. Or maybe your overall personal finance skills need some brushing up on so that you can put some capital in your pocket.
You need money to make money.
With this in mind, I’d recommend taking the time to hone some personal finance and investing basics.
Let’s crawl before we run.
The investment strategy that I advocate, and personally use, is dividend growth investing.
This is the strategy that I used to achieve my undermentioned financial position in life.
If you can develop a strong base of financial acumen, this strategy is almost certainly going to make you very wealthy over time.
If you’re properly investing, you won’t need margin to become wealthy.
The dividend growth investment strategy involves buying stock in world-class enterprises that are paying their shareholders rising cash dividend payments.
These rising cash dividend payments are funded by the rising profits these enterprises are producing.
This is growing passive dividend income you can reinvest and buy even more shares.
And you could one day even live off of this passive income, like I’m doing. All while seeing the underlying shares continue to increase in value.
It’s akin to letting a flock of golden geese lay ever-more golden eggs.
These golden eggs are far shinier than any margin, Jill.
You can find hundreds of potential golden geese by perusing the Dividend Champions, Contenders, and Challengers list.
And if you can just build up a nice flock of these golden geese, and then leave them alone, you’ll surely find yourself in a fantastic financial position.
Make sure to read through fellow contributor Dave Van Knapp’s Dividend Growth Investing Lessons.
He reveals what this strategy is, why it’s so effective, and how you can take advantage of it.
I take the time every Sunday to highlight a compelling dividend growth stock for long-term investment.
I share these ideas with the investment community in the Undervalued Dividend Growth Stock of the Week series.
Once you find yourself ready to put some real money to work, these are opportunities to strongly consider.
You can ignore what I’m saying. Take on the margin, if you wish.
But I think you’ll find that sticking to the basics, being wise with your personal finances, and intelligently investing for the long haul will result in an inevitable position of wealth and freedom.
And you’ll start to see that margin could only put all of that in jeopardy.
Warren Buffett has always spoken out against taking on leverage.
As he puts it: “Rational people don’t risk what they have and need for what they don’t have and don’t need.”
Regardless of what you decide to do, Jill, I’ll leave you with my best piece of advice.
Start doing it today.
I wish you luck and success.
Jason Fieber
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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.