This week, I’m talking about 5 mistakes that smart investors don’t make in bear markets. 

Today I’m talking about mistake #1 - extending yourself with margin. 

Thankfully, I don’t see too many people who margin their investment accounts, but it can turn a downturn in your portfolio to a complete disaster very quickly. 

Margin is a loan that you take out against your investment portfolio. You can borrow money when needed and use your stock portfolio as collateral, just like your house is collateral for your mortgage loan. 

The strategy works just fine when the investments that you borrowed against are doing well, but when the investment value drops below a certain value it will trigger what’s called a “maintenance margin”. Basically, the financial institution where your account is held will force you to deposit more funds or sell off some or all of the holdings in your account to pay down the margin loan. 

Margin and other risky strategies are used often by hedge fund managers and other large, institutional managers, and it’s this forced selling that has made the stock market returns worse in the current crisis and every other crisis. 

While margin loans can be a tempting way to buy more stocks with less cash, or take a loan from your portfolio when times are good, let this current environment be a lesson to you to stay disciplined with your portfolio and frankly, just stay away from margin loans altogether. 

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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