Market fear has given way to greed as risky loans have re-emerged, an investment advisor has said.
Mark Starosciak, managing partner of Infinium Investment Advisors in Denver, Colorado, has said margin loans are seeing a resurgence as investors become more comfortable with the economy.
“A period of four to five years of fear began to transition to greed at the beginning of this year,” he said.“As this happens, you’ll see a lot of risky strategies come back into play.”
Margin loans, which hit an all-time high earlier this year according to FINRA, can be used to buy real estate, fund small business acquisitions or to provide gap financing, but it’s not worry free, Starosciak said.
In the same way that a bank will lend money against equity in your house, your brokerage firm can lend money against the value of certain stocks, bonds and mutual funds in your portfolio. But the similarity has some seeing flashbacks to the myriad of problems people can face when tapping into their home equity
for consumer goods.
The loans can magnify profits, but it can do the same for losses. If your securities decline to the point where they no longer meet the minimum equity requirements for your margin loan, you'll get a call tobring additional money to the table.
This risk, combined with higher interest rates mean margin is efficient if you have a short-term need and a diversified portfolio, but not advisable for those who don’t have the financial means to weather the storm if and when the next one comes, Starosciak said.
At the onset of a recovery, greed is driving investor decisions, he said, and you don’t want to be the last one to the party because when it ends, it will cause a lot of financial pain.