The Risks of Margin Accounts in Investing Strategies

Margin accounts increase risk without justifying rewards, making them unwise for prudent investors.

### The Risks and Considerations of Margin Accounts in Investing
* 💰 Kevin inquires about the use of margin accounts by financial mutants, which allow investors to **borrow money against their brokerage accounts** for additional investments.
* 📉 The easy answer to why margin accounts are not pursued is due to **high interest rates**, making them **less viable currently**.
* 🏠 However, leveraging is already present in financial strategies, such as using a mortgage for a first home purchase with a **down payment of 3 to 5%**.
* ⚠ The speaker warns about the risks associated with margin loans, comparing it to being "**caught swimming naked**" when financial downturns occur, emphasizing the importance of having a **solid financial foundation first**.
* 📊 Warren Buffett's investment philosophy is highlighted, noting that he **builds up cash to seize opportunities** rather than leveraging portfolios to extreme levels, as the **risks often outweigh potential rewards**.
* 🔍 Before engaging in margin investing, one should **carefully evaluate both the best-case and worst-case scenarios** to ensure the risks taken are justified.
* 💡 Ultimately, for those following sound financial practices, the need to take on such risks may be unnecessary, as they can **achieve their goals without margin accounts**.

[Music] here's the next question. This one's from Kevin. This one's interesting. Um, I know your answer, but I don't know which direction you're going to go with it. Kevin asks, Hey, why don't you guys use margin accounts for your money guy mutant investors? For those of you that don't know, margin just means, Hey, sometimes financial institutions where you hold your brokerage accounts will actually let you borrow money against those accounts. So, if I have $100,000 in an investment account, they might issue to me margin where I can borrow $50,000 against that account. You know, I can do that $50,000. I can then go invest that $50,000. So, I'm actually investing 150% of what I was able to have invested. That's the way a margin account works, and you got to pay it back, and it accrues interest. And so, Kevin's question is, Hey, for financial mutant, right, why don't you do that? Why isn't that a strategy that you guys pursue? Well, I'm

going to give you the easy answer, and then I'm going to give you the actual logical answer too, so you can understand there's a why behind this. The easy answer right now: interest rates are high. It's not even a viable thing with interest rates where they are. But even if we get into a lower interest rate environment, let me tell you when and where this might make sense so you don't fall into this siren song of the benefits of Leverage on all aspects of your life. Look, if you look at our financial order of operations, there's already elements of Leverage. You think about your first home purchase. That is a leverage opportunity. We're going to tell you to put down 3 to 5% on your first house. You're going to go mortgage the rest. That is you taking advantage of Leverage with the real estate of your primary residence. Margin is one of those things where you could use the leverage either to just borrow off of your assets, or you even could have access to investing more.

with a margin loan. But realize anything that is levered, there's risk. Mhm, you know, and it, it look, you can maximize, it can be a multiplier when you use leverage effectively, but you know what my, my favorite Uncle Warren talks about is that when the tide goes out, you can tell who's swimming naked, who's skinny dipping. What happens, Brian, if someone has a margin loan out and all of a sudden the tide starts going out? I mean, because realize these things, they don't, when it rains, it pours, guys, 'cause you will lose your job, stock market will go down 25%, banks will just stop lending money because they're scared to death too, and you're sitting there just butt naked, just not knowing what to do with yourself, and you're going to get caught in a bad situation because you didn't get steps one through seven. If you want to know what to do with your money and where you can do lever debt, I think it's really a step eight of where I talk about abundance goals in

the financial order of operations because you'll have the financial foundation underneath you so you can hopefully weather whatever gets thrown at you financially so you don't get yourself in a situation but don't do it too early Kevin by the way I don't I think I said butt necked where it's Buck necked you know there's people say it all different ways I just wanted to cover that part too that part was for free that wasn't even part of the I can see the I can see everybody around here just going which way did he just say it cuz I know there's all kind of and now I watch enough YouTube videos I don't even know what to I like you both ways so that we got both of them in there here's be buck deer that's sitting out there it could be you know somebody's you know rear end naked I don't know I don't you know I don't know yep I love it I think that's great here's what when it comes

to making financial decisions. You're back to Kevin. One of the things you always have to make sure of is you have to assess the risk that you're taking on, and is it really worth it. Here's a real practical example. I could be really, really risky and keep no cash on my emergency reserve, and chances are I'll be fine if no emergency happens. I can get those invested. I can have them working for me. But realistically, what was the benefit? What was the benefit that I received relative to the risk that I took on? I put, I hung it all out there, put it all at risk, and if it went bad, it could take me. And if it goes good, I have a few more dollars. I have a slightly higher percentage. I have a slightly better rate of return. I think margin investing is very much inside of that same vein. It's one of the reasons why you look at one of the most successful investors ever, Warren Buffett. He talks about this in shareholder letters. Hey, we build up cash, and what we do is wait for opportunities.

and we deploy cash to be able to take advantage of opportunities. He doesn't say, Hey, we leverage our portfolios to 170%. We make sure we maximize our equity exposure, da da da da da da da, because he recognizes that the risk that you're taking on in doing that does not justify even the potential reward. So, before you enter into some kind of transaction like that, make sure it's a great time. Even though we don't often talk about this way, it's a great time to put on the 3D glasses. The reason that you would margin is because you're already thinking about the dream plan. What is the absolute best outcome from this? You need to spend some time in the doooo plan. Okay, if it goes wrong, what am I sacrificing? What am I going to put myself at risk on? What are the things? What are the hard decisions I might have to take? And if I have to do that, was all of this even worth it? And I think you're going to find, Kevin, if you're a

financial mutant doing all the stuff that you're supposed to be doing the way you're supposed to be doing it. You just don't have to take on that kind of risk. Between me mispronouncing stuff and then you talking about the 3D glasses and the doooo plan, this might be the first video ever that's going to get an explicit lyric thing. It's going to be like NWA and then the money guys show because of this one clip. NWA and the money gu, those are honestly when you're listening on Spotify. I think those two normally play right after each other, money guy and then and of I love it.

Why Don’t You Use Margin Accounts for Your Money Guy Mutant Investors?

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Margin accounts allow investors to borrow money against their brokerage accounts, potentially increasing their investment capacity.

The current high-interest rates make margin borrowing less viable.

The financial order of operations already includes elements of leverage, such as a mortgage for a first home, making margin accounts less necessary.

Margin loans can amplify gains but also come with significant risks.

During a financial downturn, individuals with margin loans may find themselves in a precarious situation, facing job loss and a declining stock market.

It's essential to have a solid financial foundation and follow a structured financial order of operations before considering leveraged debt.

Assessing risk is crucial when making financial decisions, as the potential reward must justify the risk taken.

Keeping no cash in an emergency reserve may seem risky, but the benefit gained is often minimal.

Successful investors like Warren Buffett emphasize building up cash and waiting for opportunities, rather than maximizing equity exposure and taking on excessive risk.

The Unconventional Approach to Financial Success

The speaker emphasizes a unique, low-risk method to achieve financial success, contrasting with traditional approaches.

The video humorously mixes mispronunciations and unconventional references, potentially leading to an explicit content warning.

The speaker draws a playful connection between their content and NWA's music, highlighting the unexpected pairing on Spotify.