Some people might look at $100,000 as a lot of money, but not something you could retire on. However, by opening a margin account, your bank will lend you $1 for every $1 you put into the account. So, when investing $100,000, you can double that to $200,000 between your portion and the bank's.
Average Market Return
Since the creation of the S&P 500 index fund in 1923, which monitors 500 U.S. stocks, the average increase has been 10 per cent per year. So, any average investor that puts their money into a stock blindly will most likely make 10 per cent per year. Are you beginning to get the picture? With the previously mentioned $200,000 invested and an average market increase of your stocks at 10 per cent, you will bank $20,000. That's enough to live on if you're not greedy.
Bank's Share
The bank will take about 1.5 percentage points of the portion that they lent you. However, you are still left with a nice $18,500 profit. But if your stocks decrease, you are in a situation that the bank dubs a "call," where you owe them money for the amount your stock has decreased. In other words, the bank's money is secured by the portion that you put in. If your stocks lose 50 per cent, you will need to use the 50 per cent of your portion, or in this case, $100,000, to pay the bank back and you are left with nothing. However, even during the great recession recently, the average stock's decline was at about 45 per cent. And if you know how to invest, which you will if you continue to read this blog, you will not lose that much if a similar recession is repeated.
Lesson of the day: Figure out how much you need to live comfortably each year and then save 500 per cent of that to invest. In my case, I need $20,000 per year, so I will save $100,000 so that I can earn my annual goal.
As usual, if you have any questions, please comment and I'll be sure to respond. Happy saving!
Average Market Return
Since the creation of the S&P 500 index fund in 1923, which monitors 500 U.S. stocks, the average increase has been 10 per cent per year. So, any average investor that puts their money into a stock blindly will most likely make 10 per cent per year. Are you beginning to get the picture? With the previously mentioned $200,000 invested and an average market increase of your stocks at 10 per cent, you will bank $20,000. That's enough to live on if you're not greedy.
Bank's Share
The bank will take about 1.5 percentage points of the portion that they lent you. However, you are still left with a nice $18,500 profit. But if your stocks decrease, you are in a situation that the bank dubs a "call," where you owe them money for the amount your stock has decreased. In other words, the bank's money is secured by the portion that you put in. If your stocks lose 50 per cent, you will need to use the 50 per cent of your portion, or in this case, $100,000, to pay the bank back and you are left with nothing. However, even during the great recession recently, the average stock's decline was at about 45 per cent. And if you know how to invest, which you will if you continue to read this blog, you will not lose that much if a similar recession is repeated.
Lesson of the day: Figure out how much you need to live comfortably each year and then save 500 per cent of that to invest. In my case, I need $20,000 per year, so I will save $100,000 so that I can earn my annual goal.
As usual, if you have any questions, please comment and I'll be sure to respond. Happy saving!
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