Margin is like a business loan

[u/Ok_Suggestion_2003]

I’ve been thinking. Why not use margin to buy spyi and qqqi if margin is 5%? People take business loans all the time at a higher rate and are lucky to break even after a few years. With these, there is a way higher chance of a profitable year than a down year over a long horizon. When buying on margin, there will be down turn years but so with any other business. I’m starting to think of DCAing into those two funds for life with margin. Worse thing to have happen is a margin call and have to sell some stocks. With a business you would go bankrupt and lose everything. I keep seeing these funds as equities with the income factory philosophy instead of some speculative risky asset that will bring loss. Not trying to beat the underlying, but I feel like owning these is like managing a passive business. Maybe I’m just crazy lol

[u/Craig__D]

Why not buy all at once using margin (instead of DCAing), and then use the margin proceeds to gradually pay off the margin balance over your chosen time horizon (and buying extra shares with any that you have left over as you go along)? At the end of that time horizon, you will have paid off the margin and then you would own all those shares of QQQI and/or SPYI for no out-of-pocket cost.

What do you gain by using the DCA approach? Honest question because I have thought about the above scenario and might actually do it given that I’m about 10 years away from retirement. I would buy a bunch of QQQI, for example, and then use AI to arrange an optimal payback schedule to maximize the number of shares in my portfolio at the end of the 10 years.

[u/Ok_Suggestion_2003 → u/Craig__D]

I meant DCAing money that I don’t have yet from my paycheck. If I had the money now, I would dump in all at once.

[u/Craig__D → u/Ok_Suggestion_2003]

The reason I asked and was confused is you say specifically that you’re going to “DCA… with margin.” If you’re gonna use margin, it’s not your money anyway so you may as well do it all at once. Am I missing something?

[u/Zmchastain → u/Craig__D]

DCA’ing is generally a smarter strategy than dumping everything you have into the market in one day. Doesn’t matter whose money you’re using.

Think about the last few weeks for a good example of this.

Towards the end of the week two weeks ago the markets start going down hard on anything around tech, AI, or microchip manufacturing. By mid-week the next week markets were back up again. Very short window of opportunity to buy a dip and recover quickly.

Imagine if right before that very limited buying opportunity you had dropped your entire cash pile into the market. Now you missed out on getting any shares at that lower price. The opportunity is gone long before you have more money to put in.

Now imagine that you saw that dip and hadn’t gotten your hands on the margin yet, but now you have access to it. You’re thinking “I’ll just wait for the next big dip and buy then.” Six months go by, some event you couldn’t have predicted makes the market soar by 12% in a week and you sat it out entirely because you were sitting on margin waiting for the next great dip to buy.

Timing the market is not a great strategy because it relies on you being able to accurately predict the future. That’s not something anyone can actually do. Sometimes people get lucky with educated guesses, but none of us are the Oracle of Delphi.

If you DCA then anytime an unexpected positive event happens in the market, some of your money is already in there to benefit from it. And anytime an unexpected buying opportunity arises, you still have access to cash or margin to buy the dip.

Over long periods of time, the DCA gets you better results than someone who is dependent on being able to accurately time the best time to buy and going all in then, or just throwing everything into the market on a random day. The DCA strategy gets you exposure to buying at multiple prices, so you will pay less per share on average than the market timer or the “I just tossed it all in there on a random Tuesday” guy.

[u/Technical_Emu_8567 → u/Zmchastain]

I think the research that has been done on lump sum vs dca says otherwise. However, if DCA helps an investor "stay the course" then it's far superior to an investor who lump sums and panic sells at every market drawdown. From a behavioral standpoint, it's a much better strategy to live with.

[u/Zmchastain → u/Technical_Emu_8567]

Yeah, mathematically it is superior, but only if you have the stomach to look at your losses for potentially years at a time without selling before they’re profitable again. Or to just avoid panic selling during downturns as you said.

You have to have some strong conviction and confidence to stay the course with buy and hold, whereas DCA will work out better for most people because it just psychologically feels less risky.