Brokerages like IB has pretty low sub 2% interest rate per year while index fund grows 10%. Is using borrowing/margin to amplify and purchase more shares of stable growth stocks like snp500 index fund a good strategy as long as you don't borrow too much where a 50% drop would cause you to cover?
I would want to do this long term buy and hold type of strategy.
I've considered the argument listed in Lifecycle Investing, a book by Ian Ayres and Barry Nalebuff. The argument is that certain investors (who meet certain criteria, such as having a stable income) should lever their stock investments to over 100% when they are young, over time de-lever to 100% stocks, then gradually buy bonds to reach their desired retirement stock/bond ratio. If you are seriously considering this, I recommend reading their book or at minimum watching this Youtube video for a summary.
Currently, I am not levered as I still have student loans, and the value of my loans relative to my investments mean that I already have effective 2:1 leverage. After that, I intend to lever up using deep in the money call options on VOO or VTI.
Why options over margin? Margin has certain risks that options do not. If interest rates go up overnight, IB will likely raise their rates as well, where the implied interest rate of a call option is baked in (though changes to interest rates would change the value of your option, as will the loss of time value if you hold the option close to expiration). Margin also has the maintenance requirements which could lead to a forced sell at the worst time (when your investments go down). Options also have the ability to be traded within IRAs and some 401Ks, while neither supports margin
You don't need to borrow or go into margin to leverage an index. There are already leveraged ETFs. For example UPRO is the same similar as 3x leverage on the S&P. Of course it is not a perfect 3x at all times, because of how the fund actually works. But then you get the advantages of not actually borrowing any money yourself. You can examine yourself how these leveraged funds do in practice:
There used to be even 10x S&P ETFs, but then the market crashed, and... Well, that brings us to your other question:
Yes it is a good strategy when the index is going up. It's not so good if it goes down.
Really it depends on your investment goals. Presumably you have some amount of money you are expecting to make, and some level of risk you are willing to accept. When an asset has the right balance of risk/reward, but the magnitude is just too small, you can multiply both by using leverage. But that's assuming you are a sophisticated enough investor to know what risk and reward you want.
