A couple of days ago, I wondered if the stock market was a little over-priced.
Today I received an email from one of the many free investing newsletters I subscribe to and the echoed a similar sentiment.
“The NASD, a brokerage regulator, recently sent out an ‘alert’ to investors outlining the risks associated with margin. Through the end of March, the latest data available, the amount of debt taken on by investors to buy stocks totaled $317.7 billion. And while that was a bit below the $321.2 billion record hit in February, it still surpasses the $300 billion in March 2000 at the top of the tech-stock bubble.
“‘If you’re borrowing money from your broker to buy stocks, you’re basically speculating,’ says Chris Johnson, investment strategist at Johnson Research Group.
“A sharp rise in margin debt means investors are eager to own stocks. And such spikes are often associated with market tops, as was the case in 1929 and 2000.
“Sure, investors have a chance to boost returns by using other people’s money – a technique called leverage – to buy more shares than they could on their own. But buying on margin is just another form of debt, another IOU, another buy-now-pay-later transaction.
“‘We’re not trying to set off alarm bells,’ says Elisse Walter, senior executive vice president at NASD. ‘But with margin debt (near record levels), we felt it was a good time to remind retail investors what margin is, how it operates and what the risks are.’”
Seems like the market is a bit overvalued. It may not necessarily correct but there’s no point taking on unnecessary risk. So I’ve decided to cut back on my margin holdings. I don’t usually have a lot of stock on margin but sometimes it just creeps up. I had about 12% of my portfolio on margin which I’ve scaled back to 8%. I’m thinking I’ll lower that down to less than 5% if not 0 in the next few days.
It was 0 in January, but like I said, it has a habit of creeping up on you. Plus I recently sold some of my stocks with gains and pulled 10% cash out of my account to cover some rental vacancies and part of a car purchase for the wife. That also caused the margin-to-portfolio ratio to increase.