Tuesday, April 14, 2020

Why I Decided To Use Robinhood Gold And Margin

As I'm writing this post, the number of confirmed COVID-19 cases continues to significantly increase.

When I wrote my post last week discussing my dividend income for the month of March 2020, the number of confirmed COVID-19 cases just surpassed 1 million, and they are now approaching 2 million, with over 1.8 million cases confirmed as of April 12.

Deaths have tragically surged from 66,000 to over 113,000 in the past week and our lives continue to be different in virtually every aspect compared to just a few weeks ago.

Just as tragic as the deaths themselves is the economic impact on the lives of millions of Americans as unemployment claims in the United States over the past 3 weeks are around 17 million.

With that aside, I'll be delving into the intent of this post, which is to provide rationale for my recent decision to subscribe to Robinhood Gold and use margin in my Robinhood portfolio.

Robinhood Gold Offers Valuable Insights from Morningstar

One of the primary reasons that led me to subscribe to Robinhood Gold was the fact that Robinhood Gold comes with free Morningstar reports on just about every company in my 72 stock portfolio (including fractional share holdings in M1 Finance).

These Morningstar reports are very comprehensive, including an investment thesis, fair value estimate, economic moat rating, risk summaries, and stewardship rating.

Without even considering the next point, Robinhood Gold and its accompanying Morningstar reports provide valuable insight into prospective investments and are a helpful facet of my investment research process.

Margin Offered A Way For Me To Sustainably Leverage Capital

The $5/month cost of Robinhood Gold is offset by the $1,000 of interest free margin provided by Robinhood Financial, which means the reports from Morningstar are essentially paid for by the dividend income produced by the first $1,000 of margin.

While using nearly $5,800 of margin on a portfolio that is barely worth $10,000 is a fair amount of margin, I don't believe it is unmanageable in light of my liquidity situation given that I have nearly $2,000 of available liquidity in my savings account and my car is nearly paid off, which is my only meaningful liability.

Because of this, I will be able to completely pay off the interest portion of the margin in the next 3 months.

Further supporting this point, I will soon be paying off $2,000 of margin, which will help improve my margin maintenance.

When I take into account that my portfolio would have to fall a bit more than 50% as it is, I feel comfortable with my current situation, though I will be paying off all but the $1,000 of the interest free portion in the next 3 months.

Concluding Thoughts:

So, there you have it. Robinhood Gold itself offers insights from Morningstar, which include a discussion of risks facing stocks, fair value, and other helpful tools. This alone is worth the $5/month cost of Robinhood Gold, which comes with an interest free $1,000 of capital to deploy into high-quality dividend stocks.

It was my perception that the recent downturn and plummeting into a bear market offered a great opportunity to purchase equities at bargain prices relative to the interest rate charged by Robinhood Financial (which I'll detail in my post next week) while I'm also only 3 months away from obtaining the capital necessary to pay off my margin balance aside from the interest free $1,000 of margin (not to mention the remaining debt on my car).

It would have taken a significant further plunge into a bear market we have not seen since the likes of the Great Depression for a margin call to be issued, which gave me some sense of comfort that I was not overleveraged and at a heightened risk of a margin call.

While it's still too early to tell whether we will go back into a bear market and I have no intention of remaining leveraged beyond the $1,000 mark, I do believe that we have ultimately entered into a new bull market and the American economy will be back up and running before this summer arrives.


Do you use margin or do you refrain from using margin?

What is your rationale for your decision?

As always, I appreciate your readership and welcome any comments in the comment section below.

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