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So last week i did a video talking about my m’lord finance dividend portfolio and how i borrowed twenty five thousand dollars to invest back into my portfolio and on that video i was getting a lot of questions about how this worked in people looking for me to explain this in more detail so in this video today we’re going to be talking about this feature of m1 finance
And in general something called a portfolio line of credit and how this can enable you to get access to essentially free money now before we get into this guys i just have to go ahead and say that this is not any kind of financial advice and i am not a financial adviser also this is what i have chosen to do with my own investment portfolio and i’m not recommending it
As a strategy for anyone else to follow i am simply making you aware of this tool that you may decide to use when building your wealth and while this is technically free money there are risks involved with this strategy which we will discuss later on in this video so first of all for those who are not familiar m1 finance is a commission-free stockbroker out there
That is popular for long term and dividend investing and that is where i have built my dividend portfolio now one of the benefits to m1 finance is that if you have at least $10,000 invested with them you can take advantage of a feature known as m1 borrow which is exactly what i have done within my portfolio now essentially m1 borrow is something called a portfolio
Line of credit and this allows you to borrow money against the securities held within your account and if that doesn’t make sense right now guys don’t worry we’re going to explain this in much more detail and of course guys i want to be as open and transparent as possible here i am affiliated with m1 finance so if you sign up with my link down in the description
Below i may earn a small commission in the process but that affiliate relationship in no way influences my thoughts and feelings on this brokerage platform now when you borrow money there are two primary types of loans out there the first is a secured loan and the second is an unsecured loan and i want to go ahead and cover the differences between those two now an
Unsecured loan is one where there is no asset backing the loan a few examples of this are medical debt or a credit card debt because there is essentially no collateral in place in case you do not pay back the debt for example with a credit card if you rack up a bunch of credit card debt spending money on day to day purchases and then you don’t pay the credit card
Company back they can’t exactly seize all those items that you purchased because maybe you use them up already or maybe you simply spent that money on a vacation there is no asset or collateral backing that unsecured loan and that is why interest rates on credit cards are sky-high in some cases 20% or more because the bank is taking a massive risk by offering
You that unsecured line of credit now on the other hand with a secured loan there is some kind of asset backing that loan which essentially means if you don’t pay them back they take ownership of that asset to recuperate their losses and the two most common types of secured loans out there are number one auto loans and number two your mortgage if you don’t pay
Your mortgage for a set period of time it will go into foreclosure you will lose your home and the bank will sell the house to get the money back from the mortgage and the same thing with an auto loan if you don’t make your car payments after a set period of time your vehicle will be repossessed and sold at a bank auction now a portfolio line of credit which is
Exactly what m1 finance offers with m1 borrow and other brokerages offer this as well is a type of secured loan however instead of having this loan backed by an asset such as a house or a car it is backed by the securities held within your account or in layman’s terms the stocks and etfs that you have purchased within your brokerage account now it’s a little bit
More complicated than this and we’re going to get into it later but essentially if you right to sniff your broker and you didn’t pay back that loan they would have the right to sell those stocks and etfs to get their money back out of it and this makes this type of loan extremely low risk for the person offering this loan so for m1 finance in this case or other
Brokerages offering a portfolio line of credit the risk is very low for them and as a result interest rates are low as well so now let’s talk about the interest rates associated with these different types of secured and unsecured loans first of all for credit cards we talked about this you could pay anywhere from 17 to 25 percent or more for an interest rate on a
Credit card because it is unsecured and very high risk for the financial institution auto loans and mortgages are lower because they are secured and there is an asset backing that loan now a portfolio line of credit is very low risk because it’s a highly liquid asset meaning your brokerage could easily sell your shares and recoup the money if such a situation arose
So as a result these rates for borrowing against your portfolio are even lower in most cases than with a mortgage or an auto loan so with m1 borrow assuming you have at least $10,000 within your m1 finance account you can borrow against those securities with a portfolio line of credit at an interest rate of 3.5% however where things get more interesting here is if
You are an m1 plus subscriber which is an annual fee of $125 per year it comes with a number of different perks but one of the huge ones is that they take one point five percent off of the m1 borrow rate so all the sudden you’re able to borrow money at a two percent interest rate against the securities held within your portfolio now i know what you’re saying to
Yourself right now probably something along the lines of how is a two percent loan free money well at the end of the day guys there is no such thing as a free lunch and nobody is going to simply hand you free money with a 0% interest rate however if you are able to earn a return that exceeds what you are paying on a given loan that is how you can essentially earn
Free money but again i just want to restate this guys this is not 100% risk-free and will cover what those risks are later on in the video so here’s what i decided to do with my m1 finance portfolio i took out a portfolio line of credit through m1 borrow in the amount of $25,000 add an interest rate of just 2% since i am an m1 plus subscriber and this essentially
Means i am borrowing $25,000 and paying $500 per year in interest in order to borrow that money now you can do many different things with that money that you borrow you could have it sent to your checking account and use it for medical expenses or paying off higher interest debt however what i decided to do was to take that $25,000 and reinvest it back into my
Dividend portfolio now my portfolio holds blue chip dividend paying stocks many of which are dividend aristocrats which means they have been paying and growing that dividend for 25 consecutive years or more and in total the yield of my portfolio is three point one eight 5% so in a nutshell that $25,000 that i have borrowed from m1 finance will earn a return of
Three point one eight five percent per year based on the dividend yield of my portfolio assuming that dividend yield does not change and by investing in blue chip stocks and mostly dividend aristocrats i have mitigated that risk of having a massive change in that dividend yield since i am diversified across 15 different dividend paying stocks so if you take that
$25,000 borrowed and i earn a yield of 3.1 85 percent in dividends that adds up to 796 dollars and 25 cents per year and as mentioned earlier that loan is going to cost me five hundred per year in interest based on that 2% rate so essentially when you take my potential earnings from dividends and subtract out the interest paid for m1 borrow that leaves me with a
Net profit of two hundred ninety six dollars and twenty five cents however that is just one way which you are able to be paid from dividend stocks where things get interesting is that you can also earn money from something called asset appreciation or buying something at a certain price and selling it for a higher price down the road now the average return from
The stock market over the last 100 years or so is around 10% per year over the long run it’s important to remember you don’t often earn a 10% return year after year because there are hills in valleys referred to as bull markets and bear markets but if you invest over the long haul you can expect a return of around 10% so if you instead use that 10% figure instead
Which includes dividends being reinvested if you earn 10% and you’re paying 2% to borrow that money invested your net return here is 8% but again just keep in mind it is not something you should expect to see year after year that is the long term annualized return so on $25,000 which is the amount i borrowed that is a return of 2,500 assuming i earn 10% when you
Subtract out the $500 paid in interest that is a net profit of $2,000 per year using money that is not mine and so essentially this could enable me to earn two thousand dollars per year in free money now that being said guys it is not 100 percent risk-free and it’s certainly not guaranteed because the performance of the stock market is not a straight line so that
Being said here are the risks associated with investing borrowed money through a portfolio line of credit first of all the rate at which you are borrowing that money can and will change right now through m1 borrow you can get it for 3.5% or 2% if you are an m1 plus user however that interest rate is based on the federal funds rate which is essentially the rate at
Which the federal government loans money to banks now that rate is extremely low right now based on this global pandemic essentially the federal reserve dropped rates as much as possible to a range of 0% to 0.25 percent if the federal reserve decided to increase that rate well then all the sudden the rate at which you’re borrowing money is going to go up as well
So if the federal reserve increases rates which is not likely to happen for some period of time understand that it would make the rate at which you are borrowing money go up as well making this a less lucrative opportunity the second risk to understand here is that the value of the underlying asset that you purchase can and will change the price of a given stock
Or etf changes every couple of seconds based on what people are willing to pay for and what people are willing to sell it for and when you invest borrowed money into an asset that fluctuates in value there is the potential risk here of a magnified loss so just for an example of this guys let’s say you have $10,000 invested in you borrow thirty five percent of that
Value which is how much you are allowed to borrow using m1 financed that means you have ten thousand dollars of your own money and three thousand five hundred dollars of borrowed money giving you a total of 13 thousand five hundred dollars now let’s say you invested at the worst possible time right before there was a bear market and then the market dropped 33 percent
Which is the average decline during a bear market while your $13,500 investment would now be worth around eight thousand nine hundred ten which essentially means you lost four thousand five hundred ninety dollars of value within your portfolio now if you instead invested just ten thousand dollars and did not borrow money to invest with and you experienced that same
33 percent decline your portfolio would now be worth around six thousand $600 and so that means you would have experienced a loss of just three thousand four hundred dollars versus four thousand five hundred ninety by using borrowed money so when you invest with borrowed money you are magnifying your potential losses because you have more equity or skin in the game
And third of all guys this magnified loss could lead to something called a margin call which is essentially when your broker requires you to deposit more money to invest or they’re going to sell a portion of your securities or stocks and etfs in order to cover a portion of the loan so let’s say for example you have ten thousand dollars invested of your own money
And thirty five hundred dollars of borrowed money while all the sudden if your portfolio tanked and fell to a value of four thousand dollars while all of a sudden your broker is going to get concerned because if the value of your stocks and etfs falls below how much money they have loaned you they won’t be able to recoup that loss and so an event like this after
A substantial drop in your portfolio’s value could result in this margin call where you have to deposit more money or they are going to sell some of your shares so in order to avoid this margin call you have to make sure the equity in your portfolio always remains higher than the amount of money that you have borrowed so in my case if my portfolio value fell to
Around twenty-five thousand dollars that would likely trigger a margin call however you can mitigate this risk by investing in durable time-tested companies such as blue chip stocks which is what i have chosen to do with my portfolio it would not be wise to invest borrowed money in speculative assets that experience drastic price fluctuations because that would
Make it more likely that you would experience a maintenance call so there you have it guys that is essentially how you can use a portfolio line of credit and potentially get free money as mentioned there are risks associated with this and i’m certainly not recommending that you follow this as a strategy this is simply what i have chosen to do with my own folio if
You guys want to learn more about m1 borrow i’m gonna link up to an article i did over on my blog that goes into more detail and of course if you decide you want to support this channel and sign up for em one finance there is a link down below as well but thanks so much for watching guys i hope you enjoyed this video subscribe if you haven’t already and i will see you in the next one
Transcribed from video
M1 FINANCE FREE MONEY LOOPHOLE By Ryan Scribner
