### Value averaging and MYR -A safer approach to margin?

Posted:

**Sat May 15, 2010 8:24 pm**Hello,

I have been investing for 8 years and am about to start a taxable account

since I have maxed out my 401k and IRAs and have enough disposable

income to do so.

I am thinking about using a margin account (leverage) and applying a value averaging concept. My plan is to always have

a constant percent of leverage and to invest more or less based on how the market moves.

So, if I invest $1000 bi-weekly + $500 on margin for a total

of $1500, I would be at 50% leverage.

If the investment were to drop by $100, then my total investment would be $1400 with

$500 on leverage (~55% leverage 500/900).

So in my next bi-weekly investment, I would add the $1000 but only use $450 on margin, brining my leverage back to 50%.

You continue doing this until you have an absolute dollar value on margin, like 100k, or whatever you are comfortable with.

At that point, you start reducing the leverage by continuing to make the principal investment but not using additional leverage.

I choose 50% leverage, because I could withstand a 50% market drop with no margin call.

In the worst case scenario (ie: a > 50% drop in a week), I could borrow against my 401k or Roth IRA to completely

pay off the margin account. In this case, I would have just transferred my investments from my retirement accounts,

to my taxable accounts and would be fine. I would then divert all future payments to pay off the 401k

loan until everything is even again.

Does this sound like a viable approach?

I have been investing for 8 years and am about to start a taxable account

since I have maxed out my 401k and IRAs and have enough disposable

income to do so.

I am thinking about using a margin account (leverage) and applying a value averaging concept. My plan is to always have

a constant percent of leverage and to invest more or less based on how the market moves.

So, if I invest $1000 bi-weekly + $500 on margin for a total

of $1500, I would be at 50% leverage.

If the investment were to drop by $100, then my total investment would be $1400 with

$500 on leverage (~55% leverage 500/900).

So in my next bi-weekly investment, I would add the $1000 but only use $450 on margin, brining my leverage back to 50%.

You continue doing this until you have an absolute dollar value on margin, like 100k, or whatever you are comfortable with.

At that point, you start reducing the leverage by continuing to make the principal investment but not using additional leverage.

I choose 50% leverage, because I could withstand a 50% market drop with no margin call.

In the worst case scenario (ie: a > 50% drop in a week), I could borrow against my 401k or Roth IRA to completely

pay off the margin account. In this case, I would have just transferred my investments from my retirement accounts,

to my taxable accounts and would be fine. I would then divert all future payments to pay off the 401k

loan until everything is even again.

Does this sound like a viable approach?