Q. My online broker’s site shows me not only how much is in my account, but my “potential buying power.” I believe this is an amount I could buy on margin. Should I use it?
C.M., via the Internet.
A. Buying on margin involves borrowing to purchase additional securities, using your existing investments as collateral.
Your broker’s dramatization of “potential buying power” quantifies your ability to use margin to own more stock without fully paying for it. Federal rules permit firms to lend a customer up to 50 percent of the total purchase price of a stock for new, or initial, purchases.
That’s great in rising markets. Be cautious, however, since losses occur quickly in volatile markets when stock prices decrease.
A customer’s equity in the account must not fall below 25 percent of the current market value of the account’s securities, or the customer will be required to deposit more funds or securities. That’s known as a margin call.
You might lose more money than invested; be required to deposit additional cash or securities on short notice; have to sell some of your securities when prices fall; or find that your brokerage firm sold some of your securities without consulting you in order to pay off the loan.
“Buying on margin is dangerous because it can not only magnify your gains, but your risks as well,” warned Marilyn Capelli Dimitroff, a financial planner with Capelli Financial Services Inc. in Bloomfield Hills, Mich. “I would only use this strategy for a small portion of your portfolio, definitely not your core investments.”
To open a margin account, your broker must obtain your signature and completely explain all terms. Not all securities can be bought on margin, and brokerage firms can set their own margin requirements that are higher than those set by law or regulators.
Q. I have a small portfolio with one-third of it in Tweedy, Browne American Value Fund. What’s your opinion of this fund?
W.D., via the Internet.
A. It’s a conservative, low-turnover, low-volatility fund that emphasizes the stocks of financial companies.
Unfortunately, this disciplined emphasis on quality companies that grow steadily hasn’t been rewarded in the recent market upturn.
The $727 million Tweedy, Browne American Value Fund gained 22 percent over the past 12 months and has a three-year annualized return of 1.35 percent. Both results rank in the lowest 10 percent of all mid-cap value funds.
“I’d think of this as a core fund for conservative investors who aren’t looking to shoot out the lights with returns,” said Christine Benz, analyst with Morningstar Inc. in Chicago.
“While it may look disappointing in its relative rankings right now, I think that over the long haul investors would do well with this fund.”
Experienced portfolio managers Christopher Browne, William Browne and John Spears have been on board since the fund’s inception in 1993. They buy stocks trading at discounts, while also considering factors such as insider buying.
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More than half the fund’s holdings are currently in financial services. Other significant groups include health care and consumer goods. Its largest holdings are MBIA, Transatlantic Holdings Inc., American Express, Torchmark Corp., Pfizer Inc., Popular, Federated Investors “B”, Rayonier Inc., ProQuest Co. and Freddie Mac.
This “no-load” fund requires a $2,500 minimum initial investment and has a low annual expense ratio of 1.36 percent.
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Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, #184, 369-B Third St., San Rafael, CA 94901-3581, or by e-mail at [email protected].