For the most aggressive investors, you can add to your earnings by assuming a margin balance equal to 20% of your net equity holdings (ie with $10,000 to invest, get a 20% margin loan or $2,000 - total invested = $12,000). This margin is more safely assumed after IN signals only. As such, in my computations below, I have reduced margin to 0 at OUT signals. Again, OUT does not mean to get out of the market but rather to rotate into defensive positions such as Drug stocks (this is what I have used in my model). Any gains have been taxed at 20%. Returns are based on investing in the Nasdaq only.
Returns from a $12,000 investment ($10,000 plus $2,000 margin) beginning 4/30/1970 using margin only during IN cycles would return $915,574 as of 4/30/2001. This date (4/30/2001) is also an IN signal date and thus completed cycle information is available. It is riskier to use margin during OUT signals but if you would have done this over the years, it's safe to say the balance as of 4/30/2001 would well exceed $1,000,000. |
