Investing like the ultra-rich is easier than ever

Subscribe to enjoy similar stories. Fifteen years ago, Ian Ayres and Barry Nalebuff published a book with an intriguing argument. For decades, financial advisers had suggested to retail investors that they take more risk when young, investing heavily in stocks before gradually shifting to safer bonds as they edge towards retirement.

The pair of financial economists went one step further: young investors should actually borrow money to buy stocks, an idea they named “lifecycle investing". After all, they pointed out, the historical record indicated that investors would have been better off taking on such leverage over any lifespan from 1871 to 2009. When Messrs Ayres and Nalebuff were first developing their ideas, such a strategy would have been difficult to implement.

Online brokers were far less widespread; investors faced high trading fees and difficulty borrowing. E*Trade, an early broker, offered margin rates (those it charged to borrowers) of around 9% in 1999, when the Federal Reserve’s benchmark rate was just below 5%. Even as they were writing the book in 2009, the authors noted that margin rates at large brokers such as Fidelity and Vanguard were extortionate.

Leveraged investing was mostly the preserve of institutional investors, or very wealthy individuals able to get a better deal on lending. One review of the book was titled “Don’t try this at home". Now, trying it at home is a breeze.

In their book, Messrs Ayres and Nalebuff briefly mentioned a piddling outfit called Interactive Brokers that offered far lower margin rates than its more prestigious competitors. In 2009 the company was worth $7bn and had 134,000 clients. Today it is worth $110bn and has 4m clients.