Something unprecedented is happening in the stock market, and it should terrify anyone serious about building wealth.
Margin debt reached a new all-time high of $1.02 trillion in July, marking the first time in history that investors have borrowed over a trillion dollars to buy stocks. (technically there are other uses for margin, but most people borrow to buy more assets versus withdrawing the money) Robinhood's margin book increased 90% year-over-year to a record $9.5 billion in Q2 2025 alone. (Robinhood targets retail investors.)
This isn't just a number. It's a flashing red warning sign that retail investors are making the same catastrophic mistake that has destroyed wealth in every major market crash throughout history.
What Is Margin Debt?
Margin debt is money you borrow from your broker to buy more stocks than you can afford with cash. It sounds appealing: if you have $10,000 and borrow another $10,000 on margin, you can buy $20,000 worth of stocks. If those stocks go up 20%, you make $4,000 instead of $2,000. Excluding interest, you doubled your return to 40% by making $4,000 on your original $10K.
The math looks compelling. The reality is much scarier.
I'll Acknowledge the Appeal (And Why It's a Trap)
Yes, margin can amplify gains dramatically. In a perfect world with perfect market timing, borrowing money to buy stocks would make you rich faster.
But margin requires two skills that are mathematically impossible to possess:
Perfect market timing - knowing exactly when to increase and decrease leverage
Perfect emotional control - maintaining discipline when you're winning and losing
Since no human possesses these skills, margin debt ultimately destroys wealth for virtually everyone who uses it regularly. (I am excluding hedge funds and professional investors here. They use debt extensively, but they also have trading algorithms you don’t.)
The Brutal Economics of Margin
Let's look at what borrowing actually costs you right now:
Fidelity's current starting margin rate is 12.575%
Margin rates at major brokers range from about 6% to over 11%
Interactive Brokers offers some of the lowest rates at aroud 5.8%, but even they charge meaningful interest
This means the stock market needs to outperform 6-11% annually just for you to break even on your margin loan and that’s before considering taxes, which make the hurdle even higher.
Real Example: The Math That Kills You
Let's say you have $25,000 and decide to buy $50,000 worth of stocks using $25,000 in margin debt at 9% interest.
Scenario 1: Market goes up 15%
Your $50,000 position becomes $57,500
You owe $25,000 principal + $2,250 interest = $27,250
Net position: $30,250
Your gain: $5,250 on your original $25,000 (21% return)
This looks great! You beat the market by using leverage.
Scenario 2: Market goes down 20%
Your $50,000 position becomes $40,000
You still owe $25,000 principal + $2,250 interest = $27,250
Net position: $12,750
Your loss: $12,250 on your original $25,000 (49% loss)
The market dropped 20%, but you lost 49% of your money. This is the asymmetric risk of leverage. It amplifies losses more than it amplifies gains when you factor in borrowing costs.
Scenario 3: The Margin Call (Where People Get Destroyed)
Let's say the market drops 30% and your $50,000 position becomes $35,000. Most brokers require you to maintain at least 25-30% equity in your account.
Your equity: $35,000 - $27,250 = $7,750 Your equity percentage: $7,750 ÷ $35,000 = 22%
Margin call. You must immediately deposit more cash or sell stocks to meet the minimum requirement. But here's the reality: Forced to liquidate their stocks because of margin calls, overextended investors flooded the exchange with sell orders during every major crash.
You're forced to sell at the worst possible time, locking in massive losses while still owing the full margin debt plus interest.
The Historical Devastation
This isn't theoretical. Margin debt has been the destroyer of wealth in every major market crash:
1929: The Original Margin Massacre A central cause of the 1929 stock market crash was excessive leverage. Many individual investors and investment trusts had begun buying stocks on margin, paying only 10% of the value of a stock to acquire it. When the bubble burst, forced to liquidate their stocks because of margin calls, overextended investors flooded the exchange with sell orders.
2008: History Repeats March 5, 2008: Carlyle Capital Corporation received margin calls on its mortgage bond fund, foreshadowing the broader crisis. Major financial institutions that had leveraged up were forced into fire sales, amplifying the crash.
The Pattern Is Always the Same:
Market rises for years
Investors get comfortable with leverage
Margin debt reaches record highs
Market crashes
Margin calls force mass liquidation
Crash accelerates and deepens
The Psychological Trap That Hooks Everyone
Here's the tricky part about margin: it often works at first.
Let's say you start with a small margin position and the market goes up 20%. You made more money than you would have with cash alone! The success feels intoxicating. You think you've discovered a secret to wealth building.
So you borrow more. And maybe it works again. (Stocks typically go up, not down, so it does often work.)
This early success creates a psychological trap that leads to what researchers call "escalation of commitment." Each success makes you more confident. Each success makes you borrow more. You start to believe you can time the market.
But here's what margin addicts don't realize: you only need to be wrong once.
During the inevitable crash, all your previous gains evaporate. Worse, you lose more than you invested. Even worse, you still owe the borrowed money plus interest.
This story plays out in every downturn. Someone gets lucky with margin, thinks they've cracked the code, then gets destroyed when their luck runs out. Meanwhile, the boring investor who just bought index funds with cash steadily builds wealth.
Why Market Timing Is Impossible
Margin debt only works if you can time the market perfectly. You need to:
Borrow heavily when the market is about to rise
Reduce leverage before every crash
Increase leverage again at the bottom
Repeat this cycle flawlessly for decades
Show me anyone who has done this successfully over their entire investing career. I'll wait.
Even Warren Buffett, the greatest investor of all time, has never relied on margin debt as a core strategy. If the Oracle of Omaha can't time the market well enough to use leverage safely, what makes you think you can?
The FI Perspective: Margin Is Anti-Wealth
Everything about margin debt contradicts the principles of building sustainable wealth:
Debt elimination vs. debt accumulation: While you should be paying off debt to increase your savings rate, margin adds more debt to your life.
Guaranteed costs vs. uncertain returns: You pay guaranteed interest on margin debt while hoping for uncertain stock returns.
Risk reduction vs. risk amplification: Your FI journey requires reducing financial risk, not amplifying it.
Cash flow improvement vs. cash flow destruction: Margin interest payments reduce your monthly cash flow, the opposite of what you need for FI.
Long-term thinking vs. short-term speculation: Margin encourages you to think about quick gains rather than steady wealth accumulation.
The Robinhood Problem
The explosion in retail margin debt isn't happening by accident. Robinhood's margin book increased 90% year-over-year to a record $9.5 billion, and it's not because their customers suddenly became sophisticated investors.
It's because apps have made borrowing money to buy stocks as easy as ordering food. A few taps on your phone, and you can double your market exposure.
This ease of access is creating a generation of investors who don't understand the risks they're taking. They see margin as "extra buying power" rather than what it really is: a loan that can destroy their financial future.
What About "Smart" Margin Strategies?
Yes, the wealthy use margin to avoid incurring capital gains taxes. If you have an eight-figure net worth, go for it. There are legitimate uses for these loans once your finances become complex and/or illiquid. However, if you’re reading this, that probably doesn’t apply to you. You probably don't have the resources to weather a prolonged downturn while making margin interest payments. You can't afford to lose more than you invested.
The Current Danger
We're not just at high margin debt levels. We're at the highest levels in history, during a market that many experts believe is overvalued.
Warren Buffett's actions at Berkshire Hathaway underscore this caution. The company has accumulated $344 billion in cash and equivalents, a record high, while selling stakes in major holdings like Apple and Bank of America.
When the world's greatest investor is hoarding cash and reducing positions, why would you borrow money to buy more stocks?
What to Do Instead
If you're currently using margin:
Stop immediately. Don't add to your margin position.
Create a payoff plan. Treat margin debt like high-interest credit card debt.
Sell positions if necessary. Better to realize some gains now than face a margin call later.
If you're tempted by margin:
Remember the math. You need 9-11% returns just to break even.
Study market history. Every margin debt record has preceded a crash.
Focus on savings rate. Increasing your income and reducing expenses is guaranteed wealth building.
Buy index funds with cash. Boring works. Leverage doesn't.
The Bottom Line
Margin debt reached a new all-time high of $1.02 trillion in July, and Robinhood's margin book increased 90% year-over-year. These aren't signs of sophisticated investing. They're signs of speculative excess that always ends the same way.
Margin debt is expensive, risky, and requires perfect market timing that no human possesses. It's the enemy of everything you're trying to accomplish on your FI journey.
The math might look appealing when markets are rising. The reality is devastating when they fall.
Never use margin debt. Your future self will thank you.
Note: notice I did not make a prediction about where the market will go. I simply don’t know and neither does anyone else. I said to avoid margin debt, not to liquidate your portfolio. Even when the market looks expensive by historical standards and Warren Buffett is accumulating cash, you want to keep saving and investing. Some people see an AI-driven surge in valuations and borrow on margin. Others see a bubble about to pop and short the market. We don’t know who will be right, so we play it safe and use buy-and-hold index investing over decades to make sure we don’t time the market wrong.