Living beyond your means is a big enough danger to your finances. But a less visible practice -- investing beyond your means -- can be even more destructive.

Investing with "margin" -- money borrowed from your broker -- offers the tempting possibility of turbocharged returns. But one wrong move could leave your portfolio devastated. One Fool community member lost more than $60,000 with it. My colleague Toby Shute has also detailed the margin-al adventures of Chesapeake Energy (NYSE:CHK) CEO Aubrey McClendon. Whether you're an everyday investor in your 20s or the head of a major corporation, margin can come back to bite you.

Running numbers
To see more clearly how margin can cost you a fortune, simply look at the margin interest rates some brokers charge. Schwab (NASDAQ:SCHW) recently imposed between 6% (if your debit balance was $2.5 million or more) and 8.5% (if it was less than $25,000). At TD AMERITRADE (NASDAQ:AMTD), the rates were between 6.25% (for debit balances of $1 million or more) and 9% (for less than $10,000). Keep in mind that these rates apply at a time when interest rates are near record lows!

Think about what those rates really mean. If you're borrowing money at 8% or 9%, you'd better be certain you'll earn more than that -- not only to cover the cost of the loan and deliver profits, but also to reward you for the risk you've taken on. The market has averaged 10% per year over the very long haul, but over many relatively lengthy periods, it has averaged much less. Even a promising company such as Coca-Cola (NYSE:KO) has averaged just 1% a year over the past decade. If you'd invested in it on margin, you'd have been paying a lot in interest while waiting in vain for the stock to appreciate.

Imagine paying 8% or 9% interest over a few years while invested in the following companies, all of which have earned five-star ratings from our Motley Fool CAPS community:


CAPS Rating (out of 5)

5-Year Avg. Annual Return




Coventry Health Care (NYSE:CVH)



Honda Motor (NYSE:HMC)









Data: Motley Fool CAPS.

Sure, you would have seen your investment in Honda beat the market (the S&P 500 ended pretty much where it started over this period). But even Honda's 7.1% annual gain might not have been enough to cover the interest you'd have been paying in margin.

If you're thinking of making millions by using margin, think again.

Longtime Fool contributor Selena Maranjian owns shares of Chesapeake Energy, Coca-Cola, CEMEX, and PepsiCo. Chesapeake Energy, Coca-Cola, and SYSCO are Motley Fool Inside Value recommendations. Coventry Health Care, CEMEX, and Charles Schwab are Motley Fool Stock Advisor picks. Coca-Cola, PepsiCo, and SYSCO are Motley Fool Income Investor picks. The Fool owns shares of Chesapeake Energy and SYSCO. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.