Author Topic: Credit card balance transfer to invest  (Read 944 times)

YoungStache

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Credit card balance transfer to invest
« on: April 19, 2017, 05:27:38 PM »
I received a balance transfer offer in the mail for a 1% fee, 0% APR until July 2018. I was thinking of depositing the credit into my bank account and buying (and holding) index funds with it, in the amount of 10K - 20K. I have no debt, and have the income to pay off the balance transfer before the promotional period ends.

What do you guys think?

Put in 20K right away? Or put in 10K and save 10K as a hedge and dump it in if the market drops? VTSAX?

Hargrove

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Re: Credit card balance transfer to invest
« Reply #1 on: April 19, 2017, 05:48:21 PM »
Eh, I am getting offers that are this sweet. The problem is that the risk is not worth the reward.

If the market goes up, you win. If it goes down, you lose. When people say "over time it goes up," they mean decades (usually 30-year spans, here).

Over a 30-year horizon, this sort of bet is "as safe a gamble as we can guess" when it comes to stock investing.

Over a 1-year horizon, especially at a known high in the markets, speculating on a base of -1% is not a wise thing to do.

Even if you win the gamble, you throw a blight on your credit report for what amounts to a few hundred dollars in gains (with your amount, maybe you could clear 1k, but you could also lose it). Since, in a single year, the stock market can fluctuate significantly up or down, this is not a great idea. Your odds of gain are slightly higher than of loss, but not overwhelmingly higher. If anything happens to you in the interim before June 2018 that prevents you from paying 100% by then, you are set with a surely toxic debt with a skyscraping APR. Two or three weekend shifts or four account opening bonuses will probably get you the same returns with virtually no risk.
« Last Edit: April 19, 2017, 05:52:44 PM by Hargrove »

josh4trunks

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Re: Credit card balance transfer to invest
« Reply #2 on: April 19, 2017, 06:14:17 PM »
I have done this twice now.

Pull out as much as possible (in my cases I did it with no fee), make a spreadsheet to make sure I will produce the income to pay back before introductory rate changes.
But I am using the money to pay off student loans, which have a guaranteed rate of return, in my case around 4% = [ 6-7% x (1 - tax rate) ].

Telecaster

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Re: Credit card balance transfer to invest
« Reply #3 on: April 19, 2017, 06:17:42 PM »
Terrible idea.  The market could easily be down 20% or more in July 2018. 

YoungStache

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Re: Credit card balance transfer to invest
« Reply #4 on: April 19, 2017, 06:26:19 PM »
Good points! But if the market goes down within the eligibility period for activating the offer then it's a different story :)

Telecaster

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Re: Credit card balance transfer to invest
« Reply #5 on: April 19, 2017, 06:38:36 PM »
No, it is the same story, just the amount of tragedy is different.  The market could go down.  And then could continue on down.   You have a time bomb set to explode on July 2018.  The risk of that bomb going off dwarfs any reward you think you might get.  Don't do this, don't even think about it. 

L.A.S.

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Re: Credit card balance transfer to invest
« Reply #6 on: April 19, 2017, 06:52:45 PM »
What is with all of these "Should I borrow money at X% from Y source to buy stocks?" posts lately?

Here's an Oaktree memo to read:

https://www.oaktreecapital.com/docs/default-source/memos/2008-12-17-volatility-leverage-dynamite.pdf?sfvrsn=2

talltexan

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Re: Credit card balance transfer to invest
« Reply #7 on: April 20, 2017, 07:32:46 AM »
There are so many of these "borrow to invest" posts lately that I've bookmarked this thread over from bogleheads.

If you can read through this thread and still want to do your plan, go for it!

https://www.bogleheads.org/forum/viewtopic.php?t=5934

L.A.S.

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Re: Credit card balance transfer to invest
« Reply #8 on: April 20, 2017, 08:21:14 AM »
There are so many of these "borrow to invest" posts lately that I've bookmarked this thread over from bogleheads.

If you can read through this thread and still want to do your plan, go for it!

https://www.bogleheads.org/forum/viewtopic.php?t=5934

+1.

To the OP: using leverage does not risklessly increase odds of success.  At a certain point in every market cycle thousands of people get the same bright idea: "If only I could borrow what I need and invest it i'll supercharge my returns by investing it at a higher rate of return. It's so obvious! What could possibly go wrong!"  Take note, yours is not an original thought.  Usually these are people who fear they've missed out on gains and believe they have come to the party late and need to do something to catch back up, or else they overestimate their risk tolerance and believe they are entitled to a certain level of investments in their portfolio.

In many cases using leverage to invest is just an attempt to take a free ride.

If you borrow 20K, or 50K, or 100K and invest that 20-50-or-100K in the stock market, you're net worth doesn't change a nickel at that moment.  What you have actually done is contractually agreed to service the debt and pay back the principle at some point and purchased a asset much more volatile that cost of debt service.  In a hot second the stock market could drop 20-30%, for practically no reason at all and stay there for years, leaving you dangerously underwater on your strategy.  The proper way to view the appropriateness of using leverage is not by comaparing interest rates or returns of the cost of leverage with the long term returns of an asset, but by comparing the amount of leverage with the volatility of the asset which is being levered.  This is why a bank will loan you 80% the cost of a house for 30 years, since houses are generally less volatile, but margin accounts are notoriously risky and tricky to work with -- margin usually leave investors worse off than if they just left it alone.

OP, you're proposed experiment runs the risk of (1) in the first round it could severely damage your portfolio if the volatility is too much for you to bear, and you get burned. Or (2) in the first round it could be a success!  Of these two (2) is likely more hazardous.  Think: if your leveraged strategy is a success the first time around, what are you likely to do next? Will you pat yourself on the back and walk away from the strategy and attribute your success to dumb luck? Probably not. You'll probably take on even more leverage and try to goose your returns even more.  At some point, you will have too much leverage and volatility will consume you and you will fail.

Fools rush in where angels fear to tread...
« Last Edit: April 20, 2017, 08:24:02 AM by L.A.S. »

NESailor

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Re: Credit card balance transfer to invest
« Reply #9 on: April 20, 2017, 10:28:09 AM »
There are so many of these "borrow to invest" posts lately that I've bookmarked this thread over from bogleheads.

If you can read through this thread and still want to do your plan, go for it!

https://www.bogleheads.org/forum/viewtopic.php?t=5934

Reading that thread in its entirety was a glorious way to spend 3 work days last year :D.  The guy is obviously quite brilliant and still he ended up what...quarter million in the hole?  Excellent thread precisely for that reason.  And the fact that he kept updating everyone even as the financial world was collapsing around (with) him.

bacchi

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Re: Credit card balance transfer to invest
« Reply #10 on: April 20, 2017, 11:24:39 AM »
I've seen recent CDs at 1.75%. If you could get 1 year CDs at that rate, it'd be worth it. Barely.

If you want easy money, find one of the many bank account bonuses. Wells Fargo has/had a $250 bonus after using your debit card 10 times. Easy.

Proud Foot

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Re: Credit card balance transfer to invest
« Reply #11 on: April 20, 2017, 11:55:55 AM »
I received a balance transfer offer in the mail for a 1% fee, 0% APR until July 2018. I was thinking of depositing the credit into my bank account and buying (and holding) index funds with it, in the amount of 10K - 20K. I have no debt, and have the income to pay off the balance transfer before the promotional period ends.

What do you guys think?

Put in 20K right away? Or put in 10K and save 10K as a hedge and dump it in if the market drops? VTSAX?

Personally, no I would not do it.  There is too much risk involved for only a net gain of approximately $1,500 (using a straight 7% growth rate for 15 months).  The best case scenario involve positive growth and you keeping your job through the whole period while the worst would be a market crash while also losing your job before paying off the promotion balance.  This then means you either sell off investments at a loss to pay off the remaining balance or the remaining balance becomes subject to a high interest rate.  To me the risk of a worst case scenario far outweighs the benefit of the best case scenario. 

surfhb

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Re: Credit card balance transfer to invest
« Reply #12 on: April 20, 2017, 04:32:37 PM »
2002/2008....here we come