Author Topic: Borrow to invest  (Read 5396 times)

2Cent

  • Pencil Stache
  • ****
  • Posts: 684
Borrow to invest
« on: August 10, 2015, 02:44:57 AM »
After reading this website I am quite exited to make early retirement a goal. Especially articles about investing and getting 7% average returns are very interesting as that seems to be a lot more than the average savings plan. But I have a doubt. What to do with low intrest debt? My mortgage is effectively 2%, and I can make personal loans for 5%. It would seem that I could make a ton of money by investing that instead of paying off loans. In fact math says I could go on early retirement of 25k/year with no savings if I could borrow 1250000 at 5%(which I can't ofcourse).

Obviously that 7% is not risk free, so what do you guys think is a good risk/profit balance? Or is this a bad idea altogether and am I better of taking the safe route by saving before investing.

csycsycsy

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Re: Borrow to invest
« Reply #1 on: August 10, 2015, 05:10:11 AM »
We were able to take up a mortgage at 1 percent, and we chose to take up the mortgage even though we could have paid up most of it by liquidating our stock portfolio or drawing on govt pernesion fund that pays 2.5 percent guaranteed. This has proven to be a good strategy as the stock market has returned far more than 1 percent over the past few years

If you can get a loan at 1-2 percent I would say go for it

I would not take up a loan at  5 percent to invest in the stock market. There is no guarantee the markets will return anything close to 7 percent

Ps we live in Singapore where the mortgage rates were very low over the past few years. However, it's a floating rate mortgage and we plan to prepay more of if rates go up to say 3 percent or so

kvaruni

  • 5 O'Clock Shadow
  • *
  • Posts: 92
  • Location: Northern Ireland, UK
Re: Borrow to invest
« Reply #2 on: August 10, 2015, 05:20:41 AM »
This just had to do with your risk tolerance. A mortgage/personal loan is only 2%/5%, but it is consistently 2%/5%. Market return is on average 7% and it comes with a pretty high standard deviation. That means it could just as well be two years in a row of -25%. It will take you a long time to recover from such a big fall, even at a consistent 7% in the years following that. In the meantime, the mortgage and loan will just have to be paid back as usual. Can you stomach that? If you can, sure, do some hedging. Otherwise, don't. :)

Personally, I would agree that it is relatively safe if you invest instead of paying off the mortgage. That is because a mortgage is there for a long time, and usually you can pay the monthly costs multiple times over. However, lending money for the purpose of investing is something different altogether. I would consider all money that you invest as money that disappears into thin air: you don't have it anymore, you are not getting it back in any way. If you can live with that idea and still pay off all mortgages/loans then you are fine. Otherwise, I wouldn't touch it as it sounds like gambling to me.

Seppia

  • Pencil Stache
  • ****
  • Posts: 616
  • Age: 40
  • Location: NYC
Borrow to invest
« Reply #3 on: August 10, 2015, 06:08:58 AM »
It seems to me like a bad idea. Maybe (maybe) at the peak of the 2008-2009 financial crisis when all stocks were on fire sale, but now, near historical highs?
Stay out of debt and keep investing regularly, let the dollar cost averaging do the work for you.
Being in a hurry is often a recipe for bad decisions

2Cent

  • Pencil Stache
  • ****
  • Posts: 684
Re: Borrow to invest
« Reply #4 on: August 10, 2015, 06:51:40 AM »
This just had to do with your risk tolerance. A mortgage/personal loan is only 2%/5%, but it is consistently 2%/5%. Market return is on average 7% and it comes with a pretty high standard deviation. That means it could just as well be two years in a row of -25%. It will take you a long time to recover from such a big fall, even at a consistent 7% in the years following that. In the meantime, the mortgage and loan will just have to be paid back as usual. Can you stomach that? If you can, sure, do some hedging. Otherwise, don't. :)

Personally, I would agree that it is relatively safe if you invest instead of paying off the mortgage. That is because a mortgage is there for a long time, and usually you can pay the monthly costs multiple times over. However, lending money for the purpose of investing is something different altogether. I would consider all money that you invest as money that disappears into thin air: you don't have it anymore, you are not getting it back in any way. If you can live with that idea and still pay off all mortgages/loans then you are fine. Otherwise, I wouldn't touch it as it sounds like gambling to me.
Yea, the risk of it shrinking significantly, or at least not returning anything for a few years should be accounted for. I guess I will only keep the mortgage loan and not take personal loans for investments beyond where the interest is more than a small percentage of my monthly saving.

2Cent

  • Pencil Stache
  • ****
  • Posts: 684
Re: Borrow to invest
« Reply #5 on: August 10, 2015, 06:55:30 AM »
It seems to me like a bad idea. Maybe (maybe) at the peak of the 2008-2009 financial crisis when all stocks were on fire sale, but now, near historical highs?
Stay out of debt and keep investing regularly, let the dollar cost averaging do the work for you.
Being in a hurry is often a recipe for bad decisions
Looking at the graphs we are about due for another downturn. If I manage to keep my job, I'm thinking to do some bargain hunting then, but not more than I could afford to lose.

grettman

  • 5 O'Clock Shadow
  • *
  • Posts: 84
Re: Borrow to invest
« Reply #6 on: August 10, 2015, 08:22:48 AM »
On October 24, 1928 a lot of people were borrowing to buy stocks.

Following that day, and many days after,  some of those same people started to jump out of windows.  Literally.

Its a bad idea.

fb132

  • Guest
Re: Borrow to invest
« Reply #7 on: August 10, 2015, 08:30:48 AM »
I know it can be done in Canada, not sure in the US (with the roth or IRA) though. You can invest in the RRSP on february, then when you get your tax refund in april-may, you pay your loan back.

But I would still reccommend to invest when you have the money and not use borrowed money.
« Last Edit: August 10, 2015, 08:45:06 AM by fb132 »

BicycleB

  • Handlebar Stache
  • *****
  • Posts: 2447
  • Location: Live Music Capital of the World
  • Older than the internet, but not wiser... yet
Re: Borrow to invest
« Reply #8 on: August 10, 2015, 08:37:44 AM »
I think the risk is a little greater than the reward on most borrowing; I suggest focusing on debt reduction, with the exception of fixed rate mortgage.  Often the time when your investments drop is the very time you need to pay the debt, leading to a spike in costs and forcing a "fire sale" type liquidation.  You will avoid that by, as other pointers suggest, investing just the money you have after paying off debt.

Another advantage of this safe approach is it leaves you lots of time to focus on earning money and cutting costs, the two activities that produce investable funds in the first place!

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Borrow to invest
« Reply #9 on: August 10, 2015, 12:36:49 PM »
It's not really clear to me what you mean by borrow.  Are you talking about just not paying off your mortgage early, and instead using that money to invest?  At that low of rate, that's a good plan.

http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

innerscorecard

  • Pencil Stache
  • ****
  • Posts: 589
    • Inner Scorecard - Where financial independence, value investing and life meet
Re: Borrow to invest
« Reply #10 on: August 10, 2015, 01:09:02 PM »
Beware of asset liability mismatch. A lot of new investors don't think about that.

csycsycsy

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Re: Borrow to invest
« Reply #11 on: August 11, 2015, 05:56:17 AM »
I don't understand why folks here are so negative about this. I would say if
1) you can get a loan at 1 , 2 or even 3 percent; AND
2) this is a long tenure loan say 10 years or more
Take the loan and invest in the stock market.

The chances that the investment returns will be below the interest costs over a ten year or more period are extremely low

fb132

  • Guest
Re: Borrow to invest
« Reply #12 on: August 11, 2015, 08:10:43 AM »
I don't understand why folks here are so negative about this. I would say if
1) you can get a loan at 1 , 2 or even 3 percent; AND
2) this is a long tenure loan say 10 years or more
Take the loan and invest in the stock market.

The chances that the investment returns will be below the interest costs over a ten year or more period are extremely low
The interest compounds overtime hurting your rate of return. Why not invest the money you have now instead of going towards someone else for investments?

rmendpara

  • Pencil Stache
  • ****
  • Posts: 602
Re: Borrow to invest
« Reply #13 on: August 11, 2015, 02:06:35 PM »
It's more complicated than 7% return in stocks > 5% cost to borrow.

Don't get greedy/stupid and leverage up your portfolio. Most people aren't smart enough to do that well.

If you really want to learn more about it, then here's my take: at it's core, it's a balance of liquidity risk. The long term return of 7% in stocks is as good of an estimate as we have, but are you liquid enough (i.e. is your cash flow sufficient) to keep paying off the debt if you run into 1, 3, 5, 10+ years of a "down" market? For most people, it's impossible to borrow cheaply outside of secured property (e.g. a mortgage on a home).

The simple way to achieve most of the leverage benefits is to simply refinance your home at a low rate for a 30-yr term and pay the minimum.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3477
  • Location: France
Re: Borrow to invest
« Reply #14 on: August 11, 2015, 03:37:05 PM »
Well, I'm likely starting a small Smith Manoeuvre portfolio soon.

Borrow from HELOC to invest = tax deductible expense
Invest in Canadian index (XIC most likely) = 'tax free' dividends.

It should work out ok over 20 years. If not, well, it'll be part of my target AA anyway so no problem.

evola4

  • 5 O'Clock Shadow
  • *
  • Posts: 1
Re: Borrow to invest
« Reply #15 on: August 12, 2015, 07:55:07 PM »
Itís not wise to borrow just to invest. Please make sure the company that offered 7% where youíre planning to invest is stable. But for me, Iíll pay my debt first or at least Iíll make it a goal to pay off my debt. I honestly think that the 7% offer has a high risk in it up to the extent that there wonít be any investment returns.

lostamonkey

  • Bristles
  • ***
  • Posts: 450
  • Location: Canada
Re: Borrow to invest
« Reply #16 on: August 12, 2015, 08:28:54 PM »
Interactive Broker charges 2% on their margin loans if I am not mistaken. I have been tempted to borrow a small amount and "let it ride" for a decade but I haven't pulled the trigger. There are also nice tax advantages to borrowing to invest in Canada. My effective tax rate on eligible dividends is very low because of the dividend tax credit and interest is fully deductible (against general income) so borrowing to invest will decrease my tax liability every year assuming the dividend yeild=interest paid.

Yankuba

  • Handlebar Stache
  • *****
  • Posts: 1357
  • Location: Long Island, NY
Re: Borrow to invest
« Reply #17 on: August 15, 2015, 11:39:56 AM »
15 year returns of the S&P 500 index fund are less than 4.50% - including dividends:

http://performance.morningstar.com/fund/performance-return.action?t=VFIAX&region=usa&culture=en_US

I know it is sacrilegious to go against equities on this forum but who is to say we don't have another 15 years of 5% gains in equities? Many economists feel that 2% GDP growth is the new normal (crumbling labor force participation rate, aging population, huge entitlement spending) and productivity - despite all the stories about robots and software killing jobs - is growing one half or one third as quickly as it was prior to 2000. With 2% GDP growth and an aging global population (sans Africa and the Middle East) and a largely developed world (sans India and Africa) it's going to be hard for companies to match the returns they posted in the past (in my opinion). Most of the big gains of the past 8 years were due to stock buybacks, cost cutting and financial engineering vs. actual gains in revenues and we are 5% away from the market peak. We're also much closer to the next recession than the last recession - thus, I'm not nearly as bullish on equities as others on this forum.

I can see borrowing money at low rates in order to pay off debt at higher rates but I wouldn't feel comfortable borrowing money to buy stocks.