Author Topic: Getting a large loan to buy index funds?  (Read 22457 times)

teadirt

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Getting a large loan to buy index funds?
« on: August 29, 2016, 04:17:22 PM »
Right now I'm reading Jacob Fisker's "Early Retirement Extreme" (really enjoying it so far), and this passage caught my attention:

Quote
Personal finance, as opposed to business finance, operates on the concept of consumption smoothing also known as, "Fake it until you make it," as it allows consumers to buy products which they presently can't afford due to lack of savings, but will be able to afford by making payments over time. Unlike a business, which invests the money in assets with a higher return, allowing businesses to use debt as a leverage, consumers "invest" in higher consumption. The lack of return on assets to pay the interest means they must either work harder or longer for their consumption, and so they do.

This got me thinking, why couldn't someone finance a large stock portfolio the same way they finance a car or a house? The basic hypothesis underlying MMM-style investing is that over a long enough timeline, the stock market always goes up, so it would follow that having the largest amount of money exposed to the market for the longest amount of time would be a good way to increase overall ROI, and that the interest on a loan would be far less than the (expected) long-term returns.

On the other hand, the idea of taking out the equivalent of a mortgage to buy index funds seems downright crazy and I could see myself losing a lot of sleep whenever the market takes a small dip.

I'm curious to hear your thoughts. Has anyone done this, and if so, what were the results? (I am going out of town for a week so don't expect any quick replies)

MrMoogle

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Re: Getting a large loan to buy index funds?
« Reply #1 on: August 29, 2016, 04:22:25 PM »
Some people effectively do this by taking out a mortgage when they buy a house, when they could have easily paid it with their net worth.  I'm not sure how an individual could do this though. 

dividendman

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Re: Getting a large loan to buy index funds?
« Reply #2 on: August 29, 2016, 04:26:00 PM »
You're talking about leveraged investing, which, like MrMoogle points out, is the same as taking out a mortgage. There is one key difference though: Markets can remain irrational longer than your ability to remain solvent - i.e. if your loan is callable it can be very bad. If your interest rate is too high it can also be very bad.

That said, many people do this.

MoonLiteNite

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Re: Getting a large loan to buy index funds?
« Reply #3 on: August 29, 2016, 05:03:49 PM »
So a margin account?
You basically end up paying 4-9% for the loan, with the AVERAGE of index funds being 7%. It is rather risky for that. Unless you are good at timing and TA. Not the best RvR setup. It is basically a gamble.

now a normal type of just loan? I don't know. I suppose you could get a decent rate. As long as you can keep up with the monthly payments nothing BAD will happen. Worse is you have to sell your index funds while they are in the red.

Financial.Velociraptor

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Re: Getting a large loan to buy index funds?
« Reply #4 on: August 29, 2016, 06:37:13 PM »
Not recommended.  But if you insist, Interactive Brokers is the best place for a margin loan.  I think they are running about 1.7% right now.

Buckeyes1

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Re: Getting a large loan to buy index funds?
« Reply #5 on: August 30, 2016, 05:11:19 AM »
https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Read this thread with a giant bowl of popcorn from beginning to end. It's outstanding.

Don't do this.

Fishindude

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Re: Getting a large loan to buy index funds?
« Reply #6 on: August 30, 2016, 05:20:07 AM »
If it sounds too good to be true ............

Tanor85

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Re: Getting a large loan to buy index funds?
« Reply #7 on: August 30, 2016, 05:48:32 AM »
Could be a good idea when the P/E ratio of the market is much lower than it is now.
 
One advantage of leveraged investing is that your interest payments are tax deductible (at least in Canada).

I would consider it during a major market crash.

Retire-Canada

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Re: Getting a large loan to buy index funds?
« Reply #8 on: August 30, 2016, 08:18:28 AM »
I'm curious to hear your thoughts. Has anyone done this, and if so, what were the results? (I am going out of town for a week so don't expect any quick replies)

I could pay twice as much each month towards my mortgage, but I'm choosing to use the extra money to invest in the market. If I have not FIRE'd by the time I get $200K of equity in the house and interest rates stay low [I'm currently paying sub-2%] I'll seriously consider pulling out $100K to invest.

When I run my numbers it will cost me $600 more per month to live in my paid off house vs. selling and investing the $$ then renting something comparable. This assumes current conditions stay the same in the future which may not happen. So in any case a paid off house is not an integral part of my FIRE plan. Selling the house and renting....or refinancing and investing some of the equity....or paying off the mortgage with investment $$ are all on the table.

I wouldn't take a margin loan that can be called when the market tanks, but leveraging the value in my home and using the money to invest is a viable option in my opinion.
« Last Edit: August 30, 2016, 09:03:49 AM by Retire-Canada »

hodedofome

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Re: Getting a large loan to buy index funds?
« Reply #9 on: August 30, 2016, 08:38:56 AM »
Could be a good idea when the P/E ratio of the market is much lower than it is now.
 
One advantage of leveraged investing is that your interest payments are tax deductible (at least in Canada).

I would consider it during a major market crash.

Emphasis added. If you are going to leverage, do it AFTER the market has gone down 20%+. To do it while the market is consistently hitting all time highs is asking for trouble. You need a margin of safety so that you don't get a margin call. The market has gone down 50% twice in the past 15 years, keep that in mind.

That being said, the idea is to be able to pay as little interest as possible, and have the lowest margin requirements as possible. As posted by Velociraptor, Interactive Brokers is the best for margin rates of 1.7% or less. They also give you the option of portfolio margin if your account is $100k+. Normal margin on stocks is 50%. However, portfolio margin can be as little as 15%-20%. That means on a $100k account they might let it get down to $15-20k before they'll force you to sell.

Even better, is to buy index futures. You can get the e-mini S&P 500 index contract for $4,500 in margin from Interactive Brokers, pay no interest, and control $108k worth of stock at the current price (the contract is worth $50 x whatever the index is trading at, which today is 2174). So if your account is only $54k you can buy 1 contract and effectively be at 2x leverage.

The profit/loss of the contract is $50 per point. So if today it's selling for 2174, and it goes down to 2164 tomorrow, you'll lose $500 and your account will be worth $53,500. If the index goes down 50%, that's 1,087 points x $50 = $54,350 LOSS. They'll force you to sell when your account gets down to $4,500 so that's all you'll be left with from your original account.

This is why you should wait for a market crash. If it's already gone down 20% then the index will be at $1,739. If it went down 50% total, then it would only be the difference of 1,739-1,087 = 652 points. 652 x $50 = $32,600. $54,000 - $32,600 = $21,400 your account would be worth. $21,400 is more than the $4,500 margin requirement so they won't force you to sell.

Blueskies123

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Re: Getting a large loan to buy index funds?
« Reply #10 on: August 30, 2016, 08:41:43 AM »
This is a really bad idea.  Did you know people jumped out of high rise Wall Street buildings to their death right after the crash of 1929.

Jack

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Re: Getting a large loan to buy index funds?
« Reply #11 on: August 30, 2016, 08:48:33 AM »
I invest instead of paying off my mortgage; it's completely reasonable.

Investing on margin is a different story because the loan is callable and the interest rate spread isn't large enough.

Fishindude

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Re: Getting a large loan to buy index funds?
« Reply #12 on: August 30, 2016, 09:15:55 AM »
Comparing the mortgage -vs- borrowing to invest in the market is an apples to oranges comparison.   

Borrowing strictly with the intent of investing in the market is much more of a gamble.  You might win big, but there is also a chance you could lose big all and not be able to repay the loan.

So you paid your house off early and it's selling value has declined?   Big deal, you still have a place to live which is something we all need.
« Last Edit: August 30, 2016, 09:55:03 AM by Fishindude »

Retire-Canada

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Re: Getting a large loan to buy index funds?
« Reply #13 on: August 30, 2016, 11:01:57 AM »
Comparing the mortgage -vs- borrowing to invest in the market is an apples to oranges comparison. 

If you divert money from paying your mortgage or refinance to get equity out of your home and use that money to invest it's just another loan. A home equity based loan just has better rates and can't be called compared to a margin loan or other type of loan.

If you decide to get a loan to invest money in the market one of the obvious places to look is the equity tied up in a home.

Fishindude

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Re: Getting a large loan to buy index funds?
« Reply #14 on: August 30, 2016, 11:19:53 AM »
Since some seem to think this is reasonable.
Question .... Has anybody here actually ever borrowed money from the bank via some type of loan, note, home equity loan, etc. and then used those funds to invest in the stock market?

If so, how did it work out?

MoonLiteNite

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Re: Getting a large loan to buy index funds?
« Reply #15 on: August 30, 2016, 11:32:43 AM »
This is a really bad idea.  Did you know people jumped out of high rise Wall Street buildings to their death right after the crash of 1929.

Person.
Only one guy actually jumped. And it was 2 weeks BEFORE the crash.
After the crash not one jumper. But 1 guy shot himself like 2 weeks later.

MoonLiteNite

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Re: Getting a large loan to buy index funds?
« Reply #16 on: August 30, 2016, 11:34:59 AM »
Since some seem to think this is reasonable.
Question .... Has anybody here actually ever borrowed money from the bank via some type of loan, note, home equity loan, etc. and then used those funds to invest in the stock market?

If so, how did it work out?
Someone posted  the question, home or invest first a few weeks ago.

I stated that the ethical side says you pay off your loan first.
Most people said it isn't the same thing.

I then posed your question and the thread died :/ I guess nobody really does it, because it is a larger risk. I find it funny that people do it with their home loans all the time as if it is different.

Retire-Canada

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Re: Getting a large loan to buy index funds?
« Reply #17 on: August 30, 2016, 11:54:26 AM »
Since some seem to think this is reasonable.
Question .... Has anybody here actually ever borrowed money from the bank via some type of loan, note, home equity loan, etc. and then used those funds to invest in the stock market?

If so, how did it work out?

I have used my LOC to buy ETF index funds during market drops a few times now then repaid the LOC with my monthly savings over time. Worked out fine. Prices went up between when I bought and when I repaid. My LOC is also my emergency fund so I'd weigh my work security vs. the benefit of investing the money. Currently I am working on two independent contracts so my risk of needing my EF any time soon is very low.
« Last Edit: August 30, 2016, 11:56:21 AM by Retire-Canada »

johnny847

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Re: Getting a large loan to buy index funds?
« Reply #18 on: August 30, 2016, 12:12:31 PM »
https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Read this thread with a giant bowl of popcorn from beginning to end. It's outstanding.

Don't do this.

When I saw this thread title I came over here to post exactly that thread!

BarkyardBQ

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Re: Getting a large loan to buy index funds?
« Reply #19 on: August 30, 2016, 12:25:46 PM »
https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Read this thread with a giant bowl of popcorn from beginning to end. It's outstanding.

Don't do this.

When I saw this thread title I came over here to post exactly that thread!

+2

OP, Investing vs Mortgage is the safest consumer level leverage, or you can try this...

I think the big risk would be that you can't pay off the balloon payment in December due to a down market, but having a sizable emergency fund (which many people do) mitigates this.

This is exactly what you SHOULD NOT DO. Don't invest your payments. Our strategy is basically, put all expenses on to the cards, maxing out our accounts to the point where contributions go in equally until October. This leaves us with enough cash each month to pay the mortgage and two cash required utility bills and enough to dump into savings so that 2017 IRA's are ready by October. October-December we will stash cash to make the payments in January on the first two cards and hold and save the cash for the Slate payment in May. When the 0% expires the cards are paid off and will be closed, then DW and I will switch which of us opens the new cards.

We do this to front load multiple (457/403)*2 retirement accounts. Maxed by October 1 using 0% Amex Blue Cash Preferred and 0% Citi Double Cash Back and moving the balance to Chase Slate. The first two cards have 0% til February 2017 and Chase until May. Chase Slate is 0% balance transfer fee for any transfers for the first 60 days. Combining cash back and interest (for 2017 IRAs) in 1% savings, nets about 3.5% based on our spending*, not including returns/dividends on the shares purchased. Who needs coupons when you have math? At a minimum this wipes the interest on our mortgage.

Our mortgage is 2.875% with 14 years remaining, and yearly isn't more than the standard deduction. We should be FI in 5 years and planning to FIRE in 8. Contribution/Savings Rate does more for our goal then expected growth. We cannot control the return rate, but we can control to some extent how much is there to grow. Our jobs are extremely stable, so our tolerance favors putting math to work for us as long as possible. The flat market/volatility for the past 15 months has prompted us to contribute as much as possible early in our FIRE journey, we started last January.

A couple more thoughts...

It's not for the risk averse, people with unstable income, or people who SHOULD have an emergency fund.

It's not sustainable. You have to weigh the risks of carrying over a balance to a new card (and possibly a new year) if you can't pay it off. You have to know for yourself how much you're comfortable rolling over year after year or when you might have to slow the retirement contributions. You're borrowing against time and your ability to pay it off quickly when the time comes. Getting in the market sooner for longer beats not investing for a short time to pay off cards in the future.  I'm comfortable in a scenario where we do this for a couple years, get half way through a year of front loading and then turn off contributions for a month or two, pay off the current card, and continue contributions as long as we can still max out the deferred savings by year end (for tax savings and buckets you don't get back). The goal is to still pay them off completely by end of the 0% term, but I could see getting comfortable rolling balances as long as we can get 0% monthly and on balance transfers.

*Amex Preferred Blue Cash 6% Groceries, 3% Gas, 1% everything else, except we use Citi to get 2% cash back. Discover 5% gas for 3 months. Most of our card spending is groceries and gas, and we can churn the 6% for gift cards for some other purchases.

Cycling Stache

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Re: Getting a large loan to buy index funds?
« Reply #20 on: August 30, 2016, 01:41:51 PM »
Emphasis added. If you are going to leverage, do it AFTER the market has gone down 20%+.

This is the fallacy of market timing.  Of course it feels better to invest after a significant downturn, but you have no idea what that downturn is.  Let's use 2008-2009 and a 50% drop.  You wait until it goes down 20% from peak and invest a large sum.  There was still a close to 40% drop from that point!  Believing that you are going to reliably stomach that after waiting to market time the 20% drop, and not get margin calls at that point, is a mistake.  So many people are confident of calling a downturn, but nobody has any sense of when they would confidently buy back in. 

Of course, a 50% drop is extreme and historically rare.  But like Mike Tyson (or somebody) said, everyone has a plan until they get punched in the face.  Think long and hard about how confident you are that you will hold off investing a significant sum because of concerns about excessive value, but then confidently stick with your large investment for the 40% drop (or more--because you actually have no idea how low it's going).

The people that benefit from stock downturns are the steady investors, because they're typically the ones who "stomach" the downturns and consistently put money in on those drops.  Not because they're smarter, but because they have a plan that is "un-human" and therefore not subject to standard behavioral irrationality.

I'm on board with the idea of investing rather than paying down mortgage as a form of this investing "on margin," but I don't buy into the theory that people should put a large sum in on some kind of market timing theory about market drops, because it is unlikely that the people who do that are then going to have the fortitude to make the correct, "rational" decisions thereafter.  Because they're human.

MustacheAndaHalf

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Re: Getting a large loan to buy index funds?
« Reply #21 on: August 30, 2016, 03:14:46 PM »
If you take out a loan, and do well with investing, what will you do next time?  An early success could foster bad behavior that will lead to larger risks... until the situation collapses.

OP would need to weigh the loan's fixed interest rate against the variable returns of the stock market.  A loan at 3% might be rewarded at some point in the future.  But a loan charging 12% exceeds the market return, and you will tend to fall behind even if the first year or two are higher than average.  The problem here is that cheaper loans tend to be backed by assets you can lose, while higher rates are found when you have no assets to secure the loan.

ptenn

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Re: Getting a large loan to buy index funds?
« Reply #22 on: August 31, 2016, 05:28:36 AM »
If you're Canadian and reading this thread you should look up the Smith Maneuver, it is all about this kind of idea and there is a neat tax trick involved too - you basically get to make the interest on your mortgage tax deductible (which it normally is not, unlike in the USA).

With interests pretty low these days, it is tempting to borrow to invest. I would only consider doing so with funds from a home line of credit as that is where you're likely to get the best interest rate. If you're very wealthy and can afford it, you should approach the private banking division of a major bank and talk to them about borrowing to invest. If you can pony up a couple million in collateral (your existing portfolio can potentially be used as collateral) you might be able to get in on some LIBOR based loans for some seriously good rates.

Like everything, this should be done in moderation and only with as much as you can afford to lose.


AdrianC

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Re: Getting a large loan to buy index funds?
« Reply #23 on: August 31, 2016, 05:51:38 AM »
https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Read this thread with a giant bowl of popcorn from beginning to end. It's outstanding.

Don't do this.

This bears repeating. From the first post:

Summary: Econ grad student applies Mortgage Your Retirement theory at the top of the last bull market, starting around 2x leverage, loses $210K of borrowed money, and is forced is to sell what's left of his portfolio at S&P 821 in November 2008. The complete wipeout results in a reflective period where he recollects the circumstances that led him to adopt this strategy, some of which will be included in a book.

Don't do this.

curly1973

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Re: Getting a large loan to buy index funds?
« Reply #24 on: August 31, 2016, 08:49:58 AM »
In reviewing this thread, I have a quick question for some of the Canadian contributors:

My wife and I are relatively new to MMM, and have room in our RRSP accounts - what is the general feeling about a RRSP loan, whereby you repay the loan with the subsequent tax return?  While not a "large" loan, I would be curious to hear your thoughts on the matter-  thanks!

Playing with Fire UK

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Re: Getting a large loan to buy index funds?
« Reply #25 on: August 31, 2016, 09:34:59 AM »
Thanks for the BH link. This is outstanding.

I've taken out low fee/0% credit card cash advances several times to either max contributions before the end of a tax year or to invest in high interest savings accounts. I'm thinking about doing a similar thing with regular investing.

Jack

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Re: Getting a large loan to buy index funds?
« Reply #26 on: August 31, 2016, 03:22:20 PM »
you basically get to make the interest on your mortgage tax deductible (which it normally is not, unlike in the USA).

FYI, mortgage interest is not "normally" deductible in the USA either. It's only deductible if you itemize instead of taking the standard deduction, and most Americans (i.e., the ones who are not upper-middle-class professionals in HCOL areas) don't have mortgages + other deductible expenses that large.

ptenn

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Re: Getting a large loan to buy index funds?
« Reply #27 on: September 01, 2016, 05:37:00 AM »
you basically get to make the interest on your mortgage tax deductible (which it normally is not, unlike in the USA).

FYI, mortgage interest is not "normally" deductible in the USA either. It's only deductible if you itemize instead of taking the standard deduction, and most Americans (i.e., the ones who are not upper-middle-class professionals in HCOL areas) don't have mortgages + other deductible expenses that large.

Learn something new everyday. Thanks!

In reviewing this thread, I have a quick question for some of the Canadian contributors:

My wife and I are relatively new to MMM, and have room in our RRSP accounts - what is the general feeling about a RRSP loan, whereby you repay the loan with the subsequent tax return?  While not a "large" loan, I would be curious to hear your thoughts on the matter-  thanks!

I'm Canadian and generally feel that rrsp loans were invented by banks as another way to push credit products on people. I would treat the decision making behind an rrsp loan the same way as any other borrowing to invest decision. The ensuing tax refund will not cover the principal you borrowed as you'll only get about 20-30% back (whatever your marginal tax rate is).

And if you're just starting out, I would recommend filling up your TFSA first before putting money in an rrsp. That's what I'm doing.

curly1973

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Re: Getting a large loan to buy index funds?
« Reply #28 on: September 01, 2016, 07:51:33 AM »
Thanks ptenn - your response on RRSP loans aligns with my thinking on the matter: they've just never seemed worth it, but I thought I would throw it out there to see if I was missing something.

Cheers!

Spork

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Re: Getting a large loan to buy index funds?
« Reply #29 on: September 01, 2016, 08:32:14 AM »
you basically get to make the interest on your mortgage tax deductible (which it normally is not, unlike in the USA).

FYI, mortgage interest is not "normally" deductible in the USA either. It's only deductible if you itemize instead of taking the standard deduction, and most Americans (i.e., the ones who are not upper-middle-class professionals in HCOL areas) don't have mortgages + other deductible expenses that large.

It is an anachronism.  It used to be normal.  But now that interest rates are so low, it no longer is.  But when interest rates were 7-10%, everyone and their dog itemized deductions.  Even living in a LCOL area, I always had interest+property tax > standard deduction.


Back to the OP...   If you really want to do this, you need to google the meaning of "margin call".   Not advised.

Retire-Canada

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Re: Getting a large loan to buy index funds?
« Reply #30 on: September 01, 2016, 09:23:37 AM »
Back to the OP...   If you really want to do this, you need to google the meaning of "margin call".   Not advised.

If the OP plans to buy stocks on margin. There are other ways to borrow and invest with no fear of a margin call.

Spork

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Re: Getting a large loan to buy index funds?
« Reply #31 on: September 01, 2016, 09:46:35 AM »
Back to the OP...   If you really want to do this, you need to google the meaning of "margin call".   Not advised.

If the OP plans to buy stocks on margin. There are other ways to borrow and invest with no fear of a margin call.

True enough.

And there are other ways to get an effective "margin call" without an actual margin call.  If the market shifts and you find you can no longer afford your house payment and you have to sell and move to a small apartment... you've had a margin call.

I don't mean to say leverage is evil.  I mean to say: Be damned sure you understand the risks of what you are doing.  I am going to wildly guess that suddenly thinking "hey, has anyone ever thought of borrowing money to invest" equates to not fully thinking it through.  Possibly I am wrong.  But this isn't exactly a new concept.

Kaspian

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Re: Getting a large loan to buy index funds?
« Reply #32 on: September 01, 2016, 09:49:33 AM »
https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Read this thread with a giant bowl of popcorn from beginning to end. It's outstanding.

Don't do this.

Good God, almighty!  He keeps saying how it was a huge mistake but keeps on with the strategy, saying it was sound decision-making, switching paths later to include bonds, and wishing he had've had even more money to lose (he wanted $2 million!).  Then, at the end, decides to try his hand at real estate?!  His final net worth is $700K, but you have to consider that's almost a decade of paychecks, now includes all his wife's savings, minus all the interest, fees, ulcers, and lost sleep.  I don't think this is even a case study in "100% what not to do" so much as "world's greatest display of cognitive dissonance".

okobrien

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Re: Getting a large loan to buy index funds?
« Reply #33 on: September 01, 2016, 10:36:47 AM »
Since some seem to think this is reasonable.
Question .... Has anybody here actually ever borrowed money from the bank via some type of loan, note, home equity loan, etc. and then used those funds to invest in the stock market?

If so, how did it work out?

During my Junior and Senior years of college, my financial situation was better than expected so I accepted more federally subsidized loans than I needed and purchace mutual funds with the extra cash.  At the time this was a no-brainer, borrow at 0% interest (I don't remember what they became 6 months after graduation) and invest in the stock market.  I also had zero knowledge of any of this kind of stuff, didn't talk to anybody, read about it, etc.  Lets see, when was that?  Oh yea, 2006-2007.  We all know what happened in the short run.  I was able to pay off all my loans within about 6 months of graduation, so I don't think I ended up paying any interest on the loans. (I also didn't have any money to invest during the downturn since all extra funds went to the loans.) I held the mutual funds until 2013 and ended up about 10% over all that time.  Not too bad for a silly move.  The worst thing about the whole situation, I recently decided to look back at some of the paperwork from the mutual funds and they had over 5% front load fees.  Ouch!

des999

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Re: Getting a large loan to buy index funds?
« Reply #34 on: September 02, 2016, 09:31:20 AM »
unfortunately the last recession (2008 ish) we experienced I had no extra cash to dump into the market, I am young enough to expect another recession in my lifetime, and I would be all for taking out a loan or cash advance or what ever was available to me to get cash, if at a cheap enough rate, to dump into the market.

Although it's easier to say that now, we'll see what I actually do during another large dip in the market :)

aspiringnomad

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Re: Getting a large loan to buy index funds?
« Reply #35 on: September 02, 2016, 10:30:00 AM »
Since some seem to think this is reasonable.
Question .... Has anybody here actually ever borrowed money from the bank via some type of loan, note, home equity loan, etc. and then used those funds to invest in the stock market?

If so, how did it work out?

I have used my LOC to buy ETF index funds during market drops a few times now then repaid the LOC with my monthly savings over time. Worked out fine. Prices went up between when I bought and when I repaid. My LOC is also my emergency fund so I'd weigh my work security vs. the benefit of investing the money. Currently I am working on two independent contracts so my risk of needing my EF any time soon is very low.

I do the exact same every time the market drops by 10% or more from its peak. Of course there's some risk, but IMO, it's low risk because I don't borrow anywhere near the limit of the HELOC.

In the future, because it takes 48 hours for the money to transfer from HELOC to bank account to brokerage and market dips can be brief (e.g., Brexit), I think I will use margin to buy the ETFs then pay it off as soon as the HELOC funds land. Again, not recommended if you don't know what you're doing or haven't thought through the potential risks, but it works for me.

whodidntante

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Re: Getting a large loan to buy index funds?
« Reply #36 on: September 02, 2016, 11:08:53 AM »
One way to lever is to do it with cash flow.  You invest money that could have gone to a loan paydown.  A lot of people do this.  I currently chose not to pay off my house, though I easily could if I sold part of my taxable investments.  And I've created that situation one paycheck at a time.  Here I did not "take a mortgage" to invest, but the math and the risk is the same.  I'm also looking at cars and will take a loan if the rate is cheap/subsidized, so I can stay invested. 

I's one thing to say you have a high risk tolerance, but yet another to demonstrate it in a severe bear market.  You can lose big money or be ruined, due to your emotions or due to forced selling.  Buying when the market is down doesn't protect you from downside risk.  The market may be a falling knife. Look at the wild swings during the financial crisis, for example.   Realize you wouldn't have picked the bottom to do your buying. 

Look for low cost ways to lever.  S&P 500 emini futures, margin loans at IB, 0% credit card offers, and cheap secured debt are available to a lot of people.  Good luck.


NESailor

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Re: Getting a large loan to buy index funds?
« Reply #37 on: September 02, 2016, 02:42:16 PM »
https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Read this thread with a giant bowl of popcorn from beginning to end. It's outstanding.

Don't do this.

Good God, almighty!  He keeps saying how it was a huge mistake but keeps on with the strategy, saying it was sound decision-making, switching paths later to include bonds, and wishing he had've had even more money to lose (he wanted $2 million!).  Then, at the end, decides to try his hand at real estate?!  His final net worth is $700K, but you have to consider that's almost a decade of paychecks, now includes all his wife's savings, minus all the interest, fees, ulcers, and lost sleep.  I don't think this is even a case study in "100% what not to do" so much as "world's greatest display of cognitive dissonance".

I'm on page 18 of that thread and completely consumed by it.  It's like reading a trainwreck.  I keep referencing an interactive S&P500 chart with dates of the posts.  Amazing reading even if a good chunk of the technical bits is over my head. 

bacchi

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Re: Getting a large loan to buy index funds?
« Reply #38 on: September 03, 2016, 12:40:40 AM »
That being said, the idea is to be able to pay as little interest as possible, and have the lowest margin requirements as possible. As posted by Velociraptor, Interactive Brokers is the best for margin rates of 1.7% or less. They also give you the option of portfolio margin if your account is $100k+. Normal margin on stocks is 50%. However, portfolio margin can be as little as 15%-20%. That means on a $100k account they might let it get down to $15-20k before they'll force you to sell.

Even better, is to buy index futures. You can get the e-mini S&P 500 index contract for $4,500 in margin from Interactive Brokers, pay no interest, and control $108k worth of stock at the current price (the contract is worth $50 x whatever the index is trading at, which today is 2174). So if your account is only $54k you can buy 1 contract and effectively be at 2x leverage.

During market turmoil, IB can and will change their margin requirements, with very little notice. This is especially true for futures. What once required $4500 in margin will jump to $9000 and then to $15k within days, given a rapidly rising VIX.

This can absolutely turn a profitable position into a losing one if you're forced to cover at an inopportune time.

https://capitaldiscussions.com/interactive-brokers-increases-margin-due-to-brexit

whodidntante

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Re: Getting a large loan to buy index funds?
« Reply #39 on: September 05, 2016, 03:36:26 PM »
That being said, the idea is to be able to pay as little interest as possible, and have the lowest margin requirements as possible. As posted by Velociraptor, Interactive Brokers is the best for margin rates of 1.7% or less. They also give you the option of portfolio margin if your account is $100k+. Normal margin on stocks is 50%. However, portfolio margin can be as little as 15%-20%. That means on a $100k account they might let it get down to $15-20k before they'll force you to sell.

Even better, is to buy index futures. You can get the e-mini S&P 500 index contract for $4,500 in margin from Interactive Brokers, pay no interest, and control $108k worth of stock at the current price (the contract is worth $50 x whatever the index is trading at, which today is 2174). So if your account is only $54k you can buy 1 contract and effectively be at 2x leverage.

During market turmoil, IB can and will change their margin requirements, with very little notice. This is especially true for futures. What once required $4500 in margin will jump to $9000 and then to $15k within days, given a rapidly rising VIX.

This can absolutely turn a profitable position into a losing one if you're forced to cover at an inopportune time.

https://capitaldiscussions.com/interactive-brokers-increases-margin-due-to-brexit

Absolutely.  There are things you can do, not over leverage, have a substantial portfolio of diversified marginable securities and use portfolio margin, credit outside the broker, etc.  Not over leveraging being the most important thing, even more so when the market is at all time highs and predictions for future returns are modest. It looks like we are approaching the top of a credit cycle right now.  Ask me again in 5 years.  ;) 

Retire-Canada

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Re: Getting a large loan to buy index funds?
« Reply #40 on: September 05, 2016, 07:46:26 PM »
I am guessing few posting here have actually read the thread.  It is well worth the investment of time as it is a classic tale, with time stamps.  Seriously a work of art as investment education for those who think they are smart about leverage.

I read it. It's entertaining, but the main problem he had was using a margin loan. If he had borrowed money against his house he wouldn't have been forced to liquidate his holdings at the bottom of the market and it would have been a different outcome.

Spork

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Re: Getting a large loan to buy index funds?
« Reply #41 on: September 05, 2016, 09:33:46 PM »
I am guessing few posting here have actually read the thread.  It is well worth the investment of time as it is a classic tale, with time stamps.  Seriously a work of art as investment education for those who think they are smart about leverage.

I read it. It's entertaining, but the main problem he had was using a margin loan. If he had borrowed money against his house he wouldn't have been forced to liquidate his holdings at the bottom of the market and it would have been a different outcome.

Is my memory incorrect?  My recollection is that quite a lot of HELOCs were shrunk during that time frame (or the variable rates shot waaaay up.)   Isn't that effectively the same thing happening from a different direction?

Seppia

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Re: Getting a large loan to buy index funds?
« Reply #42 on: September 05, 2016, 11:57:04 PM »
God no

Jack

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Re: Getting a large loan to buy index funds?
« Reply #43 on: September 06, 2016, 07:23:06 AM »
I am guessing few posting here have actually read the thread.  It is well worth the investment of time as it is a classic tale, with time stamps.  Seriously a work of art as investment education for those who think they are smart about leverage.

I read it. It's entertaining, but the main problem he had was using a margin loan. If he had borrowed money against his house he wouldn't have been forced to liquidate his holdings at the bottom of the market and it would have been a different outcome.

Is my memory incorrect?  My recollection is that quite a lot of HELOCs were shrunk during that time frame (or the variable rates shot waaaay up.)   Isn't that effectively the same thing happening from a different direction?

First: no, because shrinking a HELOC only means you can't borrow more, not that the principle already borrowed suddenly becomes due in a balloon payment. As long as you can continue to service the debt, you're fine (and remember that "waaaay up" on a HELOC is still waaaay lower than typical credit card rates -- it might make the scheme unprofitable, but not be as disastrous as a margin call).

Second: I haven't read the whole thread, but my previous post advocating leveraging against a house (i.e., by choosing not to pay it off early) was about using a fixed-rate mortgage, which would be even safer than a HELOC.

Spork

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Re: Getting a large loan to buy index funds?
« Reply #44 on: September 06, 2016, 08:49:07 AM »
I am guessing few posting here have actually read the thread.  It is well worth the investment of time as it is a classic tale, with time stamps.  Seriously a work of art as investment education for those who think they are smart about leverage.

I read it. It's entertaining, but the main problem he had was using a margin loan. If he had borrowed money against his house he wouldn't have been forced to liquidate his holdings at the bottom of the market and it would have been a different outcome.

Is my memory incorrect?  My recollection is that quite a lot of HELOCs were shrunk during that time frame (or the variable rates shot waaaay up.)   Isn't that effectively the same thing happening from a different direction?

First: no, because shrinking a HELOC only means you can't borrow more, not that the principle already borrowed suddenly becomes due in a balloon payment. As long as you can continue to service the debt, you're fine (and remember that "waaaay up" on a HELOC is still waaaay lower than typical credit card rates -- it might make the scheme unprofitable, but not be as disastrous as a margin call).

Second: I haven't read the whole thread, but my previous post advocating leveraging against a house (i.e., by choosing not to pay it off early) was about using a fixed-rate mortgage, which would be even safer than a HELOC.

I didn't read the entire thread either.  I got a couple pages in and went "woah, 30 more pages?"  Then I sort of jumped around.

I've never had a HELOC... so my understanding is damn near nil.  I just thought I remembered them usually having variable interest rates and getting really jacked up in housing crisis.  I was just trying to make the point that "margin calls" of some sorts can effectively happen even when you're not officially borrowing on a margin. 

The idea of leveraging via "not paying off the mortgage early" makes perfect sense.  But I don't think most folks think of that as leverage.  They just think of that as investing while owning a house.

I think the actual "leverage your whole house" point is moot.  (Re-warning: I didn't read the whole thread.)  Leveraging the house requires you to have equity.  I think (looking at his graph) the guy in the thread we're referencing didn't the equity to play that game.   Getting "in the market early" was more important than anything.  In order to climb $200k in the hole with 20% still left in the house... he would have had to have a minimum of $250k of equity in the house to start *after* the housing market slumped.

CrankAddict

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Re: Getting a large loan to buy index funds?
« Reply #45 on: September 06, 2016, 04:20:20 PM »
This is very interesting to me as I had been mulling it over in the back of my mind prior to finding this thread.  I've got an $80k HELOC with a zero balance and a fully paid off house.  The HELOC is at 3.50% currently but is not fixed.  If there is a balance, I can pay the interest only each month, or, however much additional principal I choose.  It *feels* like a solid bet to make some money with, but let's say I did an index fund that came back at 7%, then I'm only netting 3.5%.  At that point, with the possibilities of the market having gone down, or the HELOC rate having gone up, is it really worth the uncertainty as compared to bonds, TIPS, etc?  Probably not. 

But what about closing the HELOC and getting a fixed mortgage?  15 year fixed rates look to be 2.6% right now.  If I could borrow at that rate, and not stress about it going up, and have 10+ years to ride out any market bumps, would this not be almost certainly a winning strategy?  I know several people with WAY more net worth than me who still owe on their houses (even though their portfolios are worth probably 10x as much as their house) just because they can do better with their dollars in the market than paying down their 3.5% fixed mortgage.  Maybe I was a sucker to pay my house off.  Maybe I should borrow my way back in? Sounds crazy/sane all at the same time...

Jack

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Re: Getting a large loan to buy index funds?
« Reply #46 on: September 06, 2016, 04:23:40 PM »
But what about closing the HELOC and getting a fixed mortgage?  15 year fixed rates look to be 2.6% right now.  If I could borrow at that rate, and not stress about it going up, and have 10+ years to ride out any market bumps, would this not be almost certainly a winning strategy?  I know several people with WAY more net worth than me who still owe on their houses (even though their portfolios are worth probably 10x as much as their house) just because they can do better with their dollars in the market than paying down their 3.5% fixed mortgage.  Maybe I was a sucker to pay my house off.  Maybe I should borrow my way back in? Sounds crazy/sane all at the same time...

I would do it.

chasesfish

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Re: Getting a large loan to buy index funds?
« Reply #47 on: September 06, 2016, 06:48:31 PM »
I'm probably the rare one on the board that has used some type of borrowed money to invest.

When my wife was in grad school, we took a little extra in student loans to max out our Roths (gasp!!).  11-12 years later all those loans are long gone and we have been way above the income limits for a Roth.

I've also used my margin line with Fidelity (crummy rate) at times when I've thought the certain stocks were irrationally priced.  I'm in the world of finance for my day job and twice I've seen certain banks get really cheap this year (oil crash in Janaury tanked all banks, so I loaded up on Bank of Hawaii, then did Chase during the Brexit).  I try not to borrow more than what I'll contribute over the next 6-12 months.

I also agree with he others about the mortgage, I agressively paid down my first home, but then borrowed the 80% and invested the difference on the next two.

I think the markets are frothy right now, but if the VIX gets up near 30 again I may go in more since I can take the risk.

aspiringnomad

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Re: Getting a large loan to buy index funds?
« Reply #48 on: September 07, 2016, 10:54:57 AM »
If there's any recency bias in the realm of Helocs, it's peoples' vague recollection of them being in the news during the housing crisis. But for most Mustachian homeowners they are a relatively secure way to borrow cheap money on demand, whether as a springy emergency fund, an opportunistic source of investment cash, or if you have substantial equity in your house and can run scenarios and read fine print, even both. I can't speak to individual risk tolerances, but folks saying stuff like "I think I remember hearing bad things about those loans" don't really further the discussion for those who have done their research on whether to take a calculated risk in accordance with their risk tolerance.

ulrichw

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Re: Getting a large loan to buy index funds?
« Reply #49 on: September 07, 2016, 12:39:57 PM »
https://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&start=0

Read this thread with a giant bowl of popcorn from beginning to end. It's outstanding.

Don't do this.

Good God, almighty!  He keeps saying how it was a huge mistake but keeps on with the strategy, saying it was sound decision-making, switching paths later to include bonds, and wishing he had've had even more money to lose (he wanted $2 million!).  Then, at the end, decides to try his hand at real estate?!  His final net worth is $700K, but you have to consider that's almost a decade of paychecks, now includes all his wife's savings, minus all the interest, fees, ulcers, and lost sleep.  I don't think this is even a case study in "100% what not to do" so much as "world's greatest display of cognitive dissonance".

I cyberstalked the author of that thread a little, and he's currently (as of June 2016 and age 36) at $1.3M net worth with an income of $300-500K, so he's doing ok:
https://www.bogleheads.org/forum/viewtopic.php?f=2&t=194305&p=2961148#p2961148

He's obviously a very intelligent individual, and also did us all a great service by not disappearing while things were going so badly (mostly people stop posting when faced with the kind of issues he did).

He also had a decent point - considering the entire timeline of a person's life when coming up with a risk profile (and hence an equity exposure), make some sense.

Having said that, I'm still with everyone who says "Don't do this."

For most of us who don't end up as professional investors, optimizing investment returns is not what makes the difference - how much we earn and how much we save is what's the real determinant (as long as we have a somewhat sound investment strategy). I believe it's not worth the administrative overhead and the additional risks for most of us to try these "fancy" strategies.

The major risk I see with the strategy mentioned here is a cash flow risk that could end up with your house in foreclosure: Imagine a worst-case scenario involving a loss of income combined with a market crash. You know have a much larger cash flow (payments on the loan) that you need to come up. You will either have to liquidate a significant portion of your now-depreciated equity position to make payments, or find another source for the funds.

Sure, that's an unlikely worst-case, and you may have enough sources of liquidity to cover your expenses plus the loan payment, but is your potential gain really worth this extra risk?