Author Topic: Taking out loan@2.36% to invest  (Read 1607 times)

Grog

  • Bristles
  • ***
  • Posts: 294
Taking out loan@2.36% to invest
« on: April 23, 2014, 12:44:53 AM »
I know, I know, first mustachian rule: never do that. BUT...I would like to introduce this little "thought experiment", so let me make a little bit of background first.

Not all country have it good like the USA. Online brokers here in Switzerland either charge you an hefty courtage fee or they give you cheap options but you have to pay a quarterly percent of your deposited assets t othe online brokers. For buy and hold investors you have the maximum gain if you buy once a year big chunk of shares and have no deposit fee.

As for now, I have invested all that I have in index ETFs and I have to start sparing money, leaving it in the bank until they are enough to to optimally make a large transaction. For reference:
- transaction around 1300 chf (my monthly spare capability): 2.23% courtage fee
- this decrease more or less linearly up to 5000 chf: 0.7 %
- and with 10'000 reaches a flat 0.5%

as far as my calcluations and online tests goes this is my best option so far. Keeping the eyes open tough.

This makes me wonder if instead of waiting one year (or even a few months) with my money losing opportunity costs (sitting in a cash deposit instead of being on the market) if it wasn't better if I take out an online loan at 2.23% interests (if I include the money I spare in tax reduction for having negative interests) for 15'000 chf and invest immediately on the market, reducing my total courtage commission at a minimum.

If I assume an average growth of my portfolio of 5%, I have two cases:

CASE A: no loan.
I deposit every 4 months 5000 chf.
so between month 0 and 4: no deposit
then I have 5000 chf growing at 5% between months 4 and 12, a second chunk of 5000 chf growing of 5 % for only 4 months (from 8 to 12) and the last 5000 chf practically not growing at all, invested at the end of month 12.

Total basic assets: 15000
total asset growth: 8/12*0.05*5000+4/12*0.05*5000= 250 chf
total courtage fee: 35*3=105 chf
net value at the end: 15000+250-105=15145

Plan B: I take out a 12-months, 15'000 chf loan and invest immediately @ 5%:

Basic capital: 15000
Interests: 0.05*15000=750
courtage fee: 75
Negative loan interests=471
Tax reduction: 117.75
Net value: 15000+750-471-75+117.75=15'322


So in the second case I would make almost double the gain that in the first (322 vs 145, 222.07% more). It takes a low market return of 3.82% to egalise the two cases, and theroetically I could take out a loan every year thus transforming the average return of the market to an expected 6-8%.
If I get 10% return (best case scenario), case A gives me 395 chf returns, while case B 1072 chf, also an increased gain of 271%

The numbers are very low so it is more a "mental experiment" than a dramatic real case scenario, but it gave me thinking anyway and I thought I would share it here to see if I get the math wrong or something. Maybe I just need a punch in the face telling me I'm stupid for even thinking this. Or maybe is ethically wrong to exploit the non-mustachian tax-reduction for negative interests........?
or maybe someone else outside USA did already do something like this...?
Another things is that if I have a goal to spare 1300 chf every months, maybe I'm lacking the discipline and I will stray away from the right road by thinking (meh, let's make only 1100 this month and let's buy that awesome 200 chf trekking equipment I need), while having a check of 1300 that MUST be paid enforces sparing discipline. I know, punch in the face for lack of discipline, but anyway. Could be a good training, a forced training.

BTW my portfolio comprise 2 etfs, comprising more or less 33% high yield world corp bond and 66% world stocks and I'm healthy with a secure job, so no problem there, and I'm more than able to take the risk.

bluecheeze

  • Stubble
  • **
  • Posts: 114
  • Age: 31
Re: Taking out loan@2.36% to invest
« Reply #1 on: April 23, 2014, 06:38:08 AM »
I also have the same situation/question.

Mine plays out like so:
Loan Conditions:      
$69,100   USD   
-$400   Up front fee taken from loan   
-$2,558   Cost of loan (interest rate 1.44% over 5 years)   
-$1,194   Monthly Paycheck Deduct (loan repayment)         

Take loan:               
   Return   Earned   Taxes   Total Gain   ROI
   0.0%   -$2,958   $0   $2,958   -4.13%
Break Even1.42%   $2,060   $309   $1,751   2.44%
   4%   $11,926   $1,789   $10,137   14.15%
   8%   $29,285   $4,393   $24,892   34.74%
   15%   $66,522   $9,978   $56,544   78.91%
               
Don't take loan:               
   Return   Earned   Taxes   Total Gain   ROI
   0%   $0   $0   $0   0.00%
Break Even1.42%   $2,064   $310   $1,754   3.06%
   4%   $5,965   $895   $5,070   8.85%
   8%   $12,417   $1,862   $10,554   18.42%
   15%   $24,965   $3,745   $21,220   37.03%
*calcs assume 5 years (length of loan)
*taxes assume 15%

Return   Benefit of Loan   
0.0%   -4.13%   $2,958
1.42%   -0.62%   $3
4%   5.30%   $5,067
8%   16.32%   $14,338
15%   41.88%   $35,324


My situation puts break even at 1.42%.  I think the numbers say to take the loan, but it is still debt which I am against....  Also, is the risk worth coming out ahead only $15k after 5 years (8% annual return)?
I settled on waiting until our house finally sells and then making the decision.  That will give me a new set of questions though- where do I invest $350k taxable? Vanguard total stock market?

Not trying to hijack your thread just trying some stimulus.