Is it worth borrowing to invest?

You'll be happier keeping your money under the mattress. Tax free.

 

With negative interest rates; that’s what a lot of people in Europe and Japan are doing.

 

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There are always investment opportunities out there as members have alluded to. First question is on transaction costs. Does the $ size of your transaction make sense to pay a transaction each for the buy and sell transaction, and still yield a profit? This is the root of many pitfalls, you need to trade a 5-10K at a time to break even on a profit sometimes.

Second question is do you have a formula to guess which stocks go up and down?

Thirdly, do you have a formula to guess which investment instruments are hot or cold?

Investing on margin --, be absolutely certain and have years of experience before you expose yourself like that. And don't be greedy, trade based on proven data in this scenario.

Thanks,

 

USAA and NavyFed give new military officers a loan of $25k+ at about 2% (or did when I took it). I funded my ROTH IRA and mutual funds with that because it was a quick kick-start to savings and forced me to save monthly by paying off the loan. It was a five year loan that I paid off in 2.5 years. It was a great way to force myself to save money, kickstart my investments, and build my credit score.

I say all that to say this: I wouldn't invest on debt again unless there were similarly particular circumstances. I have a pretty boring, slow and steady, view on investing so my risk tolerance is low.

Can you do it? Sure. Should you do it? That's up to you and your particular situation.

 

short answer : no. Leverage is a bitch

 

I would not borrow any money for investment purposes unless you have at least double the principle's worth in the bank at the time of lending.

 

Here's a basic spreadsheet to calc the diff between borrowing to invest vs. simply investing an amount equal to what would be the loan payments.

 

That's a pretty decent napkin math showing that even with low returns, borrowing (actually taking out a loan vs margins) can payout more. If you are only getting 8% year over year returns then you might be better off getting a decent broker to handle it for you...

The thing this sheet doesn't handle is:

A.) some lines of credit you can use the interest paid as a tax right off, (very advantageous to some)
B.) investment strategies, I assume the 8% was low risk investments, which is good for older folks
C.) dividend stocks - with top 10-15 dividend aristocrats could see you net a much higher return overall as well (100k would be returning ~$350 a month in dividends)

To illustrate this I tweaked the file a little (the "check boxes" keep track of reinvested dividends and increase payout on a straight line interpolation, this probably isn't best fit but for 10 minutes it's what I did).



you can see over the 20 yrs the 100k grew to ~1.5mil with dividend reinvestment and moderate rate of year over year. (this includes investing the old loan payment once loan is paid off). This brings your gains to almost double what it would be if you invested the loan payment, and you would miss out on a tax shelter with the interest write offs.

The other way to do this would be to take out another 100k loan as soon as the first is paid off. Would build faster as well.

(This is not advice or direction, I'm just a monkey with a keyboard and calculator).

 

Just to show what I mean.

 

Ahhh , cocaine

 

In today’s overvalued market I would not, even if investing in index funds S&P 500 etc.), never know when there will be a big market drop. Having said that I have a 401k and would not pull money out of it to pay off my mortgage balance since that loan is at a very low interest rate and my investments are doing a far better rate, and I would have to pay taxes on the withdrawal. But borrow more to invest? No.

 

Nope.
We would much rather refer to it as the product.

 

So many of the people on this thread and TW have not seen a down market. Cavit Emptor

 

I have a Roth IRA and a traditional IRA for around 20 years now and have done absolutely nothing with them . They are both worth about 4x what I started them with . I know nothing about this kind of stuff . The Roth is Capital Group / American Funds CB+T Cust Roth IRA

 

Notice on the “invest loan payment” scenario in your version, a return of 8% is assumed. In the “borrow to invest” scenario, you have 8% plus approx 4% dividends. Obviously the “borrow to invest” will appear much rosier than “invest loan payment” because you are using a return that’s much higher. That’s why you are coming to a false conclusion that borrowing to invests nets double what investing the loan payment would get.

 

Another thing for OP to consider is the risk of investing a big bunch of money in the stock market in a single year rather than dollar cost averaging in. For example, Jan. 1, 2000, would have been a terrible year to invest, because the S&P was down 10% in 2000, down 13% in 2001 and down 23% in 2002. You wouldn't see gains for 14 years, and then your gains would only be 1%, not even keeping pace with inflation.

 

This spreadsheet is admittedly hard to follow, but it shows the likelihood of being in the positive after investing a big chunk of money in single year. Even after investing for a 10 year holding period, you'd only be up 91% of the time. Dollar cost averaging reduces that risk.

 

Seen them... One thing to remember is down markets are temporary and the trend is always up...

Last ~40 yrs

 

It reduces risk depending on market, investing lump sums will *always* trump investing same amount of a longer time period due to compounding rates. But that is why I called the spreadsheets "napkin math". As they (nor your simulator) can accurately catch all the variables.

As far as your it would be terrible to invest in 2000, the S&P was 1441.74 on Jan 14th 2000, 20 yrs later the S&P sat at 3265.35 (Jan 10th 2020). Not sure where you calculate returns, but I am not sure I know anyone that would count that avg rate over 20yrs as bad...

(Not financial advice, everyone should do their own DD. Just a monkey with a keyboard).

 

I'm interested in hearing what is signaling that this is a good time to buy.....