A comment yesterday caused me to wonder when this kind of salesmanship is going to come forward in the world of investing, especially with RRSP season looming on the horizon. Should we be borrowing to invest if money is cheap?
The comment was a reader pointing out that since money is so gosh darn cheap to borrow, he was going to borrow some money, invest it and make some money.
It’s Simple Isn’t It?
On the surface it’s a pretty easy scenario to envision:
- Borrow $10,000 from a secured line of credit or some cheap credit vehicle that is charging say 4.5% interest (for now)
- Buy an Index Fund or Mutual Fund or “Hot Stock” which should easily outperform the regular 6% the stock market usually pays for the next 5 years
- The interest on the loan is tax deductible too!
- Pocket the at least 1.5% “profit” you make every year
Is it Just That Easy?
Sure, it can be, lots of people can make money this way, all you need is a “sure thing” that is going to pay you more than the interest you pay on your debt vehicle, simple isn’t it?
How many sure things ended up being losers? Ask bookmakers why they love sure things (so many suckers end up betting).
Sure things in the Stock Market is a “suckers’ game”, made up by people trying to make money on you buying stocks. There are good investments out there, don’t get me wrong, but what we must have learned from Nortel, Enron and the Bank Debacle that you must be wary of “sure things”.
I am too old to deal with the stress of investing AND worrying about the debt I incurred to invest that money and the associated problems too. If I have spare money I may invest in stocks since I think they are undervalued but I am not sure where as of yet.
If you want to buy or sell on margin, or borrow money to invest, go in with your eyes WIDE open and know this is risky and has serious downsides to it. You are all adults (I hope) you make your own decisions, but make sure you know all the facts first.
Investing can return good money if you find out a very good investment option. Investing with borrowed money from a credit or loan can be dangerous if you cannot get more return than the interest you are paying.
It is same as Credit Card 0% Arbitrage (get 0% CC, invest in ANYTHING, return is X%)
However if there’s not enough capital to invest with, it’s not much to look at. $5000 0% loan vs $10000 vs $20000 0% CC is a huge difference, if you invest in 20% yield income trust, or bank stocks with 5~9% yield)
You told to make sure that I know all the facts first. Well, this is absolutely correct statement except it is impossible. If you think that you know all facts and see the whole picture, you are wrong…