Tips for Borrowing Money to Invest
Leverage – or borrowing money to invest in stocks or bonds – can be a secure, effective way to achieve your financial goals. Here’s what one financial expert says about borrowing money to invest…
“The most conservative of professions – the government employee or the tenured professor – which the attract the most risk averse among us, are ideally the investors who should be taking on the greatest amount of investment risk, if only they looked at their entire personal balance sheet as opposed to just their liquid investment account,” writes Moshe Milevsky in Are You a Stock or a Bond? Create Your Own Pension Plan for a Secure Financial Future.
Should you leverage, or borrow money to make money? Click on the book cover for more info, and read on for Milevsky’s tips for borrowing money to invest in stocks, bonds, or land….
Tips for Borrowing Money to Invest
1. Make sure your return is higher than your interest rates. “Debt for investment purposes makes perfect sense,” writes Milevsky. “Just ensure that the interest you are paying on your debt is less (on average) than the return you are earning on the borrowed funds.” This financial experts encourages us to see leverage, or borrowing money to invest, as not evil or wrong – but rather an effective financial strategy.
2. Be prepared to withstand financial shocks or overcome bad investments. When you’re borrowing money to invest, you’re increasing the chance of financial upsets. Make sure you can withstand these shocks – such as by having the funds to cover the interest payments during turbulent times.
3. Remember that the best loans are those you don’t need. “If your human capital is more bond-like, for example, if you have a secure job with a predictable income stream, you might be overexposed to bonds and hence might be able to afford to borrow money to invest, even if you don’t need the loan,” writes Milevsky. If you’re struggling with debt and can’t afford your mortgage, rent, or credit card payments – then leverage may not be your best option.
4. Don’t be afraid to die with debt! If your house is worth $500,000 and you owe $200,000, then your personal equity is positive. Net worth is what matters – as long as the personal equity on your balance sheet is positive. Read Tips for Maximizing Your Retirement Income for info on retiring happily wealthy.
Milevsky urges readers to pay particular attention to the leverage ratio (the amount you borrow to invest, expressed as a percentage of your original equity or capital) and the borrowing interest rate (after-tax rate of interest on the borrowed capital).
To learn about a different way to earn money on investments, explore a Forex Trading Robot. Milevsky doesn’t cover Forex trading in Are You a Stock or a Bond?, but some investors earn huge amounts of money that way.
Do you have any questions about or tips for borrowing money to invest? Share them or ask questions below!
Comment by Mary Ann on 26 May 2009:
I am starting to study how can I build up my retirement income through investing. I would appreciate it if someone can share me tips on how to do it with low or moderate risk. Thanks in advance.
Comment by Danny Kofke on 27 May 2009:
Hi Mary Ann,
The best advice I can give is to seek a trusted financial advisor and educate yourself. I would ask a few people that you trust and who are doing well with their investments their advice and find out who their advisors are. Then sit down with a few of these advisors and interview them to see which one would be the best fit for you. In addition, do some research about your potential financial advisor – here is a site http://www.sec.gov/investor/brokers.htm – and stocks/mutual funds you are looking to purchase. You can find detailed information about stocks and mutual funds by going to http://www.yahoofinance.com and typing in a stock or mutual fund’s symbol. If you are looking to invest in low-moderate risk funds, your rate of return might not be very high. You also have to remember that there is a chance that you could lose any money you invest in the stock market. I am almost certain that this will not happen but this money is not guaranteed. If you are afraid of this risk you could always buy cds or savings bonds although this is risky because of inflation. The most important thing to remember is that the person that cares the most about your finances is the one that stares back at you when you look at a mirrior. You have to invest in a way that helps you sleep better at night.
Comment by Rebecca Schreiber, Certified Financial Planner on 1 June 2009:
Hi Mary Ann,
If you’re just starting to learn about long-term investing let me offer three words: “index mutual funds”. Index funds are a low-cost, low-maintenace way to invest in a large number of companies that tend to grow in similar ways. Index mutual funds enable you to make the most of investing small amounts since many of them have no sales charges or trading fees. With 4-5 index mutual funds focused on different areas of the economy (i.e., large-cap, small-cap, international) you can build a diversified, low-cost portfolio that will grow for you in the long run. Good luck!
Comment by Joe Wallace on 22 September 2009:
Hi Laurie,
It’s great to see more blogs spreading the word about SOUND financial investment practices. There’s so much noise online about making fortunes (Jim Cramer, anyone?) but the cautions are just as important as the encouragements. Any advice that tells people to carefully watch those interest rates is definitely worth taking–spending a dollar to make a dime is crazy, but with so much snake oil out there, it can start to sound like a good idea.