Why borrowing to invest is a bad idea

by The Investor on August 28, 2009

Like red braces, boasting about money, and TV programmes about share trading, borrowing to invest is one of those activities that becomes popular when the stock markets have been going up for a while.

And just like bragging about your shares picks on telly while you’re wearing red braces, borrowing to invest is generally a bad idea.

At the moment, borrowing to buy shares is not so popular; the level of margin debt reported to the New York Stock Exchange touched a low in February this year, and has only risen a little since.

But trading on margin will come back into vogue if this rally continues.

Indeed, I’ve already received a couple of emails from readers suggesting I give my personal views about it.

My personal view can be summed up as Don’t Do It.

But as you may know I never use three words when 3,000 are available here on Monevator, so let’s look into the whole subject in more detail.

Borrowing to invest for the short term

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Borrowing to invest is expensive

by The Investor on September 1, 2009

This is part of a series on why borrowing to invest isn’t really a great idea.

The first article in this series saw me admitting that even though I hate debt, it isn’t hard to see the apparent attraction of:

  1. Borrowing a suitcase stuffed with money
  2. Sticking it in the stock market for 20 years for the historical average annual rate of return of 10%, then…
  3. Spending the rest of your life telling people around a pool in the Virgin Islands how clever you were 20 years ago.

The rest of these articles are going to pop that balloon.

Firstly, let’s start with the cost of your debt.

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Tax and costs will eat up returns

by The Investor on September 4, 2009

This is part of a series on why borrowing to invest is rarely worthwhile.

Let’s imagine you remortgage your home to release £100,000 that you can repay over 20 years.

  • You borrow at a great rate of 6%
  • The loan is fixed for 20 years
  • You invest in the index for its average 10% a year long-term returns

… and then you pocket the 4% difference, right?

Not so fast.
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