facebookHi Peter. Most people here already have money to start investing but I don't. I'm thinking of borrowing to invest. Most will frown at this idea. But what do you think? - Seedly
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Anonymous

Posted on 03 Feb 2021

Hi Peter. Most people here already have money to start investing but I don't. I'm thinking of borrowing to invest. Most will frown at this idea. But what do you think?

I mean if I make returns then it will be worth it right? Especially when I earn more in return of the original investment amount. Hoping to hear your thoughts. Thank you in advance.

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The InvestQuest

The InvestQuest

Level 11. Master

Posted on 03 Feb 2021

Personally, I would advise you against it. At this juncture, where stock and bond markets valuations are pretty elevated, the risk reward isn't that attractive anymore in my opinion.

Hence, my advice might be entirely opposite. For investors who have borrowed to invest, it's worth considering taking some profit to reduce their borrowings tactically.

Furthermore, if you don't have the ready funds, taking an unsecured loan is typically very expensive and would likely cost more than long-term stock returns.

It's also necessary to think about bear case scenarios when borrowing to invest. If you borrowed to invest, and if the investment drops by 30-50% in value and the lender asks you to pay back the loan, what would be your next course of action?

I do have some data on borrowing to invest in this article link, which you may find helpful.

https://theinvestquest.com/borrowing-to-invest-how-much-is-leverage-is-optimal/​​​

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I borrow to invest.

but it's important to know what's the cost of funds before you invest.

I feel that if you are able to borrow at less than 2% p.a. it will be good.

Of course provided your portfolio returns can beat the 2% cost of funds needed.

What i'll do is to use the cost of funds that's being borrowed to invest in an instrument that pays out at least 2% in dividend yield so that i get to cover my interest rate.

From then onwards when it comes to loan repayment time, i have the ability to pay off the interest and roll my loan to the next year(By repaying the loan and getting a fresh loan at the same rate)

Of course do keep your loan less than 10% of your total assets, you don't want a case where you are not able to pay off your loan when the need arises. From there it will be called gambling le.

above all, It's about utililising smart money to help you with your investment. but don't be too smart about it.

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Most bubbles arise with the increased use of leverage and debt. Usually ebcause they felt they misse...

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