Borrowing Interest Free Funds to Invest in Stocks?
Zero (0%) Percentage Interest for 12 months. That is the finance offer I received today from one of my credit cards. Should I take out this money to invest in a higher rate of return?
First off, this money really isn’t 0% because they charge a “2% transaction fee.” You know, because borrowing $1,000 costs them $20 worth of “transactions fees”, and borrowing $100,000 costs them $1,980 more to process. Effectively its 2% APR.
Let’s talk about why I think it is viable to temporarily borrow this money to invest. As soon as I say that, I know there are going to be “haters.”
Haters Gonna Hate.
“How DARE you invest and risk BORROWED money!” some of you might say, but I am here to show you why there is a good chance you are already operating on “borrowed money.”
I assume most people who read this blog own stocks or are options investors. Now lets talk about my track record. I myself have only had 1 negative year in my 13 years of trading (last year). Besides that year, I have had 11 out of my 13 years in double digit gains (percentage wise). I am an extremely aggressive trader, but this isn’t my first time at the rodeo.
So let’s go back to the fact that most of you are traders. Do you own a car? Is that car financed? How about a house or a college loan? Do you have any outstanding debt?
The point is, most people have money in their brokerage accounts BECAUSE THEY BORROWED MONEY. Now there might be a few people out there with no debt at all and what is in their brokerage account is 100% their money, but to them I still have an argument for why this 2% loan could be viable.
If you trade on margin, there is a 99.9% chance you are paying more than 2% APR to borrow that money (usually more like 12-20% APR) and it would be financially irresponsible for you not to take the lower APR.
For those not trading on margin and without any financed debt (in any form), what kind of return are you earning on your account yearly? How confident are you of that return? These are the questions you should be asking. If you were 90% confident you could earn 10-12% on your money, this is a free 8-10% on the borrowed amount. In my case I have been offered $6,000 on my one credit card, which could equate to about an extra $600 if I end up 12% on the year.
I understand that many people are going to start talking about risk, but stocks ARE risky. I have roughly $6,000 in my account which means I would have to lose 50% of my portfolio after adding in the loan before I would be in trouble of not being able to pay back the principle in full on the loan.
Effectively all this loan does is operate as a margin account with an effective rate of 2%, the loan provides cheaper leverage.
I am 85% confident that I will end this year in double digits return.
I am 99% confident that I will end this year not down –50% or more.
If I was running a risk analysis for a company on whether or not to take this investment, odds are it would be a hands down homerun to the management considering the investment.
Let me disclaim this though, if you are not good about remember when things are due and keeping track of your finances – this is a bad course of action for you. If you are looking to leverage up at a rate of only 2% – this is a sweet deal. Let me also say that this can definitely lead to a slippery slop as well, why not take out a Home equity line of Credit (HELOC) as well? Well you can make an argument for that as well, but that’s for an another article.
Final Disclaimer: Always consult a professional for investment advice. Stock trading is a risky investment and no advice on this website should be taken as advice for how to you to invest.
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