I’ve been thinking quite a bit lately about why I was such a terrible day trader.
I think the number one reasons was that I was using money that was borrowed, and money that I couldn’t afford to lose.
I also had no clue about risk management.
But it got me thinking, should one ever borrow money to invest?
No, silly, Never Borrow
I don’t think you should, at least not for “investing” in stocks or options or anything risky like that. You trade differently (worse, just look at me) when you are trading with other people’s money. Losses don’t sting as bad as they should (until you run out of money completely).
So, when might it be a good idea to borrow money?
Maybe it’s OK
If you are a startup or small business owner, I think you could make the argument that borrowing money to “invest” into your business can make sense.
If you can get a 0% loan, I think that might be worth taking and at minimum stick in a savings account or I’d put it in my small lending club account and do a little interest rate arbitrage. This used to be a pretty popular technique when 0% credit cards were abundant and interest rates on savings and cd’s were much, much higher.
I can’t think of many other good times to borrow money to invest. Maybe if you were sitting on a million in cash or something, and it was somewhat illiquid, then you could get a secured loan.
What do you think? Borrowing ever a good idea when it comes to investing?
{ 3 comments… read them below or add one }
It sounds counteractive and borrowing money to invest you are playing the interest rates vs the % gained and will be a very stressful battle.
I think that part of it is always having enough cash to cover your loans. Never borrow more than you can cover. Commercial loans are great for business, you get a huge return on investment if it is all borrowed money. I can’t say that borrowing is totally bad. Gambling on day trading? Something else entirely. You sound like an addict — always looking for some new way to gamble.
I have two distinctly different family member stories- 1. An extremely wealthy (prob’ly in the billions, now) person who earned his money slowly, and paid cash for absolutely everything as he went. He NEVER borrowed. When things crashed in the 80’s, he was fine, and he still is. 2. Another couple who had always been financially responsible inherited a couple million about 8 years ago. At that time, their home was already paid off, so they were set to live a comfortable life, and even help their kids out. Fast forward to now- they invested ALL of their money in some scheme; it had done so well for them that they went ahead and borrowed against their paid for home to invest more $ in it. They have now lost everything, and aged in their late sixty’s, will be losing their home in the next year or so to short sale, if they are so fortunate, or else to FC.
Things unforeseen happen all the time, including in businesses that we ourselves may be running. We stand to come out better if we have not borrowed. I had a successful business which was sunk by debt. If I had been patient and built it without incurring debt, I wouldn’t have landed myself in bankruptcy. When business declines you can readjust a lot of things to get your bottom line down, but once you have borrowed money, you are stuck with those payments come what may. I know that the juries are split on Dave Ramsey, but what he preaches about (not) borrowing money really does make sense. His advice would have saved my example #2 a lot of heartache, and me too for that matter.