Borrowing money to invest. Good idea?

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Oak&Elm
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Re: Borrowing money to invest. Good idea?

Post by Oak&Elm »

Niether a borrower or a lender be.....run from debt. One thing I know to be true DEBT-DRIVES-DECISIONS. Put me down in the never column.
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Oak&Elm
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Re: Borrowing money to invest. Good idea?

Post by Oak&Elm »

no, it's just that simple
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grabiner
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Re: Borrowing money to invest. Good idea?

Post by grabiner »

BlueCable wrote:Well, this thread has me wondering about my mortgage and car payment.

We have ~$110,000 left on our mortgage, but we are maxing out our tax-advantaged and putting additional money into taxable accounts. Mortgage at 3.375%, $18k on car at 2.75%.

Should I be paying off my mortgage instead? We are 30, saving about 50% of our income.
Pay off the car. If your mortgage is tax-deductible, you are paying a higher rate on the car than on the mortgage, and it gives you a shorter-term benefit.

If that 3.375% mortgage is at 30 years, I wouldn't be in any hurry to pay it down as long as you are itemizing deductions; you have the low rate locked in for a long time. If it is a 15-year mortgage and is too expensive to refinance, then paying it down is probably better than taxable investing.
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boglerdude
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Re: Borrowing money to invest. Good idea?

Post by boglerdude »

If the numbers are about equal. . .do you like thrills? Borrow and invest. Are you boring? Pay off debt :mrgreen:
Altron
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Re: Borrowing money to invest. Good idea?

Post by Altron »

whodidntante wrote:Do you actually need to take this risk, or will disciplined investing on a cash basis be sufficient to accomplish your goals?
You should ask this before making any investment decision.

Also, I think it's important to point out that anyone who invests and holds a mortgage is invoking a form of this strategy. I'm guessing some of the stone throwers on this thread live in a glass house that they don't own outright.
orca91
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Re: Borrowing money to invest. Good idea?

Post by orca91 »

grabiner wrote:
BlueCable wrote:Well, this thread has me wondering about my mortgage and car payment.

We have ~$110,000 left on our mortgage, but we are maxing out our tax-advantaged and putting additional money into taxable accounts. Mortgage at 3.375%, $18k on car at 2.75%.

Should I be paying off my mortgage instead? We are 30, saving about 50% of our income.
Pay off the car. If your mortgage is tax-deductible, you are paying a higher rate on the car than on the mortgage, and it gives you a shorter-term benefit.

If that 3.375% mortgage is at 30 years, I wouldn't be in any hurry to pay it down as long as you are itemizing deductions; you have the low rate locked in for a long time. If it is a 15-year mortgage and is too expensive to refinance, then paying it down is probably better than taxable investing.
If itemizing, is the key there... With a $110k balance and a 3.375% rate, they likely don't get much or any benefit from the tax deduction part of it. They pay what $4k a year in interest? And, less each year...

Not a deduction worth hanging onto, IMO.
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bottlecap
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Re: Borrowing money to invest. Good idea?

Post by bottlecap »

Earl Lemongrab wrote: Let's say you have a 70/30 portfolio, 100k in taxable and that much in 401k/Roth combined. The taxable came from a 100k loan at 3.2% for 15 years comprising half the original equity. You'd have a monthly payment of $700.
In answering many of my questions, you speak in riddles, which is a little suspicious! I can't guess the special preconditions you are suggesting make your proposal a good deal.

Nonetheless, my larger point concerns the statement above. Why are we taking that loan? Instead of receiving stock market return in exchange for stock market risk, you are receiving (potential) stock market return minus 3.2% for the same amount of stock market risk.

My point is that even if you are not risking your entire house, you are getting a bad deal. Even if you assume that the return will be a rosy 10% per annum, you are getting 67% of the return while accepting the same 100% of risk. Whether that risk comes to pass is the gamble, of course. That's the side of the equation no one correctly evaluates because risk is hard to quantify for the average investor.

Now I agree, too, that people should not make significant investments outside of their retirement accounts (which you only have small windows to make limited amounts of contributions) when they can pay down their mortgage and that there is not a lot of difference there.

Most don't have the luxury of fully funding retirement accounts and having lots of cash to invest in the market or sink into their mortgage - so that's rarely the choice faced. If you do have the extra cash to do either, you don't have a need to take market risk for less than market return.

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grabiner
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Re: Borrowing money to invest. Good idea?

Post by grabiner »

Altron wrote:
whodidntante wrote:Do you actually need to take this risk, or will disciplined investing on a cash basis be sufficient to accomplish your goals?
You should ask this before making any investment decision.

Also, I think it's important to point out that anyone who invests and holds a mortgage is invoking a form of this strategy. I'm guessing some of the stone throwers on this thread live in a glass house that they don't own outright.
I do live in a mortgaged house, and I made the decision by considering the returns available without increasing my risk. That is, if I paid down my mortgage and sold an equal amount in bonds to keep the same stock allocation, would I be better off? In my situation, the answer is no. Buying a municipal bond equivalent to paying down my mortgage would give me a higher interest rate (because that would be a 12-year bond) and selling enough stock to pay the whole thing off would generate a huge capital gain.

But often the most important reason to invest while holding a mortgage is that tax-deferred space is valuable. If you pay down your mortgage instead of investing in your 401(k), you will have less money growing tax-deferred. When you have eliminated the mortgage, you will hit the 401(k) contribution limit and need to make taxable investments instead. Therefore, I rarely recommend making extra mortgage payments except for investors who are already maxing out retirement accounts. (I max out mine and have a large taxable account; the reason I don't make extra payments is that I have a low fixed rate.)
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Incendiary
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Re: Borrowing money to invest. Good idea?

Post by Incendiary »

So at what interest rates would you all feel comfortable carrying debt, whether in the form of a mortgage, car loan, or what have you? Or to put it another way, at what additional interest payment would you be willing to stretch out payments? For example, paying for life insurance, you can pay annually, semi annually, quarterly, monthly. As you stretch out payments, you usually pay more in premium overall. Would you rather keep the money in your pocket for longer and pay an extra 2% overall per year? 0.5%? 8%? I've always thought that as long as the interest rate was lower than, say, 5%, I'd be willing to borrow or stretch out payments so that I had just that much more to put into stocks. Reading this thread has me wondering about that threshold, though.
Xpe
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Re: Borrowing money to invest. Good idea?

Post by Xpe »

has nobody linked the market timer thread?
Rob Bertram
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Re: Borrowing money to invest. Good idea?

Post by Rob Bertram »

Incendiary wrote:So at what interest rates would you all feel comfortable carrying debt, whether in the form of a mortgage, car loan, or what have you? Or to put it another way, at what additional interest payment would you be willing to stretch out payments? For example, paying for life insurance, you can pay annually, semi annually, quarterly, monthly. As you stretch out payments, you usually pay more in premium overall. Would you rather keep the money in your pocket for longer and pay an extra 2% overall per year? 0.5%? 8%? I've always thought that as long as the interest rate was lower than, say, 5%, I'd be willing to borrow or stretch out payments so that I had just that much more to put into stocks. Reading this thread has me wondering about that threshold, though.
The futures financing rate is around 0.5% right now. That is currently what people like me are paying to borrow and invest in the stock market.

Keeping costs low is a fundamental Bogleheads principle. I believe that most people object to paying 4% when the market is only charging 0.5%. As grabiner says, borrowing might be the right choice for many people, but it needs to be done strategically in a risk and cost-effective way.
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Earl Lemongrab
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

bottlecap wrote:In answering many of my questions, you speak in riddles, which is a little suspicious!
If my thoroughly explained, realistic, example is a riddle to you, then there is little point in further discussion.

Earl
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bottlecap
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Re: Borrowing money to invest. Good idea?

Post by bottlecap »

Earl Lemongrab wrote:
bottlecap wrote:In answering many of my questions, you speak in riddles, which is a little suspicious!
If my thoroughly explained, realistic, example is a riddle to you, then there is little point in further discussion.

Earl
You're not kidding!

To the OP:

Unless you really think that current market risk justifies sacrificing a significant portion (somewhere between 33 and 100%) of your return to interest payments, you're best not taking a HELOC out the invest.

It may not break you, but it's the theoretical equivalent of flipping a coin and losing a dollar on heads and receiving less than a dollar on tails. You certainly can get lucky, but over time, the fact you are not receiving your risk adjusted return makes it a net negative game.

Good luck,

JT
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Earl Lemongrab
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

michaeljc70 wrote:Not true. If I had $100, I was down to $20. I would need it to go up 400% to get my $100 back. No broad index is up 400%. And this is 7 years later.
Which broad index funds dropped 80%? US Total Market went down about 50% from peak to trough, and International about 60%. The former completely recovered on total return basis within about two years or so.

Now, if you were in ultra-risky investments, then what you say might be true, but then comparing to the recovery of broad indexes doesn't make sense. You should post what you actually held, not vague generalities.

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Re: Borrowing money to invest. Good idea?

Post by michaeljc70 »

Earl Lemongrab wrote:
michaeljc70 wrote:Not true. If I had $100, I was down to $20. I would need it to go up 400% to get my $100 back. No broad index is up 400%. And this is 7 years later.
Which broad index funds dropped 80%? US Total Market went down about 50% from peak to trough, and International about 60%. The former completely recovered on total return basis within about two years or so.

Now, if you were in ultra-risky investments, then what you say might be true, but then comparing to the recovery of broad indexes doesn't make sense. You should post what you actually held, not vague generalities.

Earl
As my original post said, directly related to the topic, leverage. That was not vague. If you didn't know what I owned, how can you say leaving it it would come back to where it was?
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Earl Lemongrab
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

michaeljc70 wrote:As my original post said, directly related to the topic, leverage. That was not vague. If you didn't know what I owned, how can you say leaving it it would come back to where it was?
Do you mean margin loans with calls or the sort we have been discussing, a mortgage or other home loan? The former might have been a problem, the latter not. As I said, "vague generalities".

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Re: Borrowing money to invest. Good idea?

Post by sickman »

Are people thinking this is a bad idea because of the 4% and 10 yr timeframe? What if it was closer to 3% and 30 years? I'm somewhat doing this as well and thought it was a great idea!

Had a $80K 15 year mortgage 3 years ago, then cashed out $300K on a 30 year re-fi @ 3.375% and am investing that $300K in my 3 fund portfolio. I am in my mid 40's and have wife & 3 middle school kids, have no other debt and already have $1.4m in the market (1/2 taxable, 1/2 non) and $400K investment property paid off. If it matters, my house is in socal (earthquake country) and worth about $600K. I have 27 years left and thought this cash-out refi was such a smart financial move since the $ was so cheap- this thread has now got me reconsidering for the first time. Still a good idea to pay off?
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grabiner
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Re: Borrowing money to invest. Good idea?

Post by grabiner »

sickman wrote:Are people thinking this is a bad idea because of the 4% and 10 yr timeframe? What if it was closer to 3% and 30 years? I'm somewhat doing this as well and thought it was a great idea!


As has come up a few times on this thread, your strategy makes sense, because you can earn about the same on your lending (CA municipal bonds) as you pay to borrow, except for one issue:
Had a $80K 15 year mortgage 3 years ago, then cashed out $300K on a 30 year re-fi @ 3.375% and am investing that $300K in my 3 fund portfolio.
If your tax bracket is 28% federal and 9.3% CA, then your after-tax rate is 2.20%, and on a loan with a duration of more than 10 years, that is comparable to what you would earn on munis with a longer term than Vanguard's. (Another way to look at this is that a comparable 15-year loan rate would be 2.625%, which is 1.71% after tax, and has about the same duration as CA Long-Term Tax-Exempt yielding 1.60%.)

You don't need to hold munis, but this gives a fair comparison; you could choose to take the same risk by selling bonds in your IRA to buy stocks, and selling taxable stocks to pay off the mortgage.

However, you can't deduct all the mortgage interest; only $180k is deductible (original balance of $80K, and $100K home-equity debt). Unless you are deducting the other $120K as investment interest (which is only deductible against non-qualified dividends), you are paying 3.375% on that $120K; paying it down and selling bonds (in your IRA if necessary so that you keep the same stock allocation) is a guaranteed gain. If you have a three-fund portfolio, even the bonds in your IRA are earning only 1.87%.
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Re: Borrowing money to invest. Good idea?

Post by KyleAAA »

People do this all the time with 30 year mortgages. The only difference here is that you're borrowing for 10 years. At 4%, I'd prefer to make that bet over 30 years than over 10 years. I'd say you have a moderately good chance of coming out ahead but there's significant risk. It's not an objectively terrible idea although I think 4% is a bit too high for comfort. Margin rates can be had in the 1% range, but they aren't fixed and there are margin calls to contend with. Pick your poison.
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