Borrowing to invest.

kingrulzuk

Zippeh wrote: »

Im 34 at present so Im in for a while longer! I guess the five year graph is just an indication of the value potential of the £11k as Im paying it off. I dont seriously think ill be doing this but it does make for an interesting conversation! I think it was the initial tax relief and investing "early" that made me think about it. Also the fact that i wouldnt be "spending" any more than i pay into my pension per month.

Im 31 and i own 2 flats and im debt free. Im a saver and not investor.
For last few years i have been saving money overseas and will be moving there when im 40.
I dont have any pension plan but im not stupid to borrow money so i can Invest.
Good Luck

Broken_Biscuits

kingrulzuk wrote: »

Im 31 and i own 2 flats and im debt free. Im a saver and not investor.
For last few years i have been saving money overseas and will be moving there when im 40.
I dont have any pension plan but im not stupid to borrow money so i can Invest.
Good Luck

if you had a different outlook on borrowing to invest, you could have 25% ownership of 8 flats and 4x the income or 7x the income if you currently only rent one and live in one. It all comes down to the level of risk you are comfortable with. But your argument of not being stupid could be turned on its head to ask why you would want 1/7th of the profits available to you.

kingrulzuk

Broken_Biscuits wrote: »

if you had a different outlook on borrowing to invest, you could have 25% ownership of 8 flats and 4x the income or 7x the income if you currently only rent one and live in one. It all comes down to the level of risk you are comfortable with. But your argument of not being stupid could be turned on its head to ask why you would want 1/7th of the profits available to you.

I bought both the flats tru council buy back scheme many years back and both are earning me money.
Me and my wife have full time jobs and work long hrs so i dont get time for investment.
With the money i save every month i can buy 2 more but then more stress so i dont.
I have a monthly target of saving and im making way over it every month.
AS you can see below im saving 12k this year its my challenge to save extra money so i can send my parents on a Cruise. Its my way of saying thanks to my parents

TakeCareOfThePennies_2

By the way, Warren Buffet on borrowing to invest (quoted with his own emphasis) :

Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets.

guymo

TakeCareOfThePennies wrote: »

By the way, Warren Buffet on borrowing to invest (quoted with his own emphasis) :

Buffett's advice not to use leverage comes up quite often, but if you pay attention to what he does rather than what he says, you find this:

Without leverage, however, Mr Buffett’s returns would have been unspectacular. The researchers estimate that Berkshire, on average, leveraged its capital by 60%, significantly boosting the company’s return. Better still, the firm has been able to borrow at a low cost; its debt was AAA-rated from 1989 to 2009.

(from The Economist http://www.economist.com/node/21563735 )

TakeCareOfThePennies_2

guymo,

But fact remains that for the average retail investor, rather than an experienced investor of many decades, borrowing to invest, or using leverage is not a good idea. At all.

Thrugelmir

Chickereeeee wrote: »

Unless you call it a BTL mortgage...

C

That's not investing. That's a business venture. With reward comes an array of potential risks.

Thrugelmir

guymo wrote: »

Buffett's advice not to use leverage comes up quite often, but if you pay attention to what he does rather than what he says, you find this:

Berkshire Hathaway for many years has had an insurance base to the business. Therefore has had the excess capital which it was able to invest on a long term basis.

paramaniac1

bowlhead99 wrote: »

Of course if the goal when investing borrowed money is not to 'beat the index' but 'return more than the 3.7% borrowing rate', you would probably not want to borrow to invest money in an index which could drop 40% in value over the time period of your borrowing. There are other types of funds that focus on specific strategies or goals and may give a better result than an index. Easily investible indexes don't exist for all strategies, markets or asset classes.

Of course, the long term returns of the market are what you are looking at with pensions, and the loan would be repaid out of income rather than needing to cash in the investment to pay off the loan; hence if you know you can afford the monthly cashflow, borrowing at a known rate to fund something that should achieve a greater long term rate is not necessarily a bad thing. In the short term it is a gamble because you can't know whether the return from buying your pension assets at today's price and paying a borrowing fee will be better than buying it at the average of the next 60 months' prices. You hope it will be, but it might not be.

You might feel for example that although certain indexes average 8% over the long term averaged over all buy prices, we are not at a point in the economic cycle where returns would average 8% from current buy prices, maybe some lower return should be assumed for the next decade. Investment judgements are personal.

I would suggest that if Apple s**ts money and the market believes is will continue to s**t money for the next decade, then that is why people are willing to pay 0.7 trillion dollars for it. It is not necessarily the case that it will be worth more than a trillion dollars in a decade. It may only be worth half a trillion dollars when we see the actual results, or it might have gone bust. Such is the problem investing in consumer electronics firms.

Similarly, everyone is aware of the level of sales and projected growth and existing and expected branding endorsements given by major sports stars to UA, which will help drive those sales if they can continue to sign more of them. That is why it already costs $18-20bn to buy and not $18-20m. Investing on some tips and then closing your eyes to the financial news that comes across your desk is pretty dumb, even if a new poster on MSE says they are a screaming buy that he would happily invest blindfolded.

--
Anyway back to the question from the OP.

If you can afford to pay back the borrowing while meeting your own commitments, and are happy to gamble that the return is higher than the borrowing cost for the next few years it is probably OK - everyone has their own level of comfort. Obviously the levels of this new loan will restrict credit for other things you might want or need or consider more important than the pension but you will be unable to access the pension funds for the next 20+ years. If you are looking to buy a house for example, having £11k in your pension is all very well but does not help your 'affordability': the £200pm commitment might restrict what mortgage you could get.

Looking to borrow to make pension contributions at the beginning of a tax year is perhaps unusual. I have considered it myself at the end of a tax year.

This is because if you are on a 40% or 45% or 60% effective marginal tax rate which will drop to 20% or 40% the following year, but you don't have cash on hand, then grabbing a nice big slice of tax relief, funded out of the following year's earnings when the same level of tax relief is not available, is well worth it.

So, I'd quite happily borrow a few grand, get the high level of tax relief and pay back the loan in the next year or two at the very most - low interest cost and great result from timing pension contributions. The extra tax relief is better than the interest cost. However, if your tax relief rate is likely to be fixed, that advantage goes away and you are only getting normal tax relief which is always available. So there is no hurry, and looking to pay a whole five years of interest on some of this borrowed money seems like it is quite costly if the markets don't perform as you want.

I don't know where you sit, tax-bracket-wise. But feasibly, if you aspire to grow your salary or can move jobs, get a bonus etc, you may go into a higher tax bracket in the next 5 years. Borrowing now to access (e.g.) 20% tax relief now when you could have put in the money later out of normal earnings and taken (e.g.) 40% tax relief then, is definitely a waste of money.

If we were sitting here in 2010 and I was saying apple's a good company, you would be countering that consumer electronics are high risk and much better to put your money in the framlington pimlico emerging markets fund due to the lower risk asset allocation etc etc. Today my £10,000 would be worth £45,000 and your £10,000 would have probably increased by about £50! What was the risk? Apple going bankrupt? People not wanting the iphone anymore? What you suffer from is analysis paralysis. Step back and look at the bigger picture. Good, profitable companies go up in the long term. That is why I recommend not watching the financial news or websites because it will just cause you to doubt your original decision and begin meddling with your investments. There are loads of companies out there and new ones emerging all the time.Listen to the doom mongers and nay Sayers and so-called experts and you won't do anything.

Broken_Biscuits

TakeCareOfThePennies wrote: »

guymo,

But fact remains that for the average retail investor, rather than an experienced investor of many decades, borrowing to invest, or using leverage is not a good idea. At all.

there is a difference between your opinion and fact. borrowing to invest is, in my opinion, completely plausible.

your position on cash holding has been made clear that you are risk adverse. That's fine. Each to their own. that doesn't make your stance a fact though.

someone with a solid income, who can ride out vacant periods would be much better off long term putting 25% down on four btls, or 33% on three or 50% on 2 than they would buying one btl. leverage, gearing, it all works in your favour.

someone with a smaller income and more risk adverse can make money off interest free credit cards or low percentage loans.

we are all different, with different tolerances ...