bank loan to invest in stock

thegentleway

As interest rates are so low, I'm considering getting a loan (you can get £15k at 3.3% with M&S, HSBC, and Sainsburys) and investing it in an index fund as a long term investment. What returns can you expect to get from trackers?

datostar

Dividends probably little, if anything, more than you would be paying in interest on such a loan. Capital value subject to variation, sometimes drastic as the index you are tracking varies. High-risk option and banks might not be willing to loan for such a purpose.

Radiantsoul

This sort of thing is quite risky, if it were that easy the banks would buy shares rather than lend to the likes of you!

The more normal route would be take the amount you would be paying off the loan and drip feed into the market each month.

Borrowing increases your risk, but also your potential upside.

thegentleway

datostar wrote: »

Dividends probably little, if anything, more than you would be paying in interest on such a loan. Capital value subject to variation, sometimes drastic as the index you are tracking varies. High-risk option and banks might not be willing to loan for such a purpose.

I thought trackers were low risk? Ignoring loan (interest over 3 years is only £763.68), what's the risk of investing £15k in an index fund?

AlanP_2

The risk is that the value of companies / shares that make up the fund fall over the time period you are invested for.

Over a reasonable time frame equity & bond investments have returned ~4 - 5% pa above inflation historically.

In any given year (or 3 years for that matter) though you could easily see a 20 - 40% drop in value which will be recovered later on.

So is essence your investment could fall in value over the short to medium term but should increase over a reasonable time frame (say a minimum of 5 and preferably 10+ years).

Look at the news over the last few days the FTSE 100 has been dropping 2 to 3% a day and is quite a way down on what it was at the end of December and long way down from its previous high in April / May last year.

Trackers of the FTSE 100 are one of the most common ones out there and it was down 3% earlier today when I scanned the BBC website. The FTSE 250 (another index that can be tracked) was up though so you pays your money and takes your chances.

Sensible approach is to not just buy one tracker btw but to spread your investments around and track multiple indices in multiple geographies and sectors. A lot of work when you are talking £10-20k so a multi-index fund like Vanguard LifeStrategy or the L&G MultiIndex can make that process easier.

Personally I would not borrow money to invest in anything as unpredictable as the stock market but my view of risk is probably different to yours.

bowlhead99

After the three years is up, you might quite easily have lost 40% or more on the capital value of your investment (turning your £15k into 9k or less). Depending on the index you pick, the dividend income might cover the interest cost (e.g. FTSE100 yield is about 3%) but it might not (eg FTSE World yield is probably under 2%).

thegentleway

AlanP wrote: »

The risk is that the value of companies / shares that make up the fund fall over the time period you are invested for.

Over a reasonable time frame equity & bond investments have returned ~4 - 5% pa above inflation historically.

In any given year (or 3 years for that matter) though you could easily see a 20 - 40% drop in value which will be recovered later on.

So is essence your investment could fall in value over the short to medium term but should increase over a reasonable time frame (say a minimum of 5 and preferably 10+ years).

Look at the news over the last few days the FTSE 100 has been dropping 2 to 3% a day and is quite a way down on what it was at the end of December and long way down from its previous high in April / May last year.

Trackers of the FTSE 100 are one of the most common ones out there and it was down 3% earlier today when I scanned the BBC website. The FTSE 250 (another index that can be tracked) was up though so you pays your money and takes your chances.

Sensible approach is to not just buy one tracker btw but to spread your investments around and track multiple indices in multiple geographies and sectors. A lot of work when you are talking £10-20k so a multi-index fund like Vanguard LifeStrategy or the L&G MultiIndex can make that process easier.

Personally I would not borrow money to invest in anything as unpredictable as the stock market but my view of risk is probably different to yours.

Thanks for explaining. Understood about short to medium term losses but I am looking at long term investment. Good point about spreading across trackers. Out of interest, what have you invested in?

bowlhead99

Whether something is high risk or low risk depends on what you understand by, or what you mean by, risk.

If you understand trackers to be low risk, you must be comparing them with very high risk things like shares in individual companies which could be worthless tomorrow. Depending on how they're structured, the portfolio approach adopted by a typical tracker means they will probably still be worth something tomorrow even in a big crash.

But probably on a scale of 1-10 with guaranteed cash at 1, the investment risk of a typical tracker is probably a 9. Over the long term of course most people can afford to take more risk than they can tolerate for a short term investment and you come to realise that everything has risk of some sort.

Certainly even within the world of "trackers" there are higher risk options and lower risk options because it depends what time tracking. You aren't going to lose a lot on a short-dated UK government bond tracker, but you're not going to gain a lot either. If you can find a tracker for equities of biotechnology companies in emerging markets, the risk and returns profile would be rather different.

Shmo

There are leveraged trading products such as CFDs and spreadbetting that would remove the lender as the middleman between you and a broker although you would need an initial stake to fund your account with. You might find the rates are cheaper (IG CFD charges are 2.5% + the relevant interbank rate for long positions) and you're more flexible about the amount you're borrowing. The options for limiting losses are also better than those for regular execution only trading accounts in my experience.

On the flipside it's extremely easy to lose your entire stake in an afternoon with such products (if you bought a £10 per point bet on the FTSE100 this morning you'd be down about £2000 now), and potentially be liable for far more if your position doesn't get stopped out. However if used sensibly, I'd still see it as a preferential option to a bank loan.

atush

If you want to invest, use savings.

Dont borrow.

racing_blue

One of my favourite threads ever on the internet is Market Timers Margin Call.

Market Timer is a smart young guy. I think he has a PhD in Economics. He has read about "mortgaging your retirement" and thought pretty deeply about the logic behind it.

A typical investor might put 50% in stocks and 50% in bonds. The Stocks are generally more volatile, but tend to grow in value. The Bonds are less volatile and provide stability but not growth.

A young investor prepared to take risk might put 100% in stocks.

Market Timer takes this one step further. A loan is the opposite of a bond. It is a negative bond. So by taking a loan, and investing in stocks, he believes he can achieve a portfolio of -50% bonds and 150% stocks. Or -100% bonds and 200% stocks. He is young, so over time the growth of stocks should get him faster to his fnal goal: a portfolio big enough to finance retirement.

If you have not already read the thread, and you have a spare hour, you really should. It is painful and educational in equal measure