Taking out a loan to invest in stocks [not leveraged]

GangBusters

At first glance the idea of taking out a loan to invest is obviously ridiculous but investment banks do it all the time and if the interest on the loan is only 3% surely the low interest rate combined with massively discounted stock prices = prime buying opportunity?

I have one of two decisions to make. The first is to just invest £1000 a month from my salary for the next 30 years, the second is to take out a £20,000 loan, invest it all as a lump sum in a diversified portfolio and repay the loan over 20 months at £1000 a month. Either way I'm putting £20,000 into the market, the difference is one of them is over 20 months with no interest but I will probably miss the -30% - 40% discount. The other is taking advantage of the reduced prices and possibly getting a jump start on compounding, but I will pay 3% interest.


I mean it's not like I'm taking a loan out to buy bitcoin or anything, this is the stockmarket and it always bounces back and even stronger than before. If there's one thing I've learnt about stockmarket crashes is they don't last very long and they recover at least 50% from the lows in very quickly giving a very short window of buying opportunity.

bowlhead99

GangBusters said:

 low interest rate combined with massively discounted stock prices = prime buying opportunity?

The stock prices are cheaper than they were because it's been realised that (a) the companies aren't going to make as much money as people presumed they were, and that (b) the companies' businesses are susceptible to risks that people hadn't really thought about being a possibility. 

So a reduced stock price does not mean it is 'discounted' from some better level. The new level is the better and more appropriate level, if you look at the price now vs the earnings the companies are going to make (not what it was once thought they might hopefully make). Some companies appear 'discounted', but it may be the case that they have just been repriced at some intermediate point along the way to ceasing to exist.

If there's one thing I've learnt about stockmarket crashes is they don't last very long and they recover at least 50% from the lows in very quickly giving a very short window of buying opportunity.

If that's the major thing you learned, you haven't taken the right lessons or had a very good teacher.  You should almost certainly have heard Japan's Lost Decade (typically referred to as the Lost Two Decades now) https://en.wikipedia.org/wiki/Lost_Decade_(Japan). You could go back to other time periods and find sea-changes of economic prosperity. It's not always a crash and quick recovery.

Also, "Taking out a loan to invest in stocks [not leveraged]" doesn't make any sense. Using a loan to finance additional investment purchases in order to 'gear up' the rate of return from the underlying return to some higher rate that you intend to achieve having paid back the finance with the investment proceeds, is exactly what 'leverage' means. So [not leveraged] seems to be a fundamental misunderstanding on your part. The potential gains and losses are enhanced over and above the underlying investment performance dut to the financial gearing.

GangBusters

But the reduced earnings forecast comes from Coronavirus and businesses temporarily shutting down. Once Coronavirus has been contained businesses will open and the share price will quickly be back to where it was before, at least 50% up from the lows like in all the other crashes. 

I'm referring to the S&P500 which has recovered exceptionally well from every crash it's ever had so there's no reason why it wouldn't recover again. 

Lastly your point about leveraging, I understand leveraging to be where I can use £500 to buy £20,000 for example but if the price were to drop I would receive a margin call. If I receive £20,000 which isn't leveraged against anything then it doesn't matter how low it goes, I'll never get forced to cover my losing position. That's how it works with forex leverage anyway

Thrugelmir

GangBusters said:

But the reduced earnings forecast comes from Coronavirus and businesses temporarily shutting down. Once Coronavirus has been contained businesses will open and the share price will quickly be back to where it was before, at least 50% up from the lows like in all the other crashes. 

How is Coronavirus going to be contained? 

bowlhead99

GangBusters said:

I'm referring to the S&P500 which has recovered exceptionally well from every crash it's ever had so there's no reason why it wouldn't recover again. 

Oh that's fine then, you should definitely set your expectation by using the index that 'recovered exceptionally well from every crash it's ever had' rather than considering a different index which was the largest stock market in the world by value, fell from grace and didn't recover its high point for multiple decades.

Lastly your point about leveraging, [etc. etc. ] That's how it works with forex leverage anyway

Understand the fundamentals of what you are doing and why it is called leverage or gearing.  You will get a more rounded education from economics classes than from forex trading sites.

SFindlay

GangBusters said:

the second is to take out a £20,000 loan, invest it all as a lump sum in a diversified portfolio and repay the loan over 20 months at £1000 a month.

Who exactly do you think will give you an interest free loan of £20,000 over 20 months in order for you to "invest"??? They would be better off investing the £20,000 themselves as have the same risks involved as getting nothing of benefit back from you but taking the risk you lose it all and cant repay the debt!!!! 

wmb194

GangBusters said:

Lastly your point about leveraging, I understand leveraging to be where I can use £500 to buy £20,000 for example but if the price were to drop I would receive a margin call. If I receive £20,000 which isn't leveraged against anything then it doesn't matter how low it goes, I'll never get forced to cover my losing position. That's how it works with forex leverage anyway

No, borrowing any amount of money is leverage. What varies are the terms of the loan e.g., secured, unsecured, length, triggers for repayment and so on. You might not be "forced" to do anything but it's still leverage. If you blow yourself up you'll still have this loan hanging over you.

mcooke999

This sounds like an absolutely absurd idea?! What if you lost your job or couldn't work due to the Coronavirus, how do you plan servicing your debt in that (quite possible) scenario? Only a moron would do this imo

LobsterMemory

SFindlay said:

GangBusters said:

the second is to take out a £20,000 loan, invest it all as a lump sum in a diversified portfolio and repay the loan over 20 months at £1000 a month.

Who exactly do you think will give you an interest free loan of £20,000 over 20 months in order for you to "invest"??? They would be better off investing the £20,000 themselves as have the same risks involved as getting nothing of benefit back from you but taking the risk you lose it all and cant repay the debt!!!! 

He does actually assume 3% interest but seems to have missed off paying it back in that calculation. Maybe an extra £50 per month? Don't know whether that foils the masterplan...

Old_Lifer

For an individual to borrow money to invest on the stock market is completely bonkers   Prices may fall lower  and although they will eventually recover to previous highs , the recovery could take years.

fizio

plan is Nuts!!