What do you guys think of this article:http://www.law.yale.edu/outside/html/Public_Affairs/671/yls_article.htmIf I understand it correctly, it suggests that we borrow money now to buy retirement funds, then pay it off slowly over time. Is this possible? Am I understanding this correct? Is it a good idea?Gchin2
If I understand it correctly, it suggests that we borrow money now to buy retirement funds, then pay it off slowly over time. Is this possible? Am I understanding this correct? Is it a good idea?With all due respect to Yalies (DF and DB1 went to Princeton), this is not Foolish. First of all, your return is reduced by whatever interest rate you are paying on your debt. Second, failure to make an on-time payment on your debt may result in negative credit ratings. Third, inability to repay debt could force you to cash in your investment at an inopportune time (i.e. a market downturn forces you to sell at a loss).FuskieWho maintains it is not Foolish to borrow money for investing...
It is an interesting concept. Theoretically as long as rate of return on the larger amount invested exceeds payments you are ahead. However, as mentioned there are not any guarantees and periods of downturn can cause forced selling at prices less than you would like.However there are other ways of leveraging the investment without taking out a loan. There are funds designed to provide 200% of performance of S & P or Dow. These over time can provide a way to increase return without taking a loan. What I found interesting in the article was the risk of underperformance of investment in later years. Due to compounding and regular deposits, most of the growth in a retirement nest egg should take place in the last 10 years. If during those 10 years the market underperforms historic averages, or for what ever reason you underperform the market, the retirement nest egg will not be as large as expected. For example, if returns were level at 10% a year and time span was 40 years, 61.45% of eventual gain happens in the last 10 years.
What do you guys think of this article:http://www.law.yale.edu/outside/html/Public_Affairs/671/yls_article.htmIf I understand it correctly, it suggests that we borrow money now to buy retirement funds, then pay it off slowly over time. Is this possible? Am I understanding this correct? Is it a good idea?---------------Maybe they should stick to the law?Regards,Bill
There is nothing wrong with buying stocks on margin. Generally, margin rates are low, and the interest may be deducted up to the amount of investment income.Taking out a loan on a house to play the market is a but more questionable, but that is essentially what you do if you pay $1000 on the house and invest $1000 every month. That second $1000 could have been paid on the mortgage. The article, however, is stupid because it fails to recognize that there are good times and bad times in the market. In good times, be long and if you want, go on margin. But these times will not last forever. If you are fully margined (2X - which means $1 of your money and $1 of the broker's money), then you will almost certainly get a margin call when the market tanks, no matter how diversified you are. Of course, that does not have to happen, since at this point you can, and should, sell your long positions and go short, either stocks or indices.By trading on margin, I made about 46% in February 2000. In March 2000 I was entirely in cash by the end of the month, and lost about 10%. Nets out pretty well. I would have made money if I had gone short, but I did not know enough to do that then.The point is that the market (as J P Morgan said) will fluctuate. Make the most of those fluctuations, and do not just margin yourself to the hilt and go on a world cruise for a year. That will be regretted. Pay attention every day. Develop a good trading and timing discipline. Then you will certainly not have to worry about a margin call.
Do you have any debt? (a mortgage, car loan, etc)Do own stocks or funds?If you answered yes to both, you are already doing what the paper suggests - though perhaps not as the author intended.You could liquidate your investments to pay off the debt. Every day that don't, you are accepting debt to keep your investments. A dollar of debt is a dollar of debt. Whether you signed a margin contract, or a mortgage is doesn't make a lot of difference, except than at tax time :).Our society is very comfortable with leverage. I think the key question is not whether or not you should do this (since almost all of us already decided to). But instead, how much leverage should one use? Someone with a negative net worth, or high debt relative to net worth, IMO should focus on improving that before investing.-Joe
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