I wanted to try something different on My Money Design and throw a question out to my readers to debate. I’m very interested to see what the outcome will be.
The inspiration for this topic comes from a stellar comment that was left on my “How Much Money Would I Make If I Rented Out A House?” post. The commenter, Richard, laid out some great plans for how he was going to build his wealth empire. Essentially, he was going to borrow money to put together a real estate portfolio. This is the classic old mantra of using “other people’s money” to get rich, and it is certainly a path where a lot of people seem to have found great success.
Unfortunately I’m far too much of a weenie to invest in real estate (… yet). I prefer to invest in stocks and mutual funds because these are things I know and understand; a quality I think is very important before you engage in any sort of investment.
But quickly I see there is a big difference between my strategy and his:
When I want to buy stocks, I always need to put up 100% of the capital using my own money. Real estate investors, on the other hand, only need to put a relatively small portion of the cash. They just reach some minimum down payment level and then finance the rest.
So while taking the dog for a walk, this got me thinking about a great debate question for the readers:
Would You Borrow Money to Invest in Stocks?
How come the stock investors can’t get in on the action and use borrowed money for their investments too? After all: Isn’t real estate also considered an investment? So what’s the difference?
Technically the option is there if you really wanted to exercise it. One way is to buy stocks on a margin. That’s when you borrow a certain portion of the money from your stock broker to fund the purchase. The other way is to simply borrow money the old fashioned way – from the bank or another financial institution. This might be in the form of a home equity loan or some other similar finance option.
It’s one hundred percent recognizable that borrowing money to invest in stocks is risky, risky! It’s pretty easy to say “what if the stock goes down in price”? But who says you have to invest in ultra risky stocks? Why can’t you invest in ultra boring blue chip companies? Or what about gobbling up a nice variety of dividend paying stocks so that no matter what you get a guaranteed 3 to 4% yield (regardless of the share price)?
Real estate has made many people rich. But isn’t it also just as risky? Suppose you buy a rental property and it turns out to be lemon. Suppose no one rents from you for months. Suppose you do get tenants and they turn out to be an absolute nightmare! Your investment is looking about as good as Enron stock right now.
Readers – What do you think? Would you borrow money to invest in stocks? Or is this just a rotten terrible idea? Has anyone actually already done this and found success with it? Please feel free to share!
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- Should I Pay Off My Mortgage Early or Look for a Better Return?
Image courtesy of Vichaya Kiatying-Angsulee / FreeDigitalPhotos.net