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Wednesday, October 28, 2009
Carrie Schwab Pomerantz :: Townhall.com Columnist
Is it a Good Idea to Borrow in Order to Buy Stocks?
by Carrie Schwab Pomerantz
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Dear Carrie: I'm a 43-year-old male who bought a $300K home six years ago and have it paid off completely. With interest rates so low, I'm wondering about taking out a mortgage and putting the money into the stock market where I'm more likely to get a higher return. Is this the right idea? -- A Reader

Dear Reader: You pose an interesting question: leveraging your house to buy stocks. To help you make a decision, let's take a look at the potential benefit but also think about the risks.

The investment rationale is pretty straightforward. You have an asset that allows you to borrow cheaply. Current 30-year fixed-rate mortgages are right around 5 percent, and the interest is tax deductible. Your effective, after-tax interest rate will depend on your tax bracket, but I'd guess it would be around 3 percent to 4 percent. So, the practical question is this: Can you earn more than that in the stock market?

The answer isn't clear. Yes, stocks have historically returned around 8 percent, and many investment gurus have reduced expectations to closer to 7 percent. So if you can borrow at an effective cost of 3.5 percent and earn an average of 7 percent, it would work in your favor.

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But that's looking at this decision purely from a return perspective. And as an investor, you must look at every investment decision from the potential downside as well. What are you risking if you move ahead?

When you borrow in order to invest, you're taking on risk. You would have mortgage payments to maintain, which should be fine as long as you are confident about your income. But looking at some worst-case scenarios, what if you lose your job? Or the value of your home falls? Or the stock market takes another dive? A combination of these events could put you into a very bad situation. Continued...
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Carrie Schwab Pomerantz is a Motley Fool contributor.

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(9 comments so Far)
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Reply # 1
Date: Oct 28, 2009 - 8:58 PM EST
Ignorant Suckers
I have to share a secret.

In response to the headline "is it a good idea to borrow to buy stocks" the answer is an emphatic yes if you make money doing it.

But do not give your money to anyone unless you know what you are buying and you are going to monitor it every hour of the day. Do not buy a equity security unless you are willing to call the CEO and CFO of that company to grill them about their figures.

It's rather comical how many people have money tied up in securities via their IRAs and 401Ks and mutual funds who do not make it a full time job tending to their investments. This is how professionals make serious money: by relying on these ignorant suckers to buy something past its prime.

Everyone wants to make money--not everyone knows how.
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Reply # 2
Date: Oct 28, 2009 - 5:59 PM EST
Better to invest monthly... makes cents"
As a former securities agent I can tell you that it's better to invest monthly, rather than in one lump sum. Riding the monthly ups and downs in the market while it fluctuates is safer and typically earns more dividends in the long run.

A stock may sell for fifty dollars one month and then be down a couple of bucks the following month. You haven't lost the farm, plus you'll make additional money when it does go back up the following month. If you can invest what you were paying out in a mortgage payment per month, for ten years, why not? Riding the roller-coaster makes "cents."
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