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Borrowing to Invest in Your 20s and 30s
Is it ever advisable to borrow funds in order to invest earnings in the markets? Actually there are many examples of how doing so would have yielded some fantastic returns. The period of 1995 to December of 1999 would have returned a nice pile of earnings to an investor who decided to cash out on the equity in their home in order to invest in the market. So, the answer to that question is actually – it depends on the markets and on the risk factors to the borrower.
With most money markets averaging about ten to twelve percent returns and most home equity loans or mortgages standing at roughly six to eight percent it is difficult to see if such a long-term risk is going to really be worth the effort.
The real issue about borrowing to invest while you’re in your 20s and 30s is whether or not the activity is going to generate any long-term results. Most equity loans are going to have a minimum of 15 years to repay, and if that is the case they will also be a liability to the investor for that entire period of time. While some investors can easily afford such an added measure of risk, for others it is too much of a strain on their plans and is not going to yield adequate results.
Another factor that must be taken into consideration, particularly in the current financial climate, is job stability. While the borrowing to invest concept may even out and yield some good long term results, the investor is going to require the ability to make the payments on the loan. This means long term job stability which is not always a guarantee. This too is another risk factor that absolutely must be taken into consideration before deciding to borrow and invest, even if the investment is a “sure thing”.
Generally borrowing to invest is considered a form of leveraging and the key to successful leveraging, particularly where investment plans are concerned, is a long time frame. So the concepts of stability, risk and time must all play major roles in any plans for borrowing to invest while in your 20s and 30s.
Of course there is also the final element of the unexpected, most of us don’t plan on illness during our youth, we may suffer from an accident, and we may decide to get married and start a family, which can all be seen as unexpected pressures on financial plans. If there are outstanding loans during such events it could cause difficulties and pressures that are not worth any kind of return.