Diversifying Your Portfolio: Is It Worth Taking Out a Loan to Invest?
When it comes to planning for your future, a good investment portfolio can help you get ahead. But what happens when you can’t afford to invest, but still want to secure your financial future? If you don’t have the cash flow right now, is it worth taking out a loan to make investments? We don’t recommend it! We highly recommend saving to invest instead. This will keep you from going further into debt from activities that you may be unsure of, and that have an uncertain outcome. Get out of debt BEFORE focusing too much on personal investments.
With that said, here are some pros, and mostly cons to borrowing to invest.
What You Could Gain From an Investment Loan
The advantage of taking out an investment loan is, if everything goes according to plan, you can profit in the long run. With the right investments, you can afford to meet your loan repayments and interest payments, and still make a profit on top of that. Borrowing to invest is a strategy that is used by highly skilled and experienced investors to turn a profit. Sometimes, it can also be worthwhile to borrow money to meet an annual contribution like an RRSP payment, if you’re living in Canada. However, when you’re borrowing money, you always have to be aware that things might not go as planned.
Borrowing to Invest Is Risky Business
The reason that borrowing to invest is a strategy used mostly by experienced investors is because this is a strategy that involves a high amount of risk. When the market is right, with the right investment, this strategy can work out for the better. But if the market takes a turn and your investment doesn’t play out like you thought it would, or you run into other financial difficulties, you could end up with more debt than you began with.
Beware of Rising Interest Rates
One of the problems with borrowing to invest is the issue of rising interest rates. With a smart investment, you may be able to make your loan repayments on time at an interest rate of 2 or 3 percent. But what happens if that interest rate goes up? Will you be able to pay 4 or 5 percent interest? How about 8 or even 10 percent?
How Much Are You Borrowing and How Much Could You Lose?
A simple question to ask yourself before taking out a loan to invest is, “How much am I borrowing, and how much could I stand to lose?” Borrowing a small amount to top up an investment is less risky, but borrowing in large amounts always leads to greater risk. Also, think about what sort of investments you want to make, and what you would be borrowing against. A non-diversified investment can be extremely risky, especially if a lot of what you are investing is coming from a loan. It’s also not advised to borrow against your home to invest, as this could lead to foreclosure on your home if your investment goes sour or if you can’t meet your loan payments.
Whenever you’re considering a risky financial strategy like this, it’s always a good idea to think about the worst possible outcome. Never invest without the advice of a professional. Could you lose your home? Will you be able to make your interest payments? Would you be forced to look into debt relief? It’s also a good idea to talk to a qualified financial planner before you pursue any new loans, especially if you’re already dealing with other debts.