Tom Nash
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Juggling Chainsaws Is a BAD Idea...
🕑 Added 2024-12-07 07:36:04 +0000 UTCAlright, buckle up ROIC Academy members.
Today, we’re tackling one of the dumbest ideas that still gets pitched around like it’s pure genius: taking a loan to invest. Sure, the stock market averages 10% returns annually, and sure, on paper, it looks like a winning strategy. But let me save you some heartbreak (and probably a house repo): leveraging your investments is financial Russian roulette.
Why Does It Sound So Tempting?
Leverage is fancy talk for borrowing money to invest more than you currently have.
Here’s an example:
You have $100,000 in a retirement fund.
You borrow $80,000 against it.
Now you’re investing $180,000.
The idea?
When the market gives you 10%, you earn on $180,000 instead of $100,000. Subtract the loan interest, and maybe you’re left with 15% returns.
Look at you, a financial mastermind! Or so it seems… until reality smacks you in the face.
The Plot Twist...
Look, if you’re not a seasoned pro with nerves of steel, leverage is like juggling chainsaws, it’s all good until one slips. Say the market takes a dive. A big one. Maybe we’re hit with something absurd like the “Poodle Crisis 🐩” (because every crash needs a dramatic name).
Markets drop 40%, and suddenly you’re not looking at returns, you’re looking at a margin call.
Let’s run the math:
Your $100,000 investment account drops 40%, leaving $60,000.
You still owe the $80,000 loan.
Congrats, you’re now $20,000 in the red.
Oh, and did I mention the lender can force you to sell everything at a loss to repay the loan? And if that’s not enough, they’ll send over some friendly debt collectors to discuss your life choices.
Lenders aren’t stupid (well, not that stupid). If you borrow heavily against your investments, say, more than 50%, they’ll restrict you to lower risk funds to protect their own backsides.
Translation? You’re locked out of high growth equity funds and stuck with “safe” options that yield, oh, maybe 5%.
Let me spell it out:
Without leverage, you could earn 10% from a market index.
With leverage, you’re stuck earning 5%, minus the loan interest.
That’s like running a marathon in flip-flops, you’re just making life harder for no reason.
Here’s the kicker: loans aren’t free. With today’s interest rates, the gap between your investment returns and the loan interest is laughably thin. Let’s say the market gives you 10% annually, but your loan costs you 7%.
That 3% difference? It’s not worth the stress of margin calls, market crashes, or your spouse asking why the bank repossessed your lawn mower.
Why I Don’t Touch Leverage With a 10 Ft Pole
Look, I love maximizing returns as much as the next guy, but leverage doesn’t pass the smell test. The potential upside is too small, and the downside is catastrophic. If you lose, you’re not just losing what you invested, you’re losing what you don’t even own yet.
For me, investing is all about risk management. And leverage? It’s a risk I don’t need. I’m playing the long game here, dollar cost averaging, compounding, low fees. It’s not sexy, but it works. Meanwhile, leveraging your portfolio is like gambling your life savings on a roulette wheel because you think the dealer winked at you.
The Only People Who Should Leverage
There’s a tiny, tiny group of people who might pull this off:
Seasoned investors with decades of experience.
People sitting on cash mountains who can handle margin calls.
Psychopaths.
Labradoodle Owners.
Masochists.
If that’s you, great. But for the 99% of us mere mortals, leveraging is a fast track to bankruptcy court.
I get it. Leverage sounds like the cheat code to get rich quick. But here’s the thing: the stock market isn’t a sprint, it’s a marathon. And last I checked, marathon runners don’t carry anvils on their backs.
Oh, and if you’re still tempted to leverage? Just imagine explaining to your family why you sold their favorite couch to pay off a margin call.
Trust me, that conversation isn’t worth it.
Comments
Jack M
Thanks for the leveraged funds explanation, it's amazing how many of them have prominent promotions. I'll steer clear, hope the woke community doesn't protest the Labradoodles reference! Cheers!
Island Boy
Very true statements. I'm starting to see more signs indicating Fomo now: YouTube option experts popping up in news feed, AI generated videos on the greatest wealth transfer in history, personal development videos about if this video appears then it's for you. Let's not forget those margin specialists telling everyone that's it's safe to do without any context. It's crazy to see how at the beginning of the year everyone was still risk averse even after Nvidia popped but now after the Fed and Bitcoin seem to be be developing some symbiotic relationship, folks are ready to sell a kidney. Lol
Generico Fakero
obviously
Lex
Labradoodle owners! 😂
