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Should You Borrow to Invest?

Should You Borrow to Invest?

Conventional wisdom says that it is ill-advised to borrow money for investment purposes. However, closer inspection of this clearly illustrates that most investments are made through loans. Loans are borrowed money. Of course, it depends what type of investment you’re looking to get involved in. Investments that generate profits above the costs of the borrowed capital are net winners.

The upside of borrowing money to make an investment is that you can generate significant profit, and you can do so by simply being creditworthy. The flipside of this equation is that if the investments sours, you are liable for the borrowed money and any interest repayments that must be made. It is certainly not advisable to be indebted for life, and that’s what can happen to investors who falter in the markets.

Lower your overall level of risk through comparative shopping

Fortunately, there are many ways to mitigate your liability, costs and risks when borrowing money. Sage advice is to always compare personal loansbefore simply signing on the dotted line. It makes no sense to commit yourself to unfavourable terms and conditions, exorbitant interest rates, and a lengthy repayment plan. The amount that you’re going to be repaying on a personal or business loan should always be measured against the potential payoff of your investment.

If we look at the stock markets today as a case in point, there is room for optimism. Wall Street is rallying at record levels, with the Dow Jones having surpassed the critical 21,000 level after President Trump’s speech to a joint session of Congress on Tuesday, 28 February 2017. US equities are shaping up to be the preferred investment option for everyday folks. However, caution is the order of the day. Every time equities markets rise too quickly there is always the risk of a correction.

Wall Street is rallying – but Should You Invest in Equities Markets Now?

We have seen 20% + gains over the past 1 year in the S&P 500 index, Dow Jones, and NASDAQ composite index. Will this bull run continue? Probably not, but if it does nobody knows for how long. That’s why investments should always be carefully gauged. It’s no good coming into the market when it is already at a crescendo; investments are better in up-and-coming equities, indices, commodities or stocks.

If fiscal stimulus measures in the United States kick in, the coal industry will blossom, shale oil will prosper, and the steel industry will take off. These are potential investment prospects that high-level investors are already capitalizing on. Remember, your 401(k) is not protected by the FDIC. The only way your money is protected in your 401(k) is if it is simply cash waiting to be invested at leading companies such as Fidelity etc. Also, cash held in banks in the form of certificates of deposit, checking or saving accounts is guaranteed. All other investments can go north or south.

How Do You Invest Borrowed Money?

In a word, carefully. Safe investments are those that are less likely to go up in smoke if markets reverse. Everybody knows that equities markets can turn on a dime. If the White House pushes the trade policy that markets oppose, stocks could tumble. If geopolitical uncertainty in the Middle East flares up, equities markets could crash. It’s important to understand that there are safe-haven investments that will always flourish when a risk-off approach to equities kicks in. For example, gold bullion is the go-to investment option when people are feeling skittish about financial markets.

Even though property is a fluctuating asset, it is a fixed asset that will always hold value. It may not be worth what you paid for it if markets falter, but you will always have the property. The same cannot be said of stocks which can erode into nothing if companies fold. Land, buildings, parking lots, and other tangible fixed assets are highly valuable investments. In all cases, one should guard against leveraging oneself in the financial markets.

Never borrow money beyond what you’re capable of repaying – regardless. If you have a risk-averse personality, it’s probably not a good idea to buy huge volumes of iron ore, copper, gold, silver or crude oil on futures markets because things could turn against you.

The bottom line is the following: Think carefully about where you borrow money, why you wish to borrow money, and where you want to invest the borrowed money.

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