Then there is the more blatant type of borrowing, which is borrowing money directly to invest. Accumulating a large enough block of money to begin an investment portfolio is difficult to do with today’s high cost of living. People are sometimes tempted to borrow a substantial amount for the initial portfolio.
The money may be borrowed in the form of “good debt”, such as a home equity line of credit or a cash-out first mortgage. It may even be borrowed from a 401(k) plan.
These loans are tame compared to margin loans and credit card debt, even if you are borrowing money for investment purposes, you’re still leveraging your investments. And that means you are taking on a higher risk.
When considering borrowing money to leverage investments, you should always remember that debt payments are certain, but investment returns are not.
A limited amount of leverage — at the right time in the right investment vehicles — can improve the return on your portfolio. But too much debt invested at the wrong time and in the wrong investment vehicles can land you in the poor house.
Have you ever leveraged debt for investments?