Investing money in the stock market: Personal Approach
It is very common in real estate to borrow money from your banker to buy your primary residence or a property to rent. This makes it possible to increase your assets tenfold by taking advantage of the leverage effect.
In this article, we will discuss borrowing to invest in the stock market which allows you to benefit from the same advantages.
Attention, this article is not a recommendation to borrow to invest but only a reflection on the advantages and disadvantages that this can represent.
Why borrow to invest?
Borrowing money allows you to put a large amount of money to work that you may not have access to at time T. You thus benefit from the leverage effect because you earn money on a large amount invested.
It is indeed better to earn 10% of 10 000€ (or 1000€) than 10% on 1000€ (or 100€), especially since the effort is the same. Of course, you have to pay back your credit every month with a certain interest rate.
If you manage to generate a positive performance on your investments (which is the case of the stock market in the long term), you directly pocket the difference between this performance and the interest rate.
If, for example, you earn 10% and the credit interest rate is 1%, you put 9% of a sum that isn’t really yours in your pocket!
It’s impressive in principle.
However, the risk of the capital loss is also substantial.
To sum up, it is interesting to borrow to invest in your performance is higher than the interest rate.
However, it is important to keep in mind that the stock market is a volatile investment in the short term and that it is quite possible to have a capital loss over the time it takes to repay the loan.
When is it worth borrowing to invest?
First of all, it is important to know that using credit increases your debt ratio. This one must ideally remain lower than 30% especially if you wish to make a real estate credit afterward.
It is therefore advisable to first borrow to buy a property, so you will not have a bad surprise with a refusal of your bank …
Borrowing to invest is interesting if you would have invested your money in the same way anyway.
Let me explain: I personally invest in the stock market as much as possible each month and in the long term (a little more than 500€/month ideally).
I am therefore already exposed to the rise and fall of the financial markets.
So it doesn’t change anything for me.
I have just personally taken out a loan with Barclays at an impressive rate. Moreover, the reason is “personal” and therefore there is no justification to be provided.
The conditions are a rate of 0.95% for 10,000€ borrowed over 3 years (a monthly payment of 280€).
This allows me to unlock the equivalent of a year and a half of savings while repaying less than what I currently invest.
Thus, if an opportunity arises I can seize it without any problem. I also believe that it is easy to produce a return of more than 0.95%/year over the long term. In fact, I remind you that the average earnings of the French Dividend Aristocrats on the stock market are 8%/year over 20 years.
It is also positive from the perspective of investing in growing dividends.
In fact, I am buying stocks today that I should have bought in 3 years.
This allows compound interest to start.
Let’s say a stock’s dividend yield is 3% and its annual growth rate is 8%. If I buy it today with credit, its return in 3 years will be 3.78%!
Being still young, this makes it possible to duplicate the time factor with the compound interest.
This is also ideal in my case because since my recent real estate purchase (main residence) I no longer have much cash reserve.
I will therefore be able to continue to invest with credit while at the same time rebuilding a new reserve.