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Does It Ever Make Sense To Borrow To Invest?

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Many people ask me if they should borrow money for investing.

The answer is a big fat NO! (the ! is for Elaine Benes)

If you have to ask that question then you are not in the position to apply leverage to your investing strategy. Never borrow money simply for tax reasons. 

Rule number 1 for investing is to acquire discipline before applying leverage (borrowed money).

I was a financial advisor at the age of 19, managed the trading desk for a billion dollar hedge fund and designed strategies that made millions and I won't borrow money to invest.

Don't be fooled by financial advisors who tell you to borrow money to invest because they stand to gain a larger commission.

Discipline is the single most important trait found in profitable investors. If you don't have the discipline to live within your means then you won't have the discipline to use leverage to magnify your gains and you won't have the discipline to exit losing investments.

Leverage is a dangerous two edged sword. If you are a consistent and profitable investor then you may consider using leverage to potentially magnify your gains. On the other hand, losing is also part of investing and your losses will be magnified.

The question you have to ask yourself is are you disciplined enough to stop out (get out) of losing investments? If you have trouble exiting a losing investment then you will surely have trouble getting out when the investment really turns sour.

Do you know about the story of how Long-Term Capital Management (LTCM) lost Billions and went bankrupt. Read the book 'When Genius Failed' by Roger Lowenstein for a good story on the perils of leverage.


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Do you know why Lehman Brothers, Bear Stearns and Enron filed for bankruptcy? One word, Leverage.

These are all major financial institutions employing the smartest people in the world, LTCM had a team of Noble Prize laureates and they still managed to file for bankruptcy. 

The reason is very simple, they used extreme leverage (borrowed money) and held onto bad investments (failed to use stops) and let initial losses in the Millions turn into losses in the Billions.

So the lesson is simple, if a major financial institution can't handle leverage then you mostly likely can't handle it either.

If you still want to borrow money for investing then all I can do is recommend that take a few coaching sessions with the team at BehindWallStreet.com and we can show you how to apply risk management techniques so your don't lose all your money.

If you know anyone who is thinking about borrowing to invest, do them a favor and have them read this article on BehindWallStreet.com.

Read more articles on the Articles Page and Trading & Investing Blog.

We welcome all comments on Facebook and LinkedIn.

By Joel Laceda - July 31, 2013 BehindWallStreet.com

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Markets

 

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