Does It Ever Make Sense To Borrow To Invest?

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.