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Would You Borrow Money to Invest in Stocks?
I wanted to mix things up on My Money Design and toss out a question for my readers to debate. I’m really curious to see what you all think.
The idea came from a great comment on my “How Much Money Would I Make If I Rented Out A House?” post. Richard, the commenter, shared some impressive plans for growing his wealth. Essentially, he planned to borrow money to build a real estate portfolio. This approach uses “other people’s money” to get rich, a strategy many have found success with.
Personally, I’m too cautious to dive into real estate just yet. Instead, I stick to stocks and mutual funds because I understand them well. Knowing and understanding an investment is crucial before putting your money into it.
But here’s where things differ between my strategy and his:
When I buy stocks, I have to use 100% of my own money. Real estate investors, however, only need a small portion of the cash up front. They just need to cover a minimum down payment and can finance the rest.
While walking my dog, I started pondering an interesting question for the readers:
Why can’t stock investors also use borrowed money to invest? After all, real estate is considered an investment too, so what’s the difference?
Technically, stock investors can borrow money if they want. One way is to buy stocks on margin, borrowing part of the money from your stockbroker. Another way is to take out a loan from a bank or financial institution, like a home equity loan.
Yes, borrowing to invest in stocks is risky. It’s easy to worry about what happens if the stock price drops. But why invest in high-risk stocks? Why not choose stable, blue-chip companies? Or pick a range of dividend-paying stocks for a consistent 3-4% yield, no matter the share price?
Real estate has certainly made many people wealthy. But it’s not without its risks. What if your rental property turns out to be a dud? What if it sits vacant for months? Or if your tenants are a nightmare? Suddenly, your investment could look as bad as Enron stock.
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