Stock market: Is it a good idea to borrow to invest?

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Borrowing to invest is a double-edged sword. The loan can be advantageous, fiscally speaking and boost the return on investment. It can also be dangerous and turn out to be the worst financial decision to make.

Borrowing: risks to take

In “Life Cycle Investing and Leverage: Buying Stocks on Margin Can Reduce Retirement Risk,” two Yale financial experts demonstrate that borrowing to invest is a good idea. They add in their essay that investing between your twenties and thirties ensures a comfortable retirement.

However, they believe that borrowing to invest in the stock market is not for everyone. And for those who choose to take the plunge, make sure to do so when the markets are at their lowest. Mastering “market timing” is not easy, however, and moreover proves to be impossible in the long term. Added to this is the fact that the stock market is very volatile and the risk of bankruptcy cannot be ruled out. Also, to avoid financial inconvenience, it is necessary to have good knowledge of the stock market before starting.

A rapid return on investment

Borrowing to invest can also have benefits if accompanied by a well thought-out strategy. This is what 99% of the population does for a living: they borrow to be able to buy a house, a car, etc. The famous American investor is himself a follower of this strategy. Research carried out by analysts at AQR Capital Management has indeed revealed that Buffet has built up his fortune through multiple loans at very low interest with his insurance company. 60% out of 70% of the shares in his portfolio were thus “borrowed”.

All this to say that borrowing to invest can be a good idea if it is well thought out. The success of the operation also depends on the choice of the asset. If the return on investment is quick and higher compared to the interest on the loan, then the bet is won.

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