In the heyday of the stockmarket boom of the 1990s, there were regular stories of investors making massive returns in a matter days. This was in the period of the so called “technology bubble” but as with all bubbles, it finally burst with serious consequences for many investors. Can borrowing to invest ever really work?
While the strategy of using borrowed funds to invest is always going to be a risky strategy, there are ways in which you can reduce the risk. If you decide to take this path, you should consider the following factors :-
Level Of Risk
Before even looking into borrowing to invest, you need to consider what level of risk you are willing to take, and what investment return you are looking for. With a higher return comes a higher risk, so you need to find a suitable balance for your own personal situation.
Term Of Investment
While long term investments are often more lucrative, and deemed to be less risky by many, there are risks with any investment. Stocks and shares are notoriously volatile with many factors contributing to any future change in share price values – some of the factors are out of control of even the directors of a particular company, e.g. world recession, terrorist threat, etc.
Asset Backing
Many investors who look to borrow to invest will already have assets behind them, which they can fall back on in the event that the “funded” investments do not work to plan. This is perhaps the best form of financed investment, but whether you choose to go ahead with or without backing – you will ultimately pay the price if it all goes wrong.
Experience
Do you have the expertise, or know of suitable advisers, which will increase the chances of you being successful? Many people who struggled in the aftermath of the 1990s did so because they were “following the crowd” without the necessary experience. This show of “irrational exuberance” is often a sign that a stockmarket is becoming over heated.
While it is true that many investors have made big money from “funded” investments, it is not suitable for everyone. It is difficult enough to make suitable investment returns with “free money”, never mind with the extra pressure from using borrowed funds. Unless you have the experience and nerve to take in the good and bad days , you should think twice about entertaining the idea.