Personal loan to invest

So anyway, I had some time to kill and after reflexion, tell me if my plan is worth it or not: I work at an investment bank related to a commercial bank, thus I get preferred loan rates. I can get a personal loan for 5 years at a current rate of 3% (read that right). I figure I can borrow alot and put it in the stock market. Five years from now, I figure equities will be back on track (or else we’ll have bigger problems). Strategy is to invest in dividend paying and value stocks. I like Buffet’s holdings, so I was thinking about AMEX, UPS, Coca-Cola and maybe some GE. They’re paying anywhere from 3-7% yield now, which covers the loan cost. I guess I could also profit from the FX “back to normal curve” as I invest from Canada. Risks are obviously: Securities prices down the drain, dividend cuts and my own job loss. Apart from that, what am I missing? Buy-and-hold strategy I guess. I know the numbers make sense, bla bla, guess I just wanted a tribune to double-check on my thinking.

Timing on the payments…if you are paying monthly but not receiving dividends just make sure you have some other source to make the payments… You might look at some MLP’s too…

Just invest in Cdn bank prefs. Yield 6.3-7.6% and are guaranteed. Invest in all 5 to manage the risk a bit and you should get some capital appreciation should the common shares head north.

What sort of time frame will they let borrow for? GE has some corp debt maturing in 2038 yielding close to 7.7%…it’s higher up the capital structure.

So you’re leveraging a stock holding with inexpensive debt. The question of how much debt you can afford to take has relatively little to do with how much the debt costs, and almost everything to do with how much risk you are able to take with your stock picking. Just remember that if you put in 1/2 your own money, 1/2 borrowed money, and don’t pay any interest, then a 5% loss to your stocks is a 10% loss to you. If you had done this in august 2007, you’d be mostly wiped out by now. How much equity are you planning to contribute to this, or are you buying on entirely borrowed money? Just make sure you have a good idea of when you need to bail out if your positions and picks work against you. Make sure you plan this ahead of time, because if your stocks go down in the interim, you’ll be thinking “I’ll just hold out a little longer so they can go back up.”

What happens if you lose your job with a loan outstanding? Is the preferred rate a condition of employment (ie., does it increase; or does the loan need to be repaid) if you are laid off or leave the bank?

Loan would be for 5 years. My monthly bills are low (in fact, got none except for the VISA) and I could deal with the payments without any problems. I would contribute 0 equity in the process. My risk tolerance is way above the usual mean. Apart from losing my job, no other reason why I should need the money. I just spent all I needed to move out thus no major expenses coming my way.

Its Ballsy, but safer than it was a year ago, obviously. I think focusing on the dividends reduces your risk (hopefully no one slashes the div). If I could get 3% somewhere, I’d probably do it too.

Anonymous Wrote: ------------------------------------------------------- > What happens if you lose your job with a loan > outstanding? Is the preferred rate a condition of > employment (ie., does it increase; or does the > loan need to be repaid) if you are laid off or > leave the bank? You will certainly have to pay back the loan to leave your job. The risk here is that the loan ties you to your current employer. They can fire you and demand the loan back. If you quit, they will demand the loan back. Thus, for the really low cost of giving you a 3% loan they make it tough for you to leave the job because you will either have to come up with funds from other sources or take a tax hit to leave the job. In some situations, you absolutely won’t be able to leave the job because you can’t come up with the money to do it. BTW - I hope this doesn’t apply, but the assets and the loan are not explicitly tied together. That would cause you trouble if there is a legal judgement against you (and you have some nice liquid assets just sitting there) or you get divorced (she takes the assets and leaves you with the loan - your employer is surely not going to split the loan and if you don’t think divorce judges do stuff like this I can tell you remarkable stories).

Hmmm - borrow fixed to buy equity? this reminds me of a HELOC.

This is a bad idea, even if you do it and it works out.

If there is no loan limit (I assume there is), I would take out $100,000 or so (or $1 million) and put it into municpal bonds–10-year average yield is 5.10%.

If it works out, you’re a dumb genius. If it doesn’t, you’re a broke genius. If you have a 5 year time frame, you shouldn’t be putting all your monies in the stock market. Yes, we hope that the market will be higher in 5 years, but nobody knows if it will be higher or not. This decade provides all the evidence you need for that. However, that’s not to say that you can’t take out the loan and find a 5 year CD, or 5 year MM account, but you would be hard pressed to find something that will pay back your loan costs + inflation costs. That’s my opinion, and would think that this is the opinion of knowledgeable investors.

Hey, 5.10% municipal yield is a tax-equivalent yield of 6.8%, with pretty much guaranteed re-payment…just sayin’…

So where does the money come from for municipalities to repay bond principal and interest. Oh, that’s right, the largest portion is PROPERTY TAXES. Now we have housing prices crashing, unemployment, foreclosures, etc… Yields are good because the risk of default is higher. So, obviously this means don’t buy a single bond or small number if you do this. Diversify for sure or get an ETF with duration approximately the same as your loan. Maybe you need a weighted average of muni ETFs that give you the right duration. There is a nice possibility, which is that the interest payments on your loan may be able to be tax deductible, while the interest received on the munis is tax free.

bch, no offense, but your warnings against municipal bonds are dubious at best. First of all, a municipality defaulting is rare–incredibly rare. And there are a number of different municipal bonds–general obligation bonds, revenue bonds, etc. General obligation bonds defaulting is so rare that it isn’t even a real consideration when purchasing municipal bonds. And default loss after a default is so small as to be mathematically negligible. Second of all, municipalities will just RAISE taxes if property values fall too far. Fairfax County in Virginia has suffered 25% declines in home values and has a $500 million budget deficit and yet is in no danger whatsoever of default. General obligation bonds are backed by the full taxing authority of the government. “The historical default rate on single-A-rated munis is 0.0084 percent - 80 times lower, according to rating agency Moody’s Investors Service, than the historical default rate on triple-A-rated corporate bonds.” “Even triple-B-rated munis - the lowest rung of investment grade - have a default rate of only 0.06 percent.” It takes an extreme level of [insert bewildered remark] to warn against municipal bond investments as too risky. No offense.

^ good point kkent To the original poster, I’d say do it - borrow as much as they will lend you and choose one of these strategies the guys have outlined. I assume you are still pretty young, so you have (relatively) nothing to lose. How many people lost everything on their way to a fortune? Plenty. I’d suggest you have a once in a lifetime opportunity to all but set yourself up for life (depending on how much you can borrow of course). Pick a strategy that covers the loan costs so there is no cost to you but still gives you either a guaranteed return or capital growth (a bit more risky) Seriously, what have you got to lose? Like you say, if your strategy doesn’t pay, well we’re all likely to have much much bigger problems…

No offense taken. I don’t claim to be a specialist in municipal bonds, but we are living in strange times where the historical distributional assumptions may not apply. We can expect that highly unusual things are likely to unfold - some are more plausibly predictable than others. Reduced municipal revenues is pretty much certain - how much this will affect defaults is harder to tell. On the other hand, we have someone taking a leveraged position with 0% equity to capture a spread, and we’re saying that the chance of defaults on the long side is small because it has been small in the past. So take it the warning whatever you think it’s worth. As I said, I’m not a fixed income/muni guy. Diversification is probably good enough defense for this, but the higher yield is certainly influenced by higher risk. Is it enough? I don’t know, but any time you are using 100% borrowed funds, you probably ought to be thinking about it. To the O.P. the critical question is “how much can you afford to lose.” If you can afford to lose the entire amount you have borrowed, then any of these strategies might pay off. If you can’t afford to lose that much - decide how much you can afford to lose before deciding on your strategy.

Point taken, chad. I accept that position.

check out ticker GEA - GE PINE senor unsecured notes yeilding around 7% right now i believe. for more ideas a good website for exchange traded debt is good luck. -doc vN