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Is now the time for debt?

By Judy Martel · Bankrate.com
Wednesday, June 16, 2010
Posted: 3 pm ET

Spoiler alert: This blog contains a lot of "ifs." Let's start with the most important one: This being a blog about people with money, the first prerequisite for even considering taking on more debt is that you don't need to in the first place.

But as an example of using smart leverage, if you can pay cash for a home, perhaps you'd consider a mortgage anyway to take advantage of the low rates, and put the cash to work in the market. As I've reiterated more than a few times in this blog, the quicker path to wealth these days appears to be in the stock market, not in the housing market. One recent study, the 2010 Global Wealth Report by The Boston Consulting Group, confirmed this by showing a 14-percent growth in the number of millionaires worldwide since the end of 2009. It attributes the rise in millionaires to the stock market rebound last summer.

So savers with a long-term horizon would be wise to invest in the market, simply because the returns over time seem to add up to more wealth. But what if you go a step further and use some leveraged money in your investment strategy?

Investors who don't mind a lot of risk have always used margin loans to buy stocks, in which they borrow up to 50 percent of the value of the securities they already hold. But that strategy is best left to those who really know what they're doing. Margin calls can require you to come up with the cash immediately.

But if you take advantage of low-cost loans to buy big-ticket items like homes and cars, and then put the cash you've saved into the market, you could come out ahead if the stock market delivers its traditional average return of 8 percent, and your loan is for 5 percent or less. The trick is not to take on too much debt, and to follow through with a diligent investing strategy, no matter how tempting that vacation to Italy or a set of new patio furniture is.

Tell us: Have you considered taking on debt in order to invest more money in the stock market?

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1 Comment
Reggie Masterson
June 27, 2010 at 8:41 pm

The most important factor when dealing with any kind of debt is self-control. One must effectively control how much credit one uses, avoid excessive interest rates, and pay the loan back as quickly as possible. If not, you're probably part of the 54 million Americans with credit card debt, or the 11% defaulting on their credit cards right now.

Source cited: http://www.creditcardconsolidation.com