Mailbag: Should I take a Loan to Invest Now? (because Markets are making New Highs everyday)

This is going to be a short post. It’s more of a warning for those who have questions like one in title of this post….in their mind.

Yesterday, I received a mail from a reader asking me the following question:

My portfolio has moved up almost 50% in last 3 months. Some shares of small companies are up more than 100%. Do you think it is a good time to invest more? I don’t have lots of spare cash to put in markets but I am thinking of taking a personal loan to invest. A loan would cost me around 15% and that is much less than what can be easily made in these rising markets.



I replied to this reader’s mail instantly and without any hesitation.

But I felt that right now, there would many people thinking on similar lines. And that is because in recent times, markets have been moving in just one direction. And that is upwards. And this gives a perception that it is very easy to make money in stock markets.

My personal interaction with people tells that they have now started feeling that Fixed & Recurring Deposits offer just 8% in one year….whereas some stocks can give that kind of return in a day. True. It is possible. But can we be 100% sure about this? Can we be 100% sure that we will be making 5% to 8% every day kind-of-a-return on regular basis in stock markets?

The answer is no. I can’t do it. I am pretty sure nobody I know has done it. And neither have people like Warren Buffett done it. And since we are not sure about the returns, it would be a big mistake to borrow money for investing. 

It’s possible that when you take a loan and put that money in markets, your expectation is that markets will move up, like they have been doing for a while now. And probably in a year’s time, you will make much more from your investments than 15% interest that you need to pay on your personal loan.

But what if markets do not rise as expected?

What if returns are less than 15% in one year?

What if markets just stay at same levels after one year?

And what if markets fall…say by 15% in one year? What will you do then?

I hope you are getting what I mean here. 

Market returns are unpredictable. You can never be sure of returns or losses which come your way in markets. But if you take a loan, your EMIs would be predictable and fixed. You can be quite sure that you will have to pay around 15% every year for the loan.

I have seen people make this mistake in 2008 during Reliance Power’s IPO. People took loans, liquidated FDs to invest in the hottest IPO of that time. And what happened after that is known to everyone. Everyone lost money. Those who borrowed to invest lost much more than just money. They lost their sleep and faith in markets.

So, please understand that its not wise to borrow and invest in markets.

Even if you are 100% sure that markets will go up, please don’t borrow money to invest. If you do, I think it would be the biggest financial crime you can ever commit.

Note – Some months back, someone asked me just the very opposite question. I have a loan. Should I pay it back before investing? 

Seems like the question of this mailbag post is a side-effect of a bull market 😉

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Life @ 13.99%

Many people take loans for various reasons. Some take it  for unavoidable reasons and others for avoidable ones…or for ones which can be easily delayed, like vacations, purchase of electronics, luxury watches, etc.

But before you read further, I would request you to understand that I am not against those who take loans. Everyone’s needs and situations are different. Even I have taken loans in past.

Since last few days, the following image is popping up on the website of a large private bank whose services I use to conduct my financial transactions.
Personal Loan - Vacation
As you can see, the bank is telling you few important things…

First is that ‘Life is waiting’. And that is a fact. Nobody can be wrong by making such a statement. There are so many things to do in life that sometimes I feel one life isn’t enough to fully experience life. 🙂

Now second thing to observe is that the image above shows a couple enjoying vacation in Europe (probably). Now a decent European vacation for two costs around Rs 4 Lacs. This picture pops up just before one logs into bank’s website. Therefore, my assumption is that bank is showing this image to everyone irrespective of whether person logging into bank’s website is or isn’t a suitable candidate to pitch such visual advertising to sell loans for luxurious expenditures. 

It means that bank does not take into account customer’s past average balance, repayment histories before making the (very first) pitch for the personal loan.

Once again, I am not saying that one should not take loans. But vacation is something which can be delayed. Or should be planned well for. Vacations are generally not spur-of-the-moment decisions.

So it is better to plan for them from the very day the final decision is taken. Isn’t it? And some people actually don’t want to take loans for such discretionary spendings. They plan well and well before the day funds are actually required. Just sometime back, I received a mail from a reader to help him plan his funding of a trip to Dubai he wanted to gift to his wife.

For the time being, lets not judge whether what bank is doing is correct or not. Bank can anyways justify its marketing actions by saying that there are proper processes in place for approving loans to check suitability of candidate.

And they are right in saying this. They can also give an example that there are no checks on who sees the hoardings on sides of highways offering home loans for budget(!) homes costing 1+Crore. Once again they are not wrong.

This brings us to a possible conclusion that onus and responsibility of applying for loans of any kind lies with customer and not with bank. 

Bank only evaluates suitability of the applicant and then decides to lend or not to lend to him / her. Bank is there to lend you money for all your expenses. But it is for you to decide whether you need to take a loan for something which is as discretionary as a vacation, or something which has the potential to generate future wealth like property or commercial vehicles. 

Always have limits to how much you will borrow and for what reasons you are willing to borrow. Because eventually, this will be a major determinant of whether you will be rich or not.

By the way, I feel that banks are generally ready to give loans to those who don’t need it. What do you think? Also, if you have any stories about your loan related experiences which you think will be beneficial for others, please feel free to share the same in comments or drop me a mail at stableinvestor@gmail.com