Is It a Bad Idea to Take Out a Loan to Start an Investment Portfolio?

In Short

Probably. I would generally not suggest taking out a loan to create a portfolio (although I did exactly that once).

The Investment Returns Cannot Be Counted Upon to be Higher Than the Loan Interest

It would make sense if the investment returns were greater than the interest rate on the loan.  You can not count on that being true. Over ten and fifteen year periods, it would usually be correct.  The market whips, cycles, and generally makes a fool out of the experts over short periods. There are often several year periods when the market is significantly down. The statistics get really fuzzy.

The Loan Interest is a Constant Drain

Meanwhile as you are waiting for years to make money, your loan demands to be fed. You have to pay the loan on a regular schedule. A line of credit has no schedule but instead has a very high interest rate. Do you have the financial resources to carry and payback that loan without the investments coming through?

Loans Add Financial Pressure

20 years ago I refinanced a mortgage and took out an additional $40,000 to invest. I had the ability to pay back the total loan over time but it was still a dumb move. I could have put additional pressure on my family. By luck, the market went up and I made money.

Fee Structure

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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