What are the Benefits vs Risks of borrowing to invest?

What are the benefits of borrowing to invest?

You may ask why you would want to hold a negatively geared asset if it is making a loss. There are two main reasons:

You may be entitled to offset any loss you make on one investment, against other income, resulting in tax savings.
Over time, the capital growth of the assets means that you can sell the asset for a capital gain that more than covers the losses over the time held.
Other benefits of borrowing to invest can include:

If the investment is positively geared you have access to a passive income stream that can provide you with greater lifestyle choices
By borrowing to invest the capital growth potential of your assets is greater because of the greater capital base to begin with.
 What are the risks of borrowing to invest?

While the benefits of gearing into an investment are attractive, there are risks which you need to consider:

Borrowing to invest can increase losses if the value of the investment drops significantly.
You could be subject to a margin call if you have borrowed through a margin loan (explained in more detail on the margin loan page).
By borrowing to invest in one asset such as an investment property, you may be reducing your exposure to a diversified investment portfolio.
You may have limited access to your funds, if your investment is large and illiquid such as property.
As long as you are aware of the risks you can be prepared to manage them or wear the consequences. If you are unsure then talk to others or get some advice.

Capital protection is no guarantee

Capital protection does not mean you can't lose money. If markets decline such that you need to exercise the put option, you will lose the money paid for borrowing costs and the put option premium. This limits the downside to a known amount but does not eliminate loss altogether. If you want to eliminate losses due to sharemarket falls altogether, then stay with term deposits.

Near or at-the-money put options for high-dividend shares over the medium term being considered in this article, particularly given current market volatility, are generally expensive. The additional costs can erode the potential gains that were the initial purpose of the strategy.

Protection strategies became topical after some investors experienced difficult margin calls during the GFC. This may be an overreaction. The yield strategy outlined in this article is based on a modestly geared, reasonably diversified portfolio of blue chips with a record of earnings and dividends. Even precipitous falls similar to those in 2009 are unlikely to result in a margin call for this style of share portfolio.

More importantly, all investment strategies, whether term deposits or shares, should not be "set and forget". Certain strategies require more monitoring and adjusting. In a gearing strategy, a margin call is an "automatic adjustment" of last resort. Investors should consider setting portfolio review points.

As gearing drifts from the 50 per cent target up to 60 per cent, for example, a review is triggered, potentially resulting in a decision to reduce the loan by selling shares. A fall to 40 per cent gearing would trigger a similar review.

Competition for term deposits has created some very attractive safe havens for investors' cash. Financial markets have moved on, interest rates are down, and dividend yields may again be attractive.

What Is Margin Lending?

Margin lending involves borrowing money against shares you own - in order to purchase more shares. In effect it enables you to build a portfolio where, depending on your specifications and the financial institution, your borrowing level can range between 30 - 80 per cent of the portfolio's value.

Once the investor specifies how much of the portfolio they want to leverage, a loan level is set to buy shares up to that leverage level, and interest is payable on that sum. Financial institutions set minimum loan levels for margin lending.

Teach Children to save for money goals

 Once they realize that there’s more to money than just spending on whatever their latest impulse is, they’ll want to buy something larger than the amount they have on hand. That’s when you teach them about savings goals.

“You want to buy an Xbox 360? Well, let’s find out how much that costs. Now that’s how much you’ll need to save. If you take $40 from your monthly budget, you could have that in 5 months. If you take $60 from your monthly budget, you could have it in a little over 3 months. But either way, that will mean cutting back on McDonald’s and buying little toys every weekend.”

You might also create a chart on the computer, that shows their goal, and little savings milestones along the way. That way they can get excited about watching their savings grow.

What are the nonsurgical treatments available for herniated discs?

Your doctor may prescribe nonsurgical treatments including a short period of rest followed by anti-inflammatory medications, physical therapy and/or epidural steroid injections. The goal of nonsurgical treatment is to reduce the irritation of the nerve root from the disc herniation and to allow your body to slowly resorb the disc fragment.
Narcotic medications are not used for the treatment of disc herniations, as they do not reduce the inflammation of the nerve root. However, they may be used on a very short-term basis to help with the pain that is associated with disc herniations. Muscle relaxants and over-the-counter, nonsteroid anti-inflammatories (NSAID's) may also be used.

Lenticular cloud over Litla Dimun Island

Menorca, Spain