Tuesday, April 8, 2008

Borrowing cheaply to fund investments - Pt. 2

After a year of posting, I'm always hesitant in posting my ideas. Primarily, the ideas are met with some mixture of disbelief and outright anger. I don't quite understand why people are not capable of providing some coherent or rational additions to this conversation I'm having with the world. After all, the money I use in my ideas are my own, and I take nothing from any reader who themselves may feel far more risk-adverse than I.

But to answer anonymous questions, and as I stated yesterday, I will be adding the next portion of my analysis today, which is calculating true return I need, post taxes and brokerage costs.

As a starting point, I will use the 4.25% annualized rate from my calculations from yesterday. Short term gains are taxed @ 35% (assuming maximum tax rate). Brokerage fees for me are minimal, but I will say 1 cent per investment dollar.

Therefore: ($8,500 * 99%)*(1+0.65R) = $9,564.11

[translation: (Take Original funds and take out brokerage fees) * (Rate of return discounted by tax rate) and then solve for R to find the break even point for the loan]

where R is the required return for the duration of the 36 months.

R = 21.0%

Annual rate of return to break even is 6.6%.

That rate of return is not that tough to achieve, even just using index funds. However, I will add a third part to it tomorrow that may throw a wrench into this decision: investment funds are declining as I pay interest every month.


Anonymous said...

Do you need to add this new minimum annualized tax and brokerage cost covering ROI to your required minimum ROI to cover the fees and interest of the initial loan? 6.6% + 4.25% = 10.85% min annualized ROI to break even? I dont mean to be harsh I am just interested in the large challenge of beating the market by a lot in order to justify short term trading, especially with borrowed money at interest. I dont believe any single individual investor has really ever made any significant money after taxes, fees, time of research invested, etc, by short term trading. I could be wrong. I am interested in following your results. Thank you for continuing to share your ideas, and sparking converstation.

Finance Guy said...

6.6% is the total ROI required.