Borrowing cheaply to fund investments - Pt. 3

The final piece of analysis for my cheap loan for investment idea is to consider a classic value-at-risk model. What is the worst case scenario, and could I handle it?

After paying out the 0.50% monthly interest, assuming the very worst, I would need a 28.8% return in the last month to have enough money to pay back the loan + fees and break even.

I think I can accept that. If I become super risk-adverse, I could generate about 2-3% return per month with the possibility of needing to shell out $2,000 at the end of 3 years to pay back the loan.

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.

Borrowing cheaply to fund investments - Pt. 1

Yesterday I talked about the possibility of using the cheap loans banks have been offering to fund investments. Based on an offer of $8,500 for either a 6-month loan at 0.99% or a forever loan at 6%, with a 3% fee on each, here are the numbers:

Instead of accounting for the "forever" loan, I just assumed a 36-month loan. Taking into consideration the interest rate and fees, choice 1 is clearly the lower costing loan.

However, just because the dollar cost is lower doesn't mean it is actually better. The 36-month lower has a lower required return rate of 4.25% compared to a return rate of 6.78% for the 6-month loan. Risk is increased greatly whenever higher returns are required in a shortened time frame.

While either return rate is doable in a normal stock market, given the current economic environment, I am leaning toward a longer time horizon. The smaller per month payment also allows me to payout of my pocket earlier on, before I've started generating any real investment income.

Tomorrow, I will work out what I need to make in order to make this venture worthwhile.

Risk-based Wealth Accretion

Creating wealth has always involved some combination of risk and luck. This weekend, I had one high luck event and an unrelated opportunity for a high risk event.

My lucky event was that I went to the local casino, threw some quarters into a slot machine, and had it spit out 10,000 quarters. That's $2,500 for those of you without calculators. This is a nice boost to my bank account and to my overall poker fund.

My high risk event came in the form of another "use this check for anything" offer. They are providing me $8,500 at 0.99% interest for the next 6 months, or 6% APR for the life of the loan. Additionally, they will be charging a 3% fee.

While normally I discuss that these fees prevent any good use of the close to free capital, I think the stock market is at a point where I could invest short-term with the funds and make some good returns.

I will be spending the next few days hashing out the details here, and making a decision by the end of the week.

Networth Update - 6 month restatement

Wow, thanks to the watchful eye of a reader, I feel like one of the major banks, and I now have to restate my networth. Apparentally, I had been neglecting to count card #6 in my liability figures. Instead of calculating out exactly the amount for the past 5 months, I have gone back and subtracted $5,500 from each month's networth statements. For this month, I have now corrected to the correct networth. You can see these changes on my linear estimating chart on the bottom of this post.

Month over month, I am still doing the same relative amount of growth in my assets, but of course, I am actually further from my goal than I thought.

My current netorth is -$11,875.79 or -1.19% from my goal.

So rather than being 3 months away from positive networth, I am actually about 12 months away.