Post #140 - Don’t buy equities with borrowed money

Part 6: Let’s emphasize the important stuff (cont.)

If I hear that you are even thinking of doing this, I’ll find you and beat you with a tree limb.

There are people out there who took home equity loans and invested the loan money in a hot stock market back in 2004.  That’s crazy.  When the market sunk in 2008 their stocks lost value, and their house lost value as well.  Double whammy.  They may have to sell the stocks at a loss just to pay back the loan.

If you have $50,000 in the bank and decide to sink the money into a few equity index funds, that’s fine.  If you then take out a car loan to finance the purchase of a fancy ride, that’s dumb.  The better choice is to use your money to buy the car (hopefully a second hand utilitarian car that’s not so expensive).  Nobody can guarantee that you will earn a return from the stock market that is higher than the rate of an auto loan.  That’s why you pay for the car with cash. 

Don’t buy stocks on margin.  Buying on margin means taking a loan from the brokerage house and using the money to play the market. Usually, the margin loan interest rate is pretty hefty.  Even if God himself comes down from heaven and gives you a great tip, don’t buy equities on margin.  It is way too risky.  If the market goes down (like in 2008), the brokerage house calls in the loan.  You have to sell all your stock plus a few relatives to pay it off.   Those stock brokers play rough when you owe them money.