The Chairman's Investing Tip #1

The Chairman’s Investing Tips

Tip #1  Never borrow money to invest

Every time the stock market goes up for a prolonged period of time, the question invariably comes up “should I borrow money at this low interest rate so that I can invest where I think I’m going to get a better rate of return?”  When people are making 10, 20 or 30% gains on their investments in the stock market or mutual funds, it seems only logical that you should borrow money at 7 or 8% interest and invest it.  The problem is, borrowing money always includes risk and if the stock market is stagnant like the past 2 years, then you are likely to not make any return and therefore lose money on the deal.  The other risk of course is that even in times of stock market growth, it is hard to guarantee that you’re going to pick a winner.  What if you picked Enron a few years ago? Or what if you picked Yahoo or Google a few weeks back before they lost significant value?  These companies seemed like good investments up until recently.  How would you like to be paying interest on stock that you bought for $5000 that is now worth only $4000.  Not only would you be losing what you’re paying in interest payments, but your net worth would also be going down.

There is one exception to this rule, a home.  For most people, the most costly investment they will ever make is buying a house.  It is almost impossible for most people to save up the necessary money to buy a house outright.  So borrowing money to buy it is the only logical way to accomplish the goal of home ownership.  Like any investment though, buying a house should be thought of as an investment process, not just buying something you like.  Some things that should be thought of when choosing a house include: Is this a desirable neighborhood in which to live?  Is this a town that is on its way up or down?  Are taxes likely to change significantly?  What are the chances or flood damage to this property?  The answers to these questions and more point to whether this house is a good investment or not.

So to sum up, when Uncle Charlie has a hot stock tip or some attractive swamp land in Florida to recommend, thank him for the advice start saving for when a real investment opportunity arises.