Investment – “Investment of economic value with a hoped-for future return” according to the dictionary. What is not there is that an investment almost always involves a risk, that you can lose some or even the entire amount invested. Despite the risk, many are willing to invest precisely because they have the chance to earn a return, that is to make money.
A basic rule is usually that you should never invest money that you do not have and that you should only invest money money that you would manage without, ie that you should not invest the money that will go towards food and bills etc.
This does not prevent people from borrowing money to investing them
Of course, using borrowed money for investments is an even greater risk than investing their own. If you lose your investment in whole or in part, when it comes to your own money, then of course it is sad but you survive and life goes on. At least as long as you have not invested everything you have.
If you instead borrow money that you then invest, and lose these, then you have double problems so to speak. A loan must always be repaid and in addition costs in interest. When the investment goes bad, it obviously becomes a worse situation because you have lost money that is not even your own.
Just because the borrowed money is gone, of course, you do not miss the interest or amortization on that money. These remain and will continue to cost you money. In other words, you are sitting with your bad investment that has lost you money plus the cost of your loan, which you now find it more difficult to repay.
That being said, it is not an impossibility to borrow money for investment and it need not be bad either. What I am saying is that one should be aware of the risk and that it is a somewhat unsafe way of doing things. It is simply better and less risky to use your own saved money for this purpose.
To weigh a loan against an investment
When comparing loans and investments over the whole, the interest rate on the loan should be weighed as a first step towards the annual return on the investment. This is a method that you can use, for example, when you have two options for saving. If, on the one hand, you can repay on, for example, your mortgage loan and on the other you can buy shares or funds for that money.
Amortizing the home is always good and it is a very safe form of saving when you take no risk. Each time you amortize, you also save the interest cost for the amortized amount. Thus, if the interest rate on the mortgage is, for example, 3 percent, an amortization equals that one would invest the money in something that has a 3 percent annual return.
Since mortgages are so cheap right now and the interest rate is around 1.5 per cent on average, it is thus often better to invest the money in cheap funds instead. There, the annual percentage rate of return is usually around 7 percent, so that’s a pretty big difference. However, the interest rate will rise enough in time and when that happens, each amortized krona becomes more worthwhile.
The disadvantage of investing the repayment money in funds instead of paying off the loan is that there is always a risk that that investment will go bad. It is conceivable that the value of the funds goes down instead of up and then they have lost X percent instead of earning, for example, 3 percent. On top of that, there is some uncertainty about future interest rates.
This is, of course, just one example that addresses how to do if you have money that you want to spend in one way or another. Then you have the choice between amortization and investment. It is a completely different thing to take out a loan to use for an investment.
When you borrow money to invest
It then becomes extra important to consider several factors such as the level of risk on the investment, expected return, the cost of the loan, its own financial stability, etc. Since the risk is higher and more factors are involved, you must also consider more things before making the decision.
Of course, one must keep in mind that a loan costs money. If you were to take a regular private loan of say 200,000 SEK with a plan to invest these to make money over the next 10 years, then you have to count on what it costs each month.
If we think of an example where you have 5 percent interest on your loan of SEK 200,000 with a repayment period of 10 years, it will be SEK 833 a month in interest (which then goes down slowly if you have a loan with straight amortization) and the amortization will be SEK 1,676 per month. A total of around SEK 2,500 is due out each month. You must be sure that you can manage this expense within your budget if there is a possibility to take out a loan at all.
It is best if you can borrow on your existing home
If you have a home that has little room to lend, it is the cheapest. Either because you have repaid much earlier or that you have re-evaluated the home and received a higher value. Then you usually have an interest rate of around 1.5 percent. Maybe lower. This means that you get a better starting position and your investment does not have to perform as well. You may even get a fairly long repayment period on this loan.
Private loans may have interest rates that start as low as 4 percent, but it is not easy to get the lowest interest rate if you do not have a very good economy. This means that there is a risk that you can only get a higher interest rate. The higher the interest rate you get, the harder it is to make a profit if you borrow to invest money. If you have an interest rate of, for example, 7 percent, investing in ordinary funds is not as good as they usually cut around 7 percent. Then the interest rate takes all profits.
Choose a safe form of investment with a high return
If you get a higher interest rate on the loan you would need to find an investment where you have a good chance of getting a higher return. Of course, you can do more with shares, but the risk level is also higher. However, there are many people who are good at investing in shares and who can beat the index quite a bit.
The important thing is to choose your investment method with care. It should be something where you have a reasonably low risk and a fairly stable return. Index funds are a good example of this as they rarely have bad years and returns tend to be stable.
When talking about investments, most of it is a matter of risk
It is never good to take too big risks and especially not when investing borrowed money. What you invest in should not be a mere chance. If you like casino games then you can bet money on gambling, which can go a little anyway. It is ok if you like the thrill of such games and there is a time and place for this, but it is best suited at the roulette table and not when investing borrowed money.
In order for it to be any idea to invest money that you have been forced to borrow (and have to pay interest on) you must have a good idea of how you can get the money to work for you so that you can make a reasonable return and earn money. If you are a keen and capable stock trader then this is obviously an ok way to go but otherwise you should choose a safer route.
In general, I would say that it is a bad idea to borrow money for an investment if you are not well acquainted with the type of investment you are considering and that you feel secure in generating returns in the area. If you are a beginner you should clearly first try to invest your own money so that you can learn and become good without taking too big risks.