It was over a nice relaxing coffee session with a good friend of mine that we happen to chance on the topic about investments. I was rather animated and very excited (probably compounded by the fact I just had a double shot of espresso) about the great variety of bargain stocks currently available. She sighed and lamented the fact that she was saving for a house and thus had little spare cash to invest.
Raising the Titanic
Somehow I get the feeling that raising capital is a serious barrier to getting into equity investments. I calmly said it was never “Money No Enough”, but rather “Not Enough Effort”. My friend then had a look on her face that implied that raising the Titanic was probably a much easier feat than raising capital! In order to repay my friend for a cup of coffee she so generously paid for me, I decided to share how easy raising capital can be.
Here are some methods to consider:
- Personal Savings (0% interest rate) – Take 10% of your current savings to invest. It should be used rather than allowing it to sit idle in the banks drawing a miserable 0.2% annual interest rate and suffering losses from inflation. Seriously, most folks can hardly notice a difference with 10% less in their cash savings
- Father-Mother Loans (Usually 0% interest rate)- Seriously, most parents never ask their kids for interests on any loans (secured or otherwise). The only thing is that you need to justify your investments and learn to be prudent. These are afterall your loved ones hard earned cash. Did I mention interest free?
- Insurance Policy Loans (4% to 8% interest rate)- It is a capital raising tool that is frequently forgotten by most insured people. Did you know that you can borrow up to 90% of the cash value of your insurance policies? Hence, if you had a policy that is worth $10k in cash value (or otherwise known as surrender value), you can borrow up to $90k at 4% to 8% interest rate per annum. The good part is that you are still insured by your policy as you take this loan from your cash value. Superb!
- Credit Card Loans (Nett 4.5% interest rate) – There are cheap loans on credit cards available that allows borrowers to repay the loan in 24 months. These loans can amount to 2 times your monthly drawn salary and usually come disguised as “Interest Free Loans”. Just remember to read the font size 1 terms and conditions to calculate the nett interest rates.
- Housing Loans (3% to 6% interest rate) - This is a rather complex, but interesting capital raising tool for people who owns property. The key is to take a housing loan that is bigger than what you need. The excess funds will then be available for us pegged at the housing loan rates, which are one of the most attractive interest rates in town. While this sounds attractive compared to Lines of Credit loans or the complicated Car Loans, the complexity and paperwork is quite prohibitive for me. Only recommended for home owners with huge properties or numerous properties.
The above is listed in the order of preference with the following criterias:
- Low interest rates – the lower the better
- Low consequences in the case of default
- Long repayment period
- Ease of approval
While the list I mentioned is not exhaustive, it should get most people started.
My friend then proceeded to look amazed and asked why would she get herself in debt to invest? I then explained the reality. There is good debt and bad bebt.
BAD DEBT
Most folks can easily find money to buy cars that depreciate 30% in value the moment you drive out of the showroom, or fund holiday trips to exotic destinations only to be miserable for months to pay off the hotel bills. So anything debt that does not generate a positive return of cash to you can be considered bad debt.
GOOD DEBT
Taking a small loan/debt as a form of raising capital for good investments can be considered good debt. This is because a wise investment can bring additional cash into your pockets and increase your individual net worth. Hence a prudent investment can generate yearly returns from 10% to 20% from buying these investments! This is a trick used by the rich. Borrowing money to make even more money…
The assumption here is that she has the capacity (like a day job) to pay off the loan via installments over a 6 to 24 months period. Thus she would be taking a loan to invest. While she is paying off the loan, the investment would immediately start making money for her. So in a scenario where she makes 12% returns on the investment and she had to pay an average of 6% on interest due to the loan, she would have a nett a respectable income of 6% on her investment. This is in addition to the fact that she now owns a financial vehicle that will generate more returns in the years to come without having to lift another tiny finger.
Even in the event of the possible loss of value of the initial capital invested in a well chosen stock, the dividend should buffer the fluctuations, and also since you own the stock after 6 to 24 months, you do have long term holding power to wait for the value to rise to acceptable range again.
Stay tuned on what can potentially be a wise and prudent investment…
You are playing a very dangerous game with your investment advice..
Never ever borrow from things that charged interests to invest in stocks.
If things turn out badly and you lose 20-30% of your initial value, you still have to pay for the whole 100% loan… and from where would you cough up the shortfall from?
Hi William.
You may need to refer to some of my previous articles to understand the context to this advise. I do not condone speculation. I encourage investment. There is a subtle difference most folks can’t tell the difference.
My advise is on how to raise capital, and not about picking the right stock. As my article suggests, there are good and bad debt. If you have a house, you already have a good debt. So why can’t the same principle be applied to buying good stocks when the opportunity arise?
There are so many instances when you need cash when you see an investment opportunity only to lack the cash to fund the acquisition. It happened to me several times in the past, but with this strategy, I am in a much better position.
Let’s assume that you have a day job and able to service your loans. Most credit line loans are quite serviceable. However, let us explore your worst case scenario as an example.
SITUATION
1. Take a loan 5% interest rate payable
2. Pay loan in 12 monthly installments across 1 year
3. Equity (or share) reduce in value by 30%
Before we panic, let’s look at some issues which you might have missed:
1. If you had invested instead of speculated, a 30% loss is serious. Best to recheck your research into the company. Most blue chip shares are quite stable companies. Buying shares into mid cap or any others is more risky. If you are speculating, then good luck to you!
2. Since you still have your day job, you still have holding power. While it is only paper loss, you can hold on to your shares with no actual loss yet.
3. Since you can hold on to your stock, you will likely get dividends ranging from 2% to about 7% of your purchase value per annum. This revenue stream exist as long as you hold on to your stock.
4. In 12 months, with your dividends, you have already managed to offset the loan interest
5. Lastly, let’s not forget you already own the stock in 12 months. Every year you hold on to your stock, you will get dividends. Hence your paper loss narrows with each year assuming the capital loss remains at 30% for the next few years.
6. Most companies recover along with the economy. Assuming you chose the company to invest wisely. Hence with holding power, your stock is very unlikely to remain at 30% loss in value. Unless you did not do your research on your investment properly prior to buying the shares.
Again, in selecting stocks, read some of my previous articles on pricing stocks and getting them at a discount instead of a premiums. Hence, this is a calculated risk, but a risk no less.
Hope this address your concerns!