One of the great things about investing is the idea of leverage. Leverage basically means that your gains (or losses) are amplified by using borrowed money. For example, if you made an investment of 10,000 into the stock market and generated a 10% return, you would have 11,000 by the end of the first year. However, if you got a loan for 100,000 and used the 10,000 as a deposit with a 2% interest rate with the same 10% return, you would have 108,000 at the end of the year, assuming you paid 2,000 in interest.
This amounts to an 80% return on your 10,000 vs a 10% return without leverage. Pretty cool huh?
Leverage is something that is not for the faint hearted. Whilst it can amplify gains, it can also amplify losses so this is something to consider. However leverage has been used for decades and every house that has a mortgage uses leverage under the same principle.
Using Credit Cards for Leverage:
There are a number of credit cards in the UK that allow you to do a “money transfer”. This means you can transfer the credit limit off the card into your bank account. This money can then be used to invest in the share market. The cost of doing this “money transfer” varies but there are some providers who charge a flat 3% fee with over 2 years of interest free payments, as long as you make the min repayments. This means effectively you can get a loan for 1.5% annually.
Another way you can do this is to take out a card that has a promotional 0% interest free offer on purchases. You can then use this card to fund your regular living expenses and then invest the cash you would have spent on living expenses into the market. This might be a better alternative than paying the money transfer fee.
Historically, the S&P 500 has returned investors since inception an annualized return of 10% yearly. Assuming this continues, this means there is an arbitrage opportunity to make the difference between interest payments and the gains made on the investment. There are many low cost tracker funds available that allow you to invest in the USA or other global markets. I personally recommend Vanguard but there are loads available out there.
1. Borrow 5000 using a money transfer credit card, 3% fee and interest free for 26 months- I used the Virgin Money card but check what the best card is for you
2. Invest in a Vanguard Lifestrategy 100% equities fund (I wanted to diversify across more markets to lower risk)
3. Make the minimum repayments necessary to pay down the credit card. For this I setup a direct debit to ensure I don’t mess this up.
4. At the end of the 26 months, I will either sell the holdings or balance transfer the remaining amount to another credit card. There are a number of credit cards that offer 0% or very low balance transfers with long interest free periods
With this strategy, I can help this money compound over time without having to outlay a large amount of capital to begin with.
A few notes about this strategy:
1. As with all things investing, understanding your risk tolerance is important. This strategy does carry more risk than regular investing so you should consider if it’s right for you.
2. I wouldn’t borrow more than I am comfortable paying back in full. This will shelter me from any large downturns in the market where if the value of my investments goes down I can leave this in the market to recover over time. Time in the market beats timing the market.
3. I wouldn’t recommend investing in individual stocks, unless you are an expert. I personally choose low index tracker funds because they are well diversified across lots of different markets and sectors.