In June of last year (2022), I took out a loan to buy stocks. For a while, the unrealized gains and losses were negative, but recently it has been a year and the stock market has performed well, so I would like to share my experience.
Warning: Investments carry the risk of loss, including potential loss of principal. Leveraged investments can result in losses that exceed the original principal. Please carefully assess your repayment ability. This article is solely a personal experience sharing. The investment methods and instruments mentioned should not be regarded as financial advice or recommendations, nor do they constitute an offer, solicitation, invitation, inducement, suggestion, or recommendation for any securities or financial instruments.
Timing of using Leverage
On June 6, 2022, I borrowed one million NTD and bought 3,000 shares of 006208.TW (ETF tracking top 50 market cap companies in Taiwan) in mid-June and 5,000 shares of 006208.TW in mid-July. The total cost including trading fees (2.8% discount) was 546323 NTD, with an average cost of 68.29 NTD per share. On June 7th and 14th, I exchanged a total of 15165.66 US dollars (450,000 NTD, with an exchange rate of 29.67 NTD), and in mid-June I bought 75 shares of VWRA (an index ETF tracking global stock markets). In mid-July, I bought 81 shares of VWRA. The total cost including trading fees was 15129.14 USD, with an average cost of 96.98 USD per share.
What happened in June 2022? The Taiwan stock market fell by 10% from its high point in January, and the global stock market also fell by about the same amount. Note that this is the market! A market drop of 10% is a lot, not individual stocks. Actually, I forgot what happened. In any case, it was a time when no one wanted to buy stocks. Although after I bought it, it wasn’t until October that it was at its lowest point, and at one point the unrealized loss exceeded 10%. Seeing unrealized losses is certainly not a happy thing. I can hold on because I have faith in the market and believe that the market will rise in the long term. And one million NTD is less than my annual salary. I borrowed for seven years with a total cost percentage of 1.69%, and my monthly repayment is about 13,000 NTD. Even if the stock market does not rise back for several years, it will have no impact on my life. Even if there is a very low probability that I must repay immediately, I also have other stock assets that can be sold to quickly obtain one million NTD cash.
On June 6, 2023, the price of 006208 was 73.15 NTD per share and the cumulative dividend was 2.251 NTD per share; VWRA was priced at US$107.32 per share and the exchange rate was NT$30.65 per US dollar. In terms of Taiwan dollars, the value of 006208 including dividend is NT$603208; VWRA is NT$513139.85; a total profit of about NT$120000; a return rate of about 12%, far exceeding the loan interest rate. Some people will say that if you don’t sell it, you don’t really make money; it may still fall later; but I plan not to sell until retirement; just wait thirty years later to see how much the stock price is; there is a high probability that it will far exceed one million.
Precautions for Credit Loans
There are several precautions for credit loans:
- Interest rate
- Monthly repayment amount
- Early repayment penalty
Interest Rate
The interest rate is the cost of capital; it is impossible to borrow a credit loan with an annual interest rate of 10% and then invest in a financial product that earns 5% per year; this way you will lose more as you borrow more. Generally speaking, if you have good work and stable income, you can borrow credit loans with a total cost percentage within 2% in Taiwan. Because loans will have opening fees and handling fees etc., you need to look at the “total cost percentage” which includes all costs.
Monthly Repayment Amount
It’s best to extend the term as long as possible so that the monthly repayment amount will be low. In Taiwan, the monthly repayment amount will affect housing loans; generally speaking banks will require that the monthly repayment amount for housing loans be less than 70% of average monthly income minus other debt repayments for borrowers. So if you have plans to buy a house in the future it’s best to control your monthly repayment amount.
Early Repayment Penalty
Because we need to control our monthly repayment amount; if we need to reduce our monthly repayment suddenly, we can achieve this by repaying our credit loan in advance. But usually there will be a penalty for early repayment; generally speaking it is 3%, but everyone’s conditions are different and the penalty may be different. Line bank (in Taiwan) credit loans currently only charge a penalty for early repayment if it is less than one month; if it is more than one month, it is not charged, which provides good financial flexibility. Of course, everyone’s conditions are different, so when borrowing, you still need to pay attention to the contract; Line bank may also charge a penalty for early repayment in the future.
There is another advantage to not having a penalty; when the credit loan interest rate rises with the central bank’s interest rate hike, there is a chance to borrow new and repay old; the interest rate of the new loan may be lower than the interest rate of the old loan after the hike, saving capital costs.
Risks
Investment always carries risk; leveraged investment carries even greater risk; even if the probability of occurrence is extremely low, it still needs to be considered. Don’t let others win the lottery and make a fortune; we win the lottery and lose everything.
- Credit loan default risk: In case of being laid off by the company and temporarily losing income for several months, you still need to ensure that you can afford the monthly repayment amount. If you don’t have a job, you generally can’t apply for a loan from a bank; if you go through other channels, the loan interest rate will definitely be high; if you borrow it, you will lose more; compound interest is very scary.
- Interest rate risk: Taiwan’s credit loan interest rates are floating and will rise or fall with the central bank’s interest rates. It’s great if it falls, but if the central bank raises interest rates crazily, credit loan interest rates will rise accordingly and monthly repayment amounts will also rise.
- Risk of continued decline in stock market and long-term non-rising: It is normal for stocks to rise and fall; even if the market rises in the long term, this long term may be 20 years or 30 years; it is possible that it will not rise within 10 years. Just like Keynes said: “In the long run we are all dead.” People are dead, no matter how much stocks rise, it has nothing to do with us. Of course, we only invest when no one wants to buy stocks, and investing in index-type market ETFs has relatively low risk, but the risk is not zero.
- Risk of sudden need for money: The risk of having to sell stocks at low points due to sudden expenses. When borrowing money to invest, even more attention needs to be paid.
Conclusion
Investment and financial management have gains and losses; borrowing money to invest has the possibility of losing more than principal. Looking back now and seeing that I made a lot of money is of course happy; even buying an index-type market ETF still had an unrealized loss of more than 10% for a while. The mood at that time must have been uncomfortable; only when you really lose money do you know how much risk tolerance you have. Simulated trading is all fake; only your own money is money. Pay attention to risks when investing; pay more attention to risks when borrowing money to invest.