Monday, 9 July 2007

To Leverage or Not to Leverage

Since I'm only 23 at the moment, I don't have much experience in the world, and as such I have to rely on other people for information and advice. One area in which I've been given advice is in personal finance. I have a car worth AU$7,000 and in my bank I have $16,000.

Dad thinks I should put that money into a deposit for an investment property. I haven't done what he has said so far because I just don't understand why it would be a good idea. I need someone to fully convince me that borrowing to invest is the best way to go. Borrowing to invest, also known as leveraging, magnifies gains by allowing you to earn more faster. On the downside, if the property or share market turns against you, leveraging can magnify the extent of your losses.

I prefer to put my money in mutual funds or index funds as they usually allow for greater diversification rather than putting all your money into one company or one house. It is also safer to invest for the long term, e.g. ten years or more. The question is, should I borrow to invest in the mutual fund?

Further Reading: Leveraging Returns, Leveraging Risk

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