Leverage investing: Borrow big, retire rich

Yale professors say 25-year-olds should be in hock to the market



From the November 2008 issue of the magazine.


Turns out you’re not so loopy after all. Borrowing money to buy stocks in your 20s and 30s can give you nearly twice as much money by the time you retire as a conventional investor.

That’s the word from a study called Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk. The study, by Yale University professors Ian Ayres and Barry Nalebuff, argues that most of us have things backwards. Rather than load up on stocks in your 40s and 50s, you should start investing heavily in equities starting in your 20s.

How? By borrowing an amount equal to what you have set aside to buy stocks. For instance, a 25-year-old who has $5,000 to invest should borrow another $5,000 and put the whole $10,000 in a stock market index. He should do the same for another 15 years or so before slowly deleveraging in his 40s.

Following that strategy will, on average, leave you with 90% more money when you turn 65 than conventional investment strategies, and give you enough to comfortably finance your retirement until you’re 112. According to the professors, the worst-case scenario is that you retire with only 30% more than the conventional investor.

Why does the strategy work so well? Ayres and Nalebuff base their calculations on U.S. stock market data going back to 1871. Over that time the average return on equities has been 9.1% and the cost of borrowing 5%, leaving someone who borrows to invest with a 4.1% net return after paying off their loan costs. By borrowing to invest early, you make the most of that favorable math.

Ayres and Nalebuff argue that borrowing to invest while you’re young is actually less of a gamble than the conventional path of saving first, then starting to invest only in your 40s. Take that 25-year-old again. This year he may only have $5,000 to invest, but 20 years from now he might have $45,000 to put into stocks. Fine. But by investing nine times as much in 2028 as he is today, he’s unwittingly betting that the stock market 20 years from now will über-outperform today’s market. If he’s wrong, and the best time to snap up bargain stocks occurred when he was young, he has no chance to make up for the lost opportunity.

“At what point in their life people invest the most money isn’t based on any strategy. It’s based on the availability of money,” says Nalebuff. Most people wind up making their biggest stock market bets when they have the most money on hand, not when it’s necessarily the right time to invest. If you’re unlucky, you could plop your life savings into the market just before it slides. In contrast, borrowing money lets you spread the risk of investing over many more years. “So our way of doing things is actually less risky,” Nalebuff argues.

Well, maybe. “I see a lot of problems here,” says John Nofsinger, a finance professor at Washington State University and author of The Psychology of Investing. The most obvious one: sleepless nights worrying about how much in debt you are when the stock market falls. When that happens, most people panic and sell.

“I call that the behavioral bomb,” says author and financial educator Talbot Stevens. “It’s not that the math of leveraging doesn’t work out, it’s that human emotions get in the way.”So is leveraging to buy stocks a good idea? Unless you’re sure you’ve got the stomach to ride out the market’s downswings while carrying substantial debt, probably not. If you do decide to borrow, specifics matter. Using a traditional margin account at a broker means that if stocks fall, you may be called upon to put in more money or be forced to sell. A handful of lenders offer no-margin-call loans to buy mutual funds or seg funds. Another option is to tap into a home equity line of credit.

But don’t go overboard. Stevens suggests asking your bank how much money you qualify to borrow. Whatever that number is, take out a loan for less than half the amount. Or be really conservative and don’t go over 25%.

Either way, keep the loan small enough that it won’t keep you up at night worrying. If, as the Yale study suggests, you will still be living the good life at 112, you’re going to need your sleep.

55 comments on “Leverage investing: Borrow big, retire rich

  1. pay off your mortgage, don't borrow to invest. invest when mortgage is paid off. this is the canadian holy grail to the good life, spend less than you earn, live within your means.


    • Totally disagree. That is in my estimation perhaps the worse advice that can be given to someone. The biggest asset one has with investing is time… paying off your mortgage early can costs you millions of dollars in net worth. Now making sure your debt free before retirement… absolutely.

      Here is what we often suggest to clients. Make your mortgage payments over 25 yrs (bi weekly accel). This will of course pay your mortgage off within 20 yrs or so. Now again if you are less than 20 yrs. away from retirement adjust your timing).

      Take the extra available money (say $800/mth) put this in your RRSP (assuming you have the room). In a 40% tax bracket that means you will get $320/mth in refund. Put that refund on your mortgage.. which will of course reduce the amortization on the mortgage, and you will have contributed $10,000 (roughly) to your RRSPs per year over likely 15 yrs which will be significant amount in your RRSPs. You will have also "found" over $50,000 that CRA has refunded you that has gone directly on principal on your mortgage. That is what is called free money, or less taxes which is always good (in my view).


  2. Thanks for all your help, with me and my capital problems this specific post ended up being very useful !


  3. Many thanks for all your help, with myself and my money complications this specific posting was very useful !


  4. I am glad to be a visitant of this arrant website ! , thankyou for this rare info ! .


  5. I really appreciate this post. I have been looking all over for this! Thank goodness I found it on Bing. You’ve made my day! Thx again shes veture


  6. I simply had to say thanks once again. I’m not certain what I could possibly have used without the actual tricks discussed by you about such situation. It actually was an absolute challenging situation for me, nevertheless viewing the very well-written form you managed it forced me to cry for fulfillment. I am just happier for this service as well as sincerely hope you realize what a powerful job you’re providing training the others thru your webblog. Most probably you haven’t got to know all of us.


  7. Well ok Thank you for your entry, I don’t quite agree completely with it but I agree with it on the most part and I certainly applaud your effort in putting it so ably.


  8. Our company was the first in the USA to make inversion tables available on a nationwide bases to home users. We have also worked with orthopedic surgeons, physical therapists, chiropractors, sports medicine doctors and other health professionals since 1980. We have seen thousands of examples of inversion therapy helping people.


  9. Thanks for making the sincere effort to discuss this. I think very robust approximately it and want to read more. If it’s OK, as you achieve extra in depth knowledge, would you mind adding more articles very similar to this one with additional information? It would be extraordinarily helpful and helpful for me and my friends.


  10. I was just talking with my coworker about this the other day at the resturant. Don’t know how in the world we landed on the subject really, they brought it up. I do remember having a wonderful chicken salad with cranberries on it. I digress…


  11. When I originally left a comment I clicked on the notify me whenever new responses are added and now each time a remark is added I recieve several email messages with similar opinion. Will there be any way you are able to remove people from that service? Thanks!


  12. Thank you a lot for providing individuals with a very breathtaking chance to read from here. It really is so pleasurable and packed with a great time for me personally and my office peers to visit your web site on the least three times in a week to find out the latest tips you have. And indeed, I am at all times motivated with the astounding points you serve. Selected two areas in this posting are truly the most impressive we have all had.


  13. Needed to create you this very small word to be able to say thanks a lot the moment again for the lovely strategies you have discussed on this page. It is quite incredibly generous of people like you in giving without restraint all that a number of us would’ve offered for an electronic book in order to make some profit on their own, most notably given that you might well have tried it in the event you desired. These good ideas also worked as a easy way to recognize that some people have similar interest similar to my own to realize very much more regarding this problem. I am certain there are several more enjoyable occasions in the future for individuals who start reading your site.


  14. Hello, I just wanted to say I love your website. Tritus Insurance Group is recognized as one of the fastest-growing national insurance marketing organizations in the United States.


  15. I just wanted to type a message to be able to appreciate you for those fabulous items you are placing here. My incredibly long internet search has at the end of the day been rewarded with brilliant facts to talk about with my close friends. I would tell you that we website visitors actually are quite endowed to live in a very good website with very many marvellous individuals with good solutions. I feel somewhat lucky to have come across your web site and look forward to many more entertaining times reading here. Thanks again for a lot of things.


  16. Hello sweet post there. maintain it heading.I significantly like to browse your blog site.Very last of all have good night


  17. Pingback: Check out my facebook profile

  18. Pingback: Black Fridy Ads

  19. Pingback: poly mva

  20. Pingback: Sweaters Sale

  21. Pingback: microwave ovens news

  22. Pingback: bathroom scales

  23. Pingback: Kelloggs Coupons

  24. Pingback: The Bathroom Scales

  25. Pingback: Thewaterkettle

  26. Pingback: The natural haircolor

  27. Pingback: Buy Kratom

  28. Pingback: Acne Skin Care Product Reviews

  29. Pingback: Gold Party

  30. Pingback: Location Vacances Ile Maurice

  31. Pingback: Electronic cigarette Review

  32. Pingback: Mauritius Villas

  33. Pingback: Villas Ile Maurice

  34. Pingback: Online marketing agencies

  35. Pingback: Paralegal Courses

  36. Pingback: Wooden Dog House

  37. Pingback: make money online from home

  38. Pingback: how to make money from the internet

  39. Pingback: Associate Degrees Online

  40. Pingback: Location Villa Ile Maurice

  41. Pingback: Best Online Dating Sites

  42. Pingback: Mauritius Villa Rental

  43. Pingback: Cyber Monday

  44. Pingback: Stair Lifts

  45. Thanks for the sensible critique. Me & my neighbor were just preparing to do a little research about this. We got a grab a book from our area library but I think I learned more from this post. I am very glad to see such fantastic info being shared freely out there. low cost auto insurance


  46. Pingback: Cheap Personal Secured Loans

  47. Pingback: Lanyards

  48. C’est un particulièrement à ceux nouveau à la blogosphère .
    Simple précise informations … Merci pour partager celui-ci.
    A lire article !


Leave a comment

Your email address will not be published. Required fields are marked *