Taking out a prosper loan to buy stocks

[Shoe]

Link to my loan request.

I don't want to get in a huge debate here if I can get better returns on my stocks vs. the interest charged on the loan (i have dealt with enough of those questions at prosper). I have done my own analysis and decided that I am more than willing to take that risk. I understand I could potentially lose a good chunk of change here. But I won't lose everything, as I will buy atleast 5 differnt stocks with a market cap over 1 billion. They aren't going to all go bankrupt, and if that 1 in a billion chance hits, then so be it.

Here is the basis of the calculations I did to take on this loan request:

Assuming a $25k, 3 year loan at 12%, my total amount paid would be: $29,893.32.

Assuming the following average annual returns, I would end up with this much money:

6%: 29,917.01
10%: 33,704.14
15%: 39,098.60
20%: 45,328.80
25%: 52,518.68
30%: 60,813.38
35%: 70,376.25

I don't want to get too cocky, so I am capping myself at a maximum annual return of 35%, which I actually think is achievable based on my opinion of my stock-picking ability. That is up for debate, not doubt, but I am not going to get in a pissing war here about stock picking ability. My main question is this, if you only achieve average stock market returns (8 - 10%) (and I am only 28 so have time in my favor), is this loan worth taking?

I understand the stock market could crash in the next 3 years or the dollar could crash or whatever else, but what are your thoughts assuming a normal market? Thanks in advance!

[almostbusto]

the rate of the loan is 12% per annum correct? then don't you have earn at least 12% per annum returns from the market to turn a profit? am i missing something here or are your numbers way off?

[domer2]

To be honest with you, I think this is a horrible idea. Unless you're buying counter-cyclical stocks, the market is a couple percentage points off its highest level ever, so how much further do you expect it to go up?

Plus, you need to dollar cost average or you'll be screwed.

If you have inside information, go for it, otherwise I do not think this is a wise financial decision.

[Shoe]

[ QUOTE ]
the rate of the loan is 12% per annum correct? then don't you have earn at least 12% per annum returns from the market to turn a profit? am i missing something here or are your numbers way off?

[/ QUOTE ]

That number is correct assuming I would make my monthly "payment" towards my stock portfolio. However, I view this loan as a way of forcing myself to save each month (as otherwise I would only save that amount maximum of 6-9 month per year). If I have to pay a few points of interest to stop me from blowing money elsewhere, it is worth it to me.

[Shoe]

[ QUOTE ]
To be honest with you, I think this is a horrible idea. Unless you're buying counter-cyclical stocks, the market is a couple percentage points off its highest level ever, so how much further do you expect it to go up?

Plus, you need to dollar cost average or you'll be screwed.

If you have inside information, go for it, otherwise I do not think this is a wise financial decision.

[/ QUOTE ]

All I can say, is that as an average investor I completely agree with your analysis. However, I may be over-confident in myself and an almost certain I can beat the market, but at the same time, do not have the records to prove it. I feel like I have constantly picked great stocks over the years, but have never had the money to invest to prove it.

I have built up a solid 401(k) and Roth IRA, but have never had excess money to "play around with", thus the main reason I made this loan request.

My only investment is I bought a few thousand dollars worth of Nintendo (NTDOY) a few months ago at $36/share. I would have bought it a year ago at $18/share if I only had the funds.

I feel I am the T.J. Cloutier of the stock market. I don't do much math but i have an absolutely great feel as to what companies are going to be successful and which one aren't. I'm also still young so I know what trends are hot and which ones aren't (i.e. I can read through the hype on journalists trying to act cool).

For the main reasons stated above, I think I can beat the market. But even if I am wrong, is it worth it force myself to commit to saving the monthly loan payment each month? I otherwise would probably blow about half the payments and have nothing to show for it.

[domer2]

Well go for it man, but it sounds like you're persuading yourself into a get-rich-quick mindset. If the 5 stocks remain stagnant, this adventure will cost you a lot of money. If they drop a little bit, a whole lot more.

Yeah you're young enough to be able to take a risk like this, but at the same time, a risk like this can set you back financially a couple years as well.

[Shoe]

[ QUOTE ]
Well go for it man, but it sounds like you're persuading yourself into a get-rich-quick mindset. If the 5 stocks remain stagnant, this adventure will cost you a lot of money. If they drop a little bit, a whole lot more.

Yeah you're young enough to be able to take a risk like this, but at the same time, a risk like this can set you back financially a couple years as well.

[/ QUOTE ]

I agree with your post completely, assuming one thing: If I could commit myself to saving a set amount of money each month, I would not need this loan. However, since I depend on myself to transfer my own money to the stock market each month, If I would otherwise miss just one month, this loan makes it worth it for my future, as the one thing I won't mess with is my credit rating.

Even if my stocks stay stagnent, at a 0% return, I will have $25k in 3 years. If I don't take this loan, I cannot guarantee I will save $25k over the next 3 years. Does that change your mind at all?

[Pokeraddict]

NEVER borrow money to gamble. It sounds like that is what you are up to. With that said, if you must have you considered margin? It will cost less then 12%. If you are buying stocks that do not qualify for margin then you are taking a serious risk.

[Shoe]

[ QUOTE ]
NEVER borrow money to gamble. It sounds like that is what you are up to. With that said, if you must have you considered margin? It will cost less then 12%. If you are buying stocks that do not qualify for margin then you are taking a serious risk.

[/ QUOTE ]

I agree, but it's not like I'm buying penny stocks here. I am buying large-caps, worst case scenario i figure i lose 20%.

Also, I am not completely borrowing, I plan to invest on average $1,000/month into the market over the next few years. Intstead of doing that, i am taking out a loan, and my monthly payments are being used to repay the loan as a way of committing myself to a monthly payment towards my future.

[IdealFugacity]

Why don't you just set up a Vanguard index fund to automatically deduct money from your checking account each month if the prime factor hurting your returns is lack of discipline?

This doesn't seem like a good idea at all...