Taking out a prosper loan to buy stocks

[Chrisman886]

Ummm ... am I missing something here? If you're this desperate why don't you just go on margin? The worst rate out there is probably 10% and you can get probably around 8%. This is a terrible idea IMO.

[Shoe]

[ QUOTE ]
[ QUOTE ]

I definitely agree this loan is "thinking outside the box"

[/ QUOTE ]
Dude, seriously what the hell are you talking about?

[ QUOTE ]
But please provide me with some calculations on how much I would actually be losing out on. I don't think it would be more than 2-3k over 3 years maximum on average. And that is worst case scenario.

[/ QUOTE ]
Again, I have no idea what you're talking about, but if you think losing 2-3k is the worst case scenario here you might actually know less than I was giving you credit for.

[/ QUOTE ]

I'm talking about worst case scenario on average. I could always run bad and lose more.

[LegallyBlind]

worst case scenario on average. that is a new one for me.

im not going to spend much time in my response since it sounds like you already made up your mind. So ill just agree with others that this is a horrible horrible idea.

[captZEEbo]

okay, I'm going to try to illustrate why this is a bad idea.

First off, if you get the lump sum all at once, you don't get the benefits of dollar cost averaging. This basically means that if you happen to invest it at a time right before a big downswing, you can end up getting in big trouble. Dollar cost averaging works in your favor. wiki

Second off, your reason for being able to beat the market is really really naive. So I'm going to go ahead and assume at best you will match the market. Historical returns show it's about 8-10%, right? Then when you factor in taxes, you lose another 2-2.5% (assuming 25% tax rate) so it's like 6-7.5% yield (assuming historical returns). You are BORROWING at 12% to earn money at a rate of 6-7.5%. That means you are netting a -4.5 to -6.5% effective yield by using this strategy. That's assuming all goes well and you are matching historical returns, which not that many investors actually get.

Sure, you have a possibility to come out ahead, say if you outperform historical market returns by a decent amount. But how much do you have to outperform the markets by to make this a +EV decision? You need to BEAT 12% in after-tax dollar returns on the stock-market over a 3 year timespan. Just how hard will this be? Well you need to get returns of 16% on the stock market (assuming 25% tax rate) over the 3 years TO BREAK EVEN. If you are confident you can get 16% on the stock market, then you should go down to wall street and get a job in some sort of i-banking or hedge fund type job. You could be making millions of dollars if you knew how to pick stocks that get 16% over the long haul. There's a reason that job pays so much, because almost NOBODY can do it.

[Jeff W]

[ QUOTE ]
First off, if you get the lump sum all at once, you don't get the benefits of dollar cost averaging. This basically means that if you happen to invest it at a time right before a big downswing, you can end up getting in big trouble. Dollar cost averaging works in your favor. wiki


[/ QUOTE ]

DCA vs. Lump Sum

[captZEEbo]

[ QUOTE ]
[ QUOTE ]
First off, if you get the lump sum all at once, you don't get the benefits of dollar cost averaging. This basically means that if you happen to invest it at a time right before a big downswing, you can end up getting in big trouble. Dollar cost averaging works in your favor. wiki


[/ QUOTE ]

DCA vs. Lump Sum

[/ QUOTE ]by worked in your favor, I meant in terms of variance, not EV. I assume most people aren't completely blind to variance. Although OP might be.

Also...

[ QUOTE ]
Our study looks at the problem from a different perspective. Given a lump sum, is it better to invest the entire amount immediately, or spread it out in equal installments?

[/ QUOTE ]He doesn't have a lump sum. He's taking out a loan to get a lump sum. It's clear he shouldn't take out the loan then use it for DCA.

[Gildwulf]

This is the stupidest idea I've ever heard on these boards.

[polkaface]

[ QUOTE ]
This is the stupidest idea I've ever heard on these boards.

[/ QUOTE ]

Would you also say this if he changed "Stock market" to reinvest at higher interest rates on Prosper?

Just curious, if it is a stock market risk aversion or an "any vehicle" risk aversion.

[wdcbooks]

[ QUOTE ]
[ QUOTE ]
This is the stupidest idea I've ever heard on these boards.

[/ QUOTE ]

Would you also say this if he changed "Stock market" to reinvest at higher interest rates on Prosper?

Just curious, if it is a stock market risk aversion or an "any vehicle" risk aversion.

[/ QUOTE ]

I am going to answer for Gild. Of course not. If he was borrowing at 12% to lend at 18% we would call it arbitrage and I would consider it to be pretty clever.

The issue isn't risk aversion per se, it is the almost willful throwing away of money. Let's imagine an alternate universe where the historical return of the type of equity he is investing in was 20%. So he borrows at 12% and invests in an index fund. That would carry risk, but it would also be +EV. This is just a bad gamble and a bad risk

[Evan]

[ QUOTE ]
If he was borrowing at 12% to lend at 18% we would call it arbitrage and I would consider it to be pretty clever.

[/ QUOTE ]
This isn't arbitrage, not is it particularly clever.