Taking out a prosper loan to buy stocks

[icetonez]

[ QUOTE ]
I feel I am the craps playing T.J. Cloutier of the stock market.

[/ QUOTE ]

[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.

[polkaface]

[ QUOTE ]
[ 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.

[/ QUOTE ]

I agree, arbitrage is riskless, borrowing at 12% to loan back to others at 18% is not riskless.

[RicoTubbs]

[ QUOTE ]
To you Rico - OP mentioned using this as a savings scheme. So his non-invested money that he is using to pay off this loan is the money that he would be investing on a monthly basis (had he not taken the loan). So essentially he is trading a 25k lump sum to invest now in lieu of saving/investing 830.36 a month for the next 3 years and hoping that after 36 months his stock account is over $29,892.89 (cost of borrowing at 12% on Prosper). Any tax consequences of his investments are not of importance because OP states he would be using the money saved (monthly payment if he didn't take the loan) to invest anyway. The only way taxes might come into play is if OP is making tons of trades. But if he buys the stocks and lets it sit, he is actually saving a lot in commissions versus buying $800 in stocks each month.

[/ QUOTE ]

My issue is your original claim:
"What was it like a 6% compounded return he would have to achieve to make money on this?"

If he borrows at 12% or 13% and invests at a return of 6%, he will lose money. He will have to cover his losses by working and contributing excess money. No one with any understanding of economics would say that this is making money.

Suppose that OP is a firm with access to debt markets at 13% and a potential project that will earn 6%. Would you advise the firm to undertake the project by borrowing?

[bad beetz]

This is a terrible idea.

[bad beetz]

I'll take a 1K prop bet here as well, accountability will be tough. You don't actually have to invest any money to make this bet you realize....

[jba]

[ QUOTE ]
I'll take a 1K prop bet here as well, accountability will be tough. You don't actually have to invest any money to make this bet you realize....

[/ QUOTE ]

what do you mean by accountability? the bet would be that he just names the portfolio, like 100 shares of google and 500 shares of msft and we see if that gains 20% in a year. who cares if he actually buys them or not

[DespotInExile]

I am astonished that this has been 69% funded. I guess global liquidity apparently runs all the way down to the idiots who lend on Prosper.

To the OP:

In order to juice your returns, I recommend that you also do the following:

Roll your 401k/IRA money out, with a direct payment to you, thus triggering the tax consequences if you dont rollover into a conduit IRA within 60 days. During this 60 days, daytrade like a madman, and lever your exposures. Trade options, currencies, or commodities whenever possible. Then on day 59, rollover your profits back into the IRA to avoid tax penalties. My calculations indicate that you should be able to net 277% returns doing this, with below average risk. Remember to fully commit yourself to this venture, however, by quitting your job so you can concentrate on picking winners.

[bad beetz]

Yah if it's done in the method you say than it's easy to account for, although you still have to collect.

I thought he might want to make real time decisions throughout the time period, which would make it tougher.

[Nomad84]

[ QUOTE ]
To you Rico - OP mentioned using this as a savings scheme. So his non-invested money that he is using to pay off this loan is the money that he would be investing on a monthly basis (had he not taken the loan). So essentially he is trading a 25k lump sum to invest now in lieu of saving/investing 830.36 a month for the next 3 years and hoping that after 36 months his stock account is over $29,892.89 (cost of borrowing at 12% on Prosper).

[/ QUOTE ]

But this is not the correct way of looking at it, as numerous others have already mentioned. $830.36/month for 36 months is $29892.89. OK...big deal. Would you keep $30k in a non-interest bearing account? I hope not. The figure he has to beat to come out ahead is at least the amount he could get risk free by depositing $830.36/month into a money market fund or similar vehicle that carries virtually zero risk, yet yields 5% or more. Taking the low side estimate of 5%, after three years, you'd have $32,272.68. This is ignoring taxes, which in this case is not really correct since the gains will be taxed at your marginal rate, but I'm really just trying to illustrate the point that the money has opportunity cost. He'd have to get better than about 8.9% returns on his portfolio in order to end up better by taking the loan. But that's ignoring the fact that he is taking on risk to get 8.9% when he could make the same returns, essentially risk free, by setting up an automatic transfer each month into a high yield savings account or money market fund. More importantly (at least in explaining why this idea sucks), if he can get 8.9% on the lump sum, then in theory he should be able to get roughly 8.9% on monthly investments too. That changes the break-even point to approximately $34,165.22. Obviously, it requires higher returns (about 11%) on the loaned amount to match this final result. As you can see, you can bounce back and forth between calculating "targets" and "target returns" for a little while before converging on the true breakeven return. It turns out that the "true" breakeven point (assuming that he can get the same returns regardless of whether he takes the loan or not) is going to be above 12%, so stating that getting 6% or 8% or whatever is "like breaking even" is just plain wrong. Whatever that breakeven point is (I don't have excel or I'd figure it out), if he can truely beat that return, it would be better to take the loan. If not, and most of us believe this to be the case, he should just set up automatic transfers every month into his brokerage account.