Taking out a prosper loan to buy stocks

[Jeffmet3]

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And if you feel bad fo the people loaning me money on prosper, then you are the sucker, as I am going to pay back the money no matter how my stocks perform. I take great pride on my credit rating, and this is as close as you can possibly get to a guaranteed 12-13% return on your money.

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Think about it rationally. If this was literally no risk, you wouldn't have to be borrowing at 13%.

If you had saved up the capital, you wouldn't have to be taking out a $25,000 lon on Prosper.com to invest.

I wish you best of luck, but you're deluding yourself into thinking this is a no-risk great move.

[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.

[captZEEbo]

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Even if my stocks stay stagnent, at a 0% return, I will have $25k in 3 years.

[/ QUOTE ]But you paid $29,893.32 for that 25k.

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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?

[/ QUOTE ]Find a better way to guarantee you save the money then. I'm not sure what your job is, but there's things like automatic payroll deduction.

[Jeff W]

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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


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DCA vs. Lump Sum

[pureCra2z]

so you think you can beat the market by 12% + inflation rate (4%??) + the interest rate you can earn on your 25k? Lets say thats 15% total. You get 20% roi. thats 10k. 10k minus 7.5k leaves you with 2.5k. thats before taxes and stuff

[captZEEbo]

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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


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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...

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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.

[Shoe]

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Even if my stocks stay stagnent, at a 0% return, I will have $25k in 3 years.

[/ QUOTE ]But you paid $29,893.32 for that 25k.

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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?

[/ QUOTE ]Find a better way to guarantee you save the money then. I'm not sure what your job is, but there's things like automatic payroll deduction.

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I just have a few points to make against all the poster's in this thread. I might be being overly-defenisve, but I have yet to hear a logical arguement against my position.

A few quotes:

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Think about it rationally. If this was literally no risk, you wouldn't have to be borrowing at 13%.

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No [censored]. There is risk involved, that is why I am willing to pay 13%.

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If you had saved up the capital, you wouldn't have to be taking out a $25,000 lon on Prosper.com to invest.

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No [censored]. If I had the capital I wouldn't be requesting a loan on prosper.

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First off, if you get the lump sum all at once, you don't get the benefits of dollar cost averaging.

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I agree, dollar-cost-averaging is great, but that is only because the market goes up over time. If you invested in a lump sum at the beginning of your investing period, you would end up with more money, on average, than your dollar-cost-averaging method (For example: Investing 12k as a lump sum every January is better long-term than investing 1k every month).

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Even if my stocks stay stagnent, at a 0% return, I will have $25k in 3 years.
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But you paid $29,893.32 for that 25k.

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But I only need a 6% return to break even on my 12% loan. See my original post in this thread. Ok, that is not counting taxes. After taxes, I need an 8-10% return to break even on my 12% loan, depending on if I pay my 15% long-term captial gains tax or short-term ordinary income tax.

[captZEEbo]

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Even if my stocks stay stagnent, at a 0% return, I will have $25k in 3 years.
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But you paid $29,893.32 for that 25k.

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But I only need a 6% return to break even on my 12% loan. See my original post in this thread. Ok, that is not counting taxes. After taxes, I need an 8-10% return to break even on my 12% loan, depending on if I pay my 15% long-term captial gains tax or short-term ordinary income tax.


[/ QUOTE ]Okay, you need 8-10% to "break even", but that's not realistically breaking even. You need to "break even" with what you could have used the money for. You have to get 8-10% returns on the market (historical averages that most investors don't even get) to break even with STICKING YOUR MONEY UNDER THE MATTRESS.

Let's just say you could have deposited those prosper payments into hsbc and got 5%. Now you have to break even with THAT. So with your 8-10% investing abilities, you are still lagging sticking it in a savings account and earning 5% risk free AND no work income. (It's work to pick stocks and pay off prosper loans, set up prosper accounts, etc).

But since you are a stock guy, you have to be able to "break even" with a DCA strategy of just making those payments directly into the market instead of through the prosper middle man.

[pureCra2z]

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But I only need a 6% return to break even on my 12% loan. See my original post in this thread. Ok, that is not counting taxes. After taxes, I need an 8-10% return to break even on my 12% loan, depending on if I pay my 15% long-term captial gains tax or short-term ordinary income tax.

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so what if you break even or even beat it by a small margin. The point is you'll be making close to nada while taking a lot of risk. Why even post if your not going to listen to ppl with more experience. gbye.

[Shoe]

Also, this post is completely seperate from the main topic of this thread. I agree that how I plan to use the funds from this loan is up to debate, and is in no way traditional. However, from a lender's standpoint (at prosper) how is my loan possibly high-risk? I have perfect credit, and I'm not even going into debt to take this loan. If I run into bad times, I can simply sell my stocks to repay this loan. How is that more risky than taking out a loan to consolidate debt (nothing to sell there to come up with funds for the loan), or to start a new business (which if it fails there will also be nothing to pay back that loan). I think people are just hesitant to support me even though my loan is less risky than a car loan (cars generally go down in value where as stocks generally go up in value). Is that not a valid point?

Whether I can out-perform the stock market or not, I think I have a valid point. My loan is much safer than any loan a bank ordinarily will approve.