How much leverage is safe in investing?

[RMA]

Given the conditions of your hypothetical, I for one would be interested in taking that bet. Let's be clear though, it would be a bet, as there have been plenty of 10year periods where equities didn't grow. I wouldn't bother at the 1m yen level, though, 1m dollars would make it more interesting. But as Kanto said, nobody will give you such a loan for investing, much less such a loan with an open-ended term, so the point is likely moot. But with an open-ended term, you could sell only when it's expedient for you to do so, so you would have a major advantage.

I also feel with such kind of loan arrangement, it is better to use it and buy index funds than refuse it.

Let's assume we have 10 million yen extra cash lying around at which we can earn 2.8% interest p.a. in bank deposit. Would we keep that money in bank deposit at 2.8% interest p.a. or we will invest in equity funds? I think it is better to invest it in equity funds rather than keeping it in a bank at 2.8% interest p.a. Then how it will be different than taking a loan at 2.8% interest p.a. and investing in equity index funds?

So my next question is how should I go with it. Should I just buy equity all country index funds / S&P 500 funds or there are other better and safer options. Unfortunately real estate is not a viable option in Japan.

[mighty58]

While I still find it difficult to believe that someone would be willing to give you an unsecured loan for investment purposes, open-ended, fixed rate low-interest, and without monthly or otherwise periodic repayments (just a lump-sum repayment at the end), then yes, your logic holds. Most of us on this board, myself included, invest under the assumption that in the long term, equity markets will go up, and most of us expect (hope) that it will return better than 2.8 p.a.. You could theoretically keep such a loan for 30 years, in which case (much like a fixed-rate mortgage) it could also serve as an inflation hedge. But again, such a debt product does not exist in the market.

[RMA]

While I still find it difficult to believe that someone would be willing to give you an unsecured loan for investment purposes, open-ended, fixed rate low-interest, and without monthly or otherwise periodic repayments (just a lump-sum repayment at the end), then yes, your logic holds. Most of us on this board, myself included, invest under the assumption that in the long term, equity markets will go up, and most of us expect (hope) that it will return better than 2.8 p.a.. You could theoretically keep such a loan for 30 years, in which case (much like a fixed-rate mortgage) it could also serve as an inflation hedge. But again, such a debt product does not exist in the market.

Whatever you said is correct except one thing that it is an unsecured loan. I will be a secured loan.

[mighty58]

Whatever you said is correct except one thing that it is an unsecured loan. I will be a secured loan.

Secured? What exactly would constitute a default then? If you have complete control over when to pay back the loan, and no interim payments are required, the only one who can declare a deafult is you yourself. Because you can essentially postpone repayment forever, the collateral is useless, so this basically functions as an unsecured loan.

I imagine the scenario you're referring to is some sort of family member offering to "loan" you money indefinitely, but unless the lender has some sort of recourse to demand repayment, the collateral serves no purpose, so this money is just a gift between family members with a loose (but ultimately unenforceable) promise to repay. I also imagine that the lending family member is not actually expecting the money back, but is superficially adding collateral and interest conditions to make it look "official" and avoid giving the lendee the impression the lender is an atm giving out free money.

[RMA]

Whatever you said is correct except one thing that it is an unsecured loan. I will be a secured loan.

Secured? What exactly would constitute a default then? If you have complete control over when to pay back the loan, and no interim payments are required, the only one who can declare a deafult is you yourself. Because you can essentially postpone repayment forever, the collateral is useless, so this basically functions as an unsecured loan.

I imagine the scenario you're referring to is some sort of family member offering to "loan" you money indefinitely, but unless the lender has some sort of recourse to demand repayment, the collateral serves no purpose, so this money is just a gift between family members with a loose (but ultimately unenforceable) promise to repay. I also imagine that the lending family member is not actually expecting the money back, but is superficially adding collateral and interest conditions to make it look "official" and avoid giving the lendee the impression the lender is an atm giving out free money.

Ok let's say I locked in my money in a fixed deposit and there's still time to maturity. Keeping that as a collateral I can take an immediate loan, wouldn't that be a secured loan?

Now the point is should I take out the loan at 2.8% and invest somewhere or it's risky and I should avoid it?

If I should go for it then where should I invest is my next concern. Should I put all in index funds (MF or ETF) or I should consider other alternatives.

[RetireJapan]

At the end of the day it is a personal decision. By borrowing money you are increasing your risk. You may end up increasing your eventual profit. You may end up losing the money invested and ending up with less than zero.

I guess you just have to ask yourself: do you like the odds? Are the possible positive outcomes worth the possible negative outcomes? Are you going to be comfortable with this strategy?

[captainspoke]

...
I imagine the scenario you're referring to is some sort of family member offering to "loan" you money indefinitely, ...

A loan to a family member is usually better thought of as a gift...

[RetireJapan]

Yeah, I don't lend people money. I will give it to them, or not, but there is no expectation of it coming back.

Much less stress on all parties!

[jcc]

I am not certain of anything but it is highly probable that equity index funds should yield more than 2.8% annually over a long period of time. If so then what is the harm in taking such a loan?

How long do you mean by long?

If you're talking 30 years, you're right.

If you're talking only 10 years though, the 1930s and 2000s in particular would like to have a word with you. So in 10 decades, we've had 2 that have insufficient returns.

Then if you correct for inflation I think you can also add the 70s, and the 60s are only barely safe.

I don't know how long your prospective time is, but if by "long" you mean 10 years, it's not long enough to be "safe". 30 years I suspect would be ok if you're able to get an interest payments only loan for such a long time...

[RMA]

I am not certain of anything but it is highly probable that equity index funds should yield more than 2.8% annually over a long period of time. If so then what is the harm in taking such a loan?

How long do you mean by long?

If you're talking 30 years, you're right.

If you're talking only 10 years though, the 1930s and 2000s in particular would like to have a word with you. So in 10 decades, we've had 2 that have insufficient returns.

Then if you correct for inflation I think you can also add the 70s, and the 60s are only barely safe.

I don't know how long your prospective time is, but if by "long" you mean 10 years, it's not long enough to be "safe". 30 years I suspect would be ok if you're able to get an interest payments only loan for such a long time...

By long time, I mean max 10 years. As you say we've got insufficient returns 2 times in last 10 decades so that also means we've got sufficient returns 8 out of 10. Inflation won't matter as taking a loan now will actually be advantageous in that case.

Suppose we've extra cash which we can put in a bank at 2.8% guaranteed interest then would it be prudent to keep it in bank or invest in the markets is what I want to know.