It might seem like a good idea to borrow and invest, but it is STRONGLY NOT ADVISED, especially if you are new to investing.
Remember, with investments, there is the risk of losing your money, depending on the type of investment you engage in. The investments with minimum risks are typically the government-backed instruments such as treasury bills and government bonds. Most others have some element of risk of loss of capital.
Now, if you decide to borrow 1 million at an interest rate of 15%, with the plan to invest in an opportunity that ‘promises’ 40%, you could be looking at a net gain of 25% right?
Now by mathematical standards, this is a good deal. Since we are being mathematical(wink), the problem lies in the probability of the ‘promise’ of 40% return on your investment.
With investments, the probability of an occurrence is based on a number of factors, some are within your control and most of the other factors are outside of your control. And just like you cannot be absolutely sure if it will snow on December 25th in New York this year, you cannot be totally sure that an investment will give the promised return.
If the investment in this example is successful at a return of 40%, you make a net income of 12% right? Not bad. But if the investment fails altogether, then your capital is lost, you are now the proud owner of a liability of 1million plus 15% interest. Not good!
I was sad when one of my mentors mentioned that her colleague is currently in jail. I was like, JAIL KE?! Yes. This colleague, let’s call her Justine, was given money to purchase a plot of land by a client but a friend(Zainab) informed her that the stock market was doubling in value at that time, which presented an ‘opportunity’ for Justine to quickly ‘borrow’ her client’s money, double it and take the return on the capital invested.
Justine, like many investors, got greedy and decided to take the risk. She somehow forgot that the stock market does not offer guaranteed return on investment. She also did not mitigate her risk, asking herself if the ‘investment’ failed, would she be able to pay back?
Justine took the plunge and doubled the money. She again was encouraged to wait a bit longer to increase her profits, which she did. Then the bubble burst and the stock market value dropped significantly, so much that Justine could not recover the original capital that she ‘borrowed’ from her client who wanted to purchase a property. Worse, she had no personal assets she could sell to give back the money ‘borrowed’. Her client was not impressed and reported her to the police and took her to court.
You can guess how she ended up in jail. If it was her money Justine lost, she would be very upset by the loss of all capital, but she certainly would not lose her freedom and be in jail right now.
Not everyone has such an
extreme case when it comes to borrowing money to invest, but I thought it might
be valuable to share this real life experience as shared with me.
What would you do if you found yourself in a similar situation like Justine
did?