Folly or fortitude?

[Biscuit]

Ok its a start but to move to the next level here is how it should have transpired.. get your wife/husband/teenager to do the house work and go down the road to Mr. and Mrs. elderly and do their work for $100 cash. Or go back to work and write an app that you can sell for $3 a pop. But good work and I hope you used a watering can and water on the trees.

The wife was helping with the watering (buckets); I don't have a teenager available; I would not enjoy doing someone else's housework; and I have never knowingly used an app, let alone written one.

[BIRMANBOY]

The problem I have with your posts is that they convey the concept that if you "put in the effort and sacrifice" "the pathway to wealth is certainly much easier and you will be retired a lot earlier than 70". Now you maybe the archetypal individual this concept is based upon but common sense tells me that individual situations should not be used as blanket pronouncements on what is or is not possible. Just because you say it is possible doesn't necessarily mean that the concept should be thrust out there as a reasonable and achievable goal. Even if they follow your exhortations of effort and sacrifice...most people will not "make it"....so why keep pumping it out as it is. Why not a more warts and all with the disclaimer that "customer satisfaction is not guaranteed". By all means give people hope but have it be accompanied by realism.

In my experience, most people find it extremely difficult to get their head around the concepts required to "be good with money". They are psychologically averse to the concept the book is promoting. But its an attitude thing not an intellect thing. So yes, in reality they will have to work hard at their job until they retire at 70 in order to fund their lifestyle because they are not the type of people who can delay gratification. But for those who are prepared to put the effort and sacrifice in to learn how to invest their money, the pathway to wealth is certainly much easier and you will be retired a lot earlier than 70.

[BIRMANBOY]

OK the Devil (sorry Satan) is in the details but you get my whimsical idea.

The wife was helping with the watering (buckets); I don't have a teenager available; I would not enjoy doing someone else's housework; and I have never knowingly used an app, let alone written one.

[Vaygor1]

I'll never understand why ppl borrow in nz at 8 percent when you can borrow overseas at a fraction of the cost

It does. But you are held hostage to the whims of the forex market. I'd only borrow offshore in order to buy offshore assets, keeping everything in the same currency.

ZB3.

If you are saying that you can borrow NZD at cheaper interest rates (maybe available in Australia?) to buy NZ domiciled shares then I agree with you.

But if you are talking about borrowing in a different currency than in which the shares are domiciled, as you appear to be saying, then I disagree. KW's reasoning is sound.

When one goes into heavy debt to fund share purchases, then one can't afford to get it wrong. There is just too much at stake. It is a situation where it is highly imprudent to take any more risk than necessary. And Forex is one such risk that can easily be removed even if a higher interest rate results.

If one was to borrow overseas in the above scenario, then I would consider them unwise.

Swapping out a known risk carrying a high potential variance (ie Forex) for a risk-free quantifiable cost is a concept most people seem to grasp.

[zb3]

ZB3.

If you are saying that you can borrow NZD at cheaper interest rates (maybe available in Australia?) to buy NZ domiciled shares then I agree with you.

But if you are talking about borrowing in a different currency than in which the shares are domiciled, as you appear to be saying, then I disagree. KW's reasoning is sound.

When one goes into heavy debt to fund share purchases, then one can't afford to get it wrong. There is just too much at stake. It is a situation where it is highly imprudent to take any more risk than necessary. And Forex is one such risk that can easily be removed even if a higher interest rate results.

If one was to borrow overseas in the above scenario, then I would consider them unwise.

Swapping out a known risk carrying a high potential variance (ie Forex) for a risk-free quantifiable cost is a concept most people seem to grasp.

You can borrow in nzd at cheaper rates through interactive brokers, but my main proposition was to borrow USD and invest in US domiciled stocks. I disagree that it is more risky, in fact the lower interest rates make it less risky. You need to consider that stock purchases are for the long term. Currently the nzd is relatively strong historically against the usd. Even if the nzd were to strengthen another 20% (unlikely given the gov will go to hell and back to prevent this) this would only result in a 20% forex loss for an investor investing in US domiciled stocks. Nzd margin rates are around 8% from asb, however you can leverage using s&p emini futures on the US market for an implied interest rate of 0.4%. This is highly diversified - much better than borrowing in nzd for individual stocks, and is 7.6% lower interest per year. You do the math and see how long it takes to make up the worst case scenario of a 20% forex loss. To be honest, chances are you'd receive a forex gain as the nzd is strong at the moment and is likely to drop, as it has been recently. The futures example is an extreme example and not advisable due to taxes. The most efficient tax wise method of leveraging for an nz investor is through leveraged etfs, these have a management fee of .9 % plus an implied interest rate similar to futures so 1.4% total. Add on the tax disadvantage and you are still easily saving 4% net a year. Seems like an easy choice if you ask me. If you are so worried about forex just hedge it, instead of paying ridiculous nz borrowing rates.

[Vaygor1]

You can borrow in nzd at cheaper rates through interactive brokers, but my main proposition was to borrow USD and invest in US domiciled stocks. I disagree that it is more risky, in fact the lower interest rates make it less risky. You need to consider that stock purchases are for the long term. Currently the nzd is relatively strong historically against the usd. Even if the nzd were to strengthen another 20% (unlikely given the gov will go to hell and back to prevent this) this would only result in a 20% forex loss for an investor investing in US domiciled stocks. Nzd margin rates are around 8% from asb, however you can leverage using s&p emini futures on the US market for an implied interest rate of 0.4%. This is highly diversified - much better than borrowing in nzd for individual stocks, and is 7.6% lower interest per year. You do the math and see how long it takes to make up the worst case scenario of a 20% forex loss. To be honest, chances are you'd receive a forex gain as the nzd is strong at the moment and is likely to drop, as it has been recently. The futures example is an extreme example and not advisable due to taxes. The most efficient tax wise method of leveraging for an nz investor is through leveraged etfs, these have a management fee of .9 % plus an implied interest rate similar to futures so 1.4% total. Add on the tax disadvantage and you are still easily saving 4% net a year. Seems like an easy choice if you ask me. If you are so worried about forex just hedge it, instead of paying ridiculous nz borrowing rates.

Thanks ZB.
I appreciate your response and info which I will digest/absorb and look into further.
It does sound like we are aligned insofar that as long as the forex risk is managed in achieving lower carrying costs then it can be taken on board.
Certainly doesn't look like a problem when the portfolio is sizeable enough and there's reasonable equity in both it and the family home.

[BIRMANBOY]

We appear to be talking at cross purposes. Either your post was lacking in sufficient detail or I misinterpreted it...either way, my apology if you are "not quite sure what I'm saying" Your post #42 said...[This is the point of the "Rich Dad Poor Dad" series of books - No you don't need to "go to school, get a good job, work hard" to be successful. Its easier, and faster, to just be good with money. And that is my experience too. My interpretation of that was that you were championing the theory that it was sufficient to be "good with money" and that "go to school, get a job, work hard was a relatively unimportant issue. Trying to encapsulate a series of books in a couple of sentences can have its problems. In saying that I do certainly agree with what you say in your last post.

I'm not quite sure what you are saying. Do you really think that people who save their money and invest it will end up worse off than people who don't save their money and spend it all? I am pretty sure that "customer satisfaction" is indeed guaranteed for the former in that they will be immeasurably wealthier at the end of their lives than the latter. Saving money is a reasonable and achievable goal for everyone, its not some special talent reserved for those on six figure incomes.

[BIRMANBOY]

So refocussing here on the most crucial element which to my mind still has not been sufficiently proved. Does the gain realised from borrowing to fund the purchase of shares outweigh the counterbalancing negative effect of compounding debt. Remembering that compounding magnifies the debt beyond its initial impact. Further also a recognition that a single event borrowing is visible and measurable but long term debt usage becomes much harder to measure. Also some recognition that there is no such thing as a "sure bet" and it would be unreasonable to expect that every excursion into this type of investing is going to be successful. Several successes do not guarantee continuity into the future.

[Biscuit]

So refocussing here on the most crucial element which to my mind still has not been sufficiently proved. Does the gain realised from borrowing to fund the purchase of shares outweigh the counterbalancing negative effect of compounding debt. Remembering that compounding magnifies the debt beyond its initial impact. Further also a recognition that a single event borrowing is visible and measurable but long term debt usage becomes much harder to measure. Also some recognition that there is no such thing as a "sure bet" and it would be unreasonable to expect that every excursion into this type of investing is going to be successful. Several successes do not guarantee continuity into the future.

In my more whimsical moments, I've viewed investing as being much like building a boat. The hull is your equity and the sails are your debt. The object of the exercise is to optimize the design over time and trim the sails for maximum velocity without capsizing.

[Vaygor1]

So refocussing here on the most crucial element which to my mind still has not been sufficiently proved. Does the gain realised from borrowing to fund the purchase of shares outweigh the counterbalancing negative effect of compounding debt. Remembering that compounding magnifies the debt beyond its initial impact.

It sounds like you have almost answered your own question. Borrowing to invest will simply magnify/amplify the end result be it positive or negative.

Several successes do not guarantee continuity into the future.

Agreed. There are never any guarantees. But which surgeon would you choose to improve your odds? The one with a good track-record or the one without?