Marc Cuniberti: Borrow to invest

Marc Cuniberti

Investors often ask me whether they should take out a loan, get a second mortgage, or pay off an annuity or life insurance to invest in the stock market.

Since many advisors are paid for the money under management and could encourage such a thing, I believe that accepting new loans to invest is unscrupulous behavior on the part of an advisor, with very few exceptions.

Because no one can predict market behavior with certainty, by taking out new loans or paying off an annuity or life insurance to invest in stocks, the client may be exposing them to undue risk.

As far as pension or life insurance is concerned, you would have to look at the contract terms. Perhaps paying out an annuity or life insurance policy is prudent in certain cases given the terms of the contract, but doing so to get them to market may not be in the client’s best interest, but rather in the adviser’s client’s interest. This is because funds from this liquidation, if managed with the advisor, could increase that advisor’s income.

As sworn trustees who only manage client funds in the client’s best interests, if I hear of such conduct I make a note of which adviser did it and catalog that information for future reference. Quite simply, suggesting that a client take on debt in order to plow it into the market is, in my stern opinion, very bad advice.

This is because the markets can actually go up, turning the debt into a source of profit in excess of the original amount of the loan and its interest payments. But markets can also fall. And these market ups and downs can go much further and last much longer than expected.

Imagine you take out a $100,000 loan and invest it and then the market falls hard and for an extended period of time like we are witnessing now.

Since the legal investment disclaimer states “You can lose money, including total loss of principal”, one must consider the possibility that he or she may not make money, break even, or possibly even some or all of the money loses. and then be on the hook to pay back money they no longer have.

Not a pleasant thought.

There are probably some advisors and investors who support this thesis and have encouraged their clients to take such actions. I believe that one should move far and fast away from the proposal to take out a loan to invest and from the person or company who proposed it.

A reasonable variation on this would be deciding whether to pay off a mortgage or instead hold it on the market. For reasons I can’t fathom, my brain doesn’t churn out that idea as violently, but I suppose it should. I guess I have my prejudices.

I would have to think long and hard about the mortgage question, see what interest rate the customer is paying on the mortgage, the term of the mortgage, and the investor’s financial situation and risk tolerance, and then move on.

That being said, there is one situation, at least for now, where I might extend my recommendation not to cancel loans and suggest investors take a look at the US government’s I-BOND, which I’ve written about a few times here in Money Matters .

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With a 100% capital guarantee and a 9.6% APR payment at this point, investors could consider an I-BOND and compare what it could pay with the cost of borrowing to fund it.

In terms of I-Bond terms, the interest rates paid are subject to change, a prepayment penalty may apply, and there are a few caveats, all of which should be known before you consider them. I suggest using the link above to my previous article to read a brief synopsis of the I-BOND, then going one step further and visiting for all the not-so-gory details.

However, the limitations compared to the opportunities offered by purchasing the I-BOND along with the government’s capital guarantee may make it one of the very few instances where a debt burden to finance an investment might be worth considering.

“Watch the markets so you don’t have to”

This article expresses the opinion of Marc Cuniberti and does not constitute investment advice or a recommendation to buy or sell any security, nor does it represent the opinion of any bank, investment firm or RIA, nor this media company, its employees, members or insurers. Mr. Cuniberti holds a BA in Economics with Honors, 1979, SDSU and California Insurance License No. 0L34249. His website is and was recently voted the top financial advisor in Nevada County. 530-559-1214

Virginia C. Taylor