I cannot stress enough that in a relationship, even if you don’t handle the investments on a daily basis or are very interested in it, learn at least the basics so you can ask informed questions. And to NOT feel like you’re asking stupid questions.
And that question probably has already been asked before by SOMEONE before, so don’t feel bad.
Sadly, it’s mostly women who are in the dark about the family finances, but it can go the other way as well as demonstrated by Ex and I.
This article really showcases why talking about money makes sense, and why you need to talk about these things up front and have it be clear from the beginning.
“CNNMoney.com — NEW YORK (Money) — Question: My husband and I work for a high-tech company, but we don’t have much in savings. My husband has been borrowing money to put into the stock market, but he has lost money for the past two years. I don’t think we should be doing this, but he says we need to take risks. What do you think? – Joan, Phoenix, AZ
Answer: First of all I think your husband needs to listen to you more. He’s right in saying that you have to take some risks if want to build wealth. But we’re talking about prudent risks. Risks that are very likely to pay off, like saving money on a regular basis, investing it in a diversified portfolio that includes both stocks and bonds and then riding out short-term drops in the markets so you can enjoy the long-term upside that the financial markets can offer.
But what your husband is doing is really more like speculation in my opinion. He’s gambling that he’ll be able to create wealth out of thin air by earning more on the money he borrows than he pays in interest to get that money.
I can understand why that may seem like a sure bet. After all, stocks have historically generated higher long-term returns than debt instruments. So your hubby probably figures that as long as he’s investing for the long haul, he’s assured of coming out ahead. The interest he’ll pay on his debt will be lower than the returns he’ll earn on the stocks.
But there are several flaws with his strategy. Aside from the fact that stocks’ higher returns aren’t guaranteed, the main pitfall is that we don’t live in the long term. We live day to day.
And as we’ve seen lately, the stock market can take some pretty frightening dives that may lead to losses in the short-term. And those losses can wreak havoc with your husband’s strategy.
Let’s say, for example, that your husband borrows $10,000 at an interest rate of 7 percent. If he invests that ten grand and earns 10 percent over the next year, he’ll have $11,000.
His loan balance at the end of the year will be $10,700. (In reality, he’ll probably have to make monthly payments, but let’s keep things simple.) So he could pay off the loan and come out ahead by $300. Hurray! Free money.
But what if stock prices decline by 10 percent? In that case, his investment account is worth $9,000 and he has a loan for $10,700. He’s now in the hole for $1,700.
Maybe he can just wait it out until the market rebounds and puts him ahead. But in the meantime, his loan is going to continue racking up interest and he’s going to have to make payments on that loan.…..
Of course, it may not come to that. Your husband’s plan could work out. But is it really worth embarking on this strategy for a gain that amounts to the difference between the loan rate and the potential investment return?
I don’t think so. It seems to me the payoff is rather small for the risk you’re taking. I suggest that you and your husband have a sit-down to discuss your finances.”
Read the entire article here.
So, grab a clue!!!!! 
- Reader Request: 10% Savings/Retirement & Where to put it (RRSP)
- Fabulously Broke’s Retirement + Investment Primer – Pt. 3: Find your inner investing Evel Knievel
- Fabulously Broke’s Retirement + Investment Primer – Pt. 5: The simple joy of the index fund
- Index Funds..and why I started
- Fabulously Broke’s Retirement + Investing Primer – Pt. 1: Terminology Basics
Mrs. Micah
on Dec 12th, 2007
@ 7:42 PM:
Borrowing to invest—that’s like 100% risk. Because even if the market goes up over the long term, that doesn’t mean it’ll go up in the time frame you need.
There’s smart risk (investing in general–preferably in index funds and the like) and stupid risk. This would be stupid risk.
And as you noted in your example, the payoff is $300. Yay for $300, but I don’t know if it’s worth that kind of risk. Surely her husband could find a way to earn that money in the time the whole investing deal takes. Unless he’s counting on 17% returns (which probably means he’s making even more risky investments).
Fabulously Broke in the City
on Dec 12th, 2007
@ 7:44 PM:
Mrs. Micah: Oops! I forgot the link back to the actual article. I didn’t give the answer. I just really liked his response.
But you’re totally right. Borrowing to invest = craziness…