Gyroscopic Investing

HB frowned upon leveraged investing. I've been doing "semi-leveraged" investing for a few years with strong success.

What I've done is borrow money on credit cards, unsecured, at low promotional rates, usually 3% for 12 to 24 months. Then I put that money into the PP. I then pay off the loan in full when the promo rate expires and it would bump up to 20% or so.

Primarily, I've done this in order to take advantage of tax-shelters with time-sensitive investment guidelines. i.e. borrow $10k to use as living expenses while putting 100% of salary into a 401k, because otherwise I wouldn't be able to max out the 401k.

At a cost of 3%, I made a profit, in addition to the value I gained by securing tax-shelters that would have otherwise expired.

For example, I took out $10k at 3.5% for 1 year, to buy IBonds last month. The annualized rate will be just over 3.5%, and I locked in my 2010 IBond purchase that I would have otherwise not had the liquid cash to put into.

I figure that I'll use my future income to pay back the debt. So essentially it's just me investing in things before I earned the money. In my budget, I even allocate the debt to future months (i.e. when the promo rate expires).

The risk is that I lose my job. However, I only wind up borrowing less than 10% of my total portfolio, so I imagine I could pull from there in order to pay back the debt if I needed to.

Suppose both the portfolio was down, at the same time I lost my job, then I default on the debt, and the investments are primarily in creditor-sheltered accounts. It's not my plan to be an asshole and default on the debt, but it's a last-resort to me, that's not too terrible. I'll take $10k to nuke my credit for 10 years as a "worst case" scenario. (Sure the IBonds aren't creditor protected but I'd liquidate and use towards living expenses while undergoing BK, leaving only creditor-protected (under ERISA) accounts like 401ks and IRAs. I'd rate that as a 1% option since there's a 99% chance I'll be working  and able to maintain good paying work due to my skillset and background.

Note: ERISA won't protect you from fraud. If you borrow $30k on CCs to fund last years IRA, this years IRA, and this years 401k, then declare BK, if it looks like you fraudulently shuffled money there, the judge will disallow it. You really should legitimately only borrow money to invest if you can pay it off with future money before the promo rate ends, and if you have a secure job, and a large enough portfolio to buffer against risk. I wouldn't intentionally declare BK for $10k or even $20k. It's just not worth the hassle. I mention it as a last resort option.

Am I missing any real risks? Anyone else like this idea?

I would be careful...  All it takes is to miss the payoff by 1 day and a lot of these "interest free for 1 year" offers charge you the full year's interest at 21% or something ridiculous like that.

To me personally, the risk is too high.  I've seen people max out credit cards expecting to pay them off every month and then end up with huge interest charges.  It's not exactly a high risk, but who knows what might happen - you might end up in the hospital or traveling for work and just forget to pay it on time.

Storm wrote: I would be careful...  All it takes is to miss the payoff by 1 day and a lot of these "interest free for 1 year" offers charge you the full year's interest at 21% or something ridiculous like that.

To me personally, the risk is too high.  I've seen people max out credit cards expecting to pay them off every month and then end up with huge interest charges.  It's not exactly a high risk, but who knows what might happen - you might end up in the hospital or traveling for work and just forget to pay it on time.

That's a valid criticism. Some people try to "juice" the return by waiting until the last few days the monthly bill is due before paying. I pay it immediately once it becomes due, which is usually a 3 week window. Meaning I find out on Nov 1 that $X is due on Nov 18, and I pay it on Nov 1 just to give that buffer.

Back in the day with high MMF interest rates, and low-fee CC balance transfers, there were guys on fatwallet finance forum running tens of thousands of dollars like this, over dozens of credit cards. That would be a nightmare to keep track of making the minimum monthly payment.

In my case, so far, I've limited myself to 1 or 2 at any given time.