Investing on credit and Sods Law
Yesterday the FTSE 100 Index closed at 5,731 which represents a gain of around 70% over the last 3 years and virtually its highest point for five years.
Last time we had such a stock market boom was during the technology bubble when thousands of investors got their fingers burnt. At that time many investors funded their share purchases with credit cards, loans and extending their mortgages – and the result was financially catastrophic.
Could it happen again? Yes it could. In fact there are signs that history is repeating itself! In the past month, financial advisers have been receiving calls from aspiring investors wanting to buy stocks funded by credit. This is very dangerous. Stock markets can move down as fast as they move up and if you’ve financed your stock purchases on credit, you can be left nursing large debts you cal ill afford. Gains are not guaranteed. It’s usually novice investors who take these risks and it’s precisely these investors who are often least able to survive a financial setback.
Our view is that you should never borrow money to invest. Yes, you could make a lot of money if the market performs as you are expecting – but have you heard of Sods Law? This basically says that if something can go wrong it will and at the worst possible time.
You have been warned!
