Investing funds obtained from low-interest bank loans into an ETF with the intention of doubling the original amount? Could this strategy be a savvy financial move?

In the world of personal finance, making smart decisions is paramount. Pedro Andersson, a seasoned journalist, delves into these matters in his podcast "Contas-poupança". Released every Monday and Wednesday at 7 AM, this podcast is now available on all podcast apps, as well as on the websites of SIC Notícias and Expresso.

Recently, an episode of "Contas-poupança" titled "Vamos a Contas" discussed a strategy that has been on the minds of many listeners. The strategy involves borrowing additional funds, such as a loan, to invest in an Exchange-Traded Fund (ETF). This strategy, based on a property valuation increase and an anticipated historical average ETF return, could potentially be financially wise, but it depends heavily on several factors.

One key consideration is the expected returns of the ETF compared to the cost of the loan. If the ETF historically yields about 7% annually, and your loan interest rate is lower than this (for example, a mortgage or personal loan at 3-5%), investing the borrowed funds in an ETF could generate a net positive return over time. However, this is not guaranteed as market returns fluctuate and past performance is no assurance of future results.

Another important factor to consider is market risk and volatility. ETFs, while diversified and typically less risky than individual stocks, still carry systemic market risk that cannot be diversified away. Hence, the returns might not be stable every year, which introduces uncertainty to your financial plan.

Paying off a mortgage early is effectively a risk-free return equal to your mortgage interest rate. This "return" is guaranteed and eliminates debt, making it a safe financial move. In contrast, investing in ETFs is riskier but potentially more rewarding.

Other considerations include the loan terms and costs, the tax efficiency and costs of ETFs, financial stability, and risk tolerance. It's crucial to consider the interest rate, any fees, loan duration, and your ability to service a higher debt load. The borrowing cost should be clearly lower than ETF expected returns for the leverage to make financial sense.

In addition, ETFs often have low expense ratios (around 0.1-0.2%) and tax advantages over mutual funds, helping improve net returns. However, using debt to invest increases financial risk and stress.

Balancing the two strategies depending on your priorities and risk profile is often recommended. Paying off part of your mortgage with extra equity is a safer use of funds that guarantees an effective return equal to your mortgage interest rate and reduces debt risk.

However, before taking on debt to invest, consulting a financial advisor to model your personal situation and debt costs against market returns is strongly advisable. This ensures the borrowing is aligned with your financial goals and risk tolerance.

In the podcast, Pedro Andersson discusses these points and more, providing listeners with a comprehensive understanding of the strategy and its implications. Whether you're considering this strategy or simply looking to start your week off financially, "Contas-poupança" is a valuable resource.

[1] Investopedia. (2021). Systemic Risk. https://www.investopedia.com/terms/s/systemicrisk.asp [2] Investopedia. (2021). Exchange-Traded Fund (ETF). https://www.investopedia.com/terms/e/exchange-traded-fund.asp [3] Morningstar. (2021). ETF Expense Ratios. https://www.morningstar.co.uk/uk/tools-calculators/etf-expense-ratios [4] Vanguard. (2021). ETFs vs. Mutual Funds. https://www.vanguard.com/content/vanguard/us/insights/articles/etfs-vs-mutual-funds.html

Investing funds obtained from low-interest bank loans into an ETF with the intention of doubling the original amount? Could this strategy be a savvy financial move?