Shares are the best way to grow your wealth over the long-term in my opinion. Share markets such as the ASX 200 (INDEXASX: XJO) have returned an average of 10% per annum over the long-term.
Property investors often point to the fact that you can use debt to build your wealth quicker.
You could say the same thing about shares. You can borrow money to invest in shares and that would really accelerate your returns.
The benefits
Shares have made strong returns over the decades. The last decade was particularly strong. Why wouldn't you want to get more exposure to that wealth-building awesomeness by using debt?
Margin loans typically have a high interest rate. But, these days, interest rates are so low. Australia's interest rate is now at a record low. That means it's cheaper to borrow and we'd get a better net benefit, assuming the returns of shares don't drastically change because of lower interest rates. There are ways that you can borrow at quite a low interest rate which could also be tax deductible.
The problems
The debt must be paid off. Debt isn't free money, a lender isn't just giving you free shares, you have to pay back that loan at some point.
Interest rates can rise. It is very unlikely that interest rates will remain this low for the next decade. At some point interest rates could rise and shares could fall at just the time you may want to sell your shares to pay off the increasingly expensive debt.
Shares could perform poorly. There is no guarantee that your shares will go up just because you own them. Share returns are not guaranteed, but your debt obligations won't change if there is a market crash.
Your investment income is still taxable. If you're in a high tax bracket then a good portion of your gains could be lost to tax.
My answer?
I don't think the risks are worth the potential rewards most of the time except perhaps during an actual recession. Shares are often priced as though everything is perfect, or the world is ending. When the world seems to be ending, when shares drop more than 20% or more, could be a calculated time to use debt when the long-term rewards significantly outweigh the potential pain.
Debt is a dangerous tool that can cause everything to go wrong. I haven't used it and I wouldn't even consider the idea unless the world goes through a major downturn. But, it's up to each investor to decide their tolerance of risk and ability to weather economic dips.
