Young investors: Forget all the conventional advice you've heard about paying down high-interest debt before you invest. A much better plan is to get a loan pronto and pile into the stock market now; you'll be able to pay the money back later.
That's what the contrarians over at Slate are telling 20-year-olds this week. Author Tim Harford's argument hinges on "generational risk": When investors are young, they have little money, therefore almost no exposure to the stock market. In middle age, they're on the hunt for high returns, but as retirement approaches, they become conservative again.
Slate's solution:
"The logical way to fight generational risk is to borrow money to make large, regular investments in stocks while young, then use a proportion of later savings to pay back the loan rather than to pile into the stock market in middle age. That sounds risky, but it is, in fact, exactly what people do in the housing market. Knowing they will need a place to live all their lives, then tend to buy a small house and gradually trade up to a bigger one, paying off their mortgages only later in life...Most of us need a retirement fund as well as a place to live; there is nothing intrinsically risky about regular borrowing to get that fund off to an early start."
I'm all in favor of early starts. Just this morning, I was thinking about how smart it would have been to invest the $10,000 I saved during college (Instead, I used it to fund my living expenses during low-paying internships in New York and Washington, D.C.)
But leveraging your financial freedom--especially when you're just getting going--seems like a terrible idea. Many of Slate's readers agree. This one makes a good point: "You have to pay your debts each month...But the return on stocks is realized over decades, if at all. Most gains and losses in the stock market occur in fits and starts."
Do you think going into debt to invest when you're young is a good idea?
anonymous @ Nov 19, 2008 23:52:13 PM