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I need help; I am what I don’t want to be. This is wrong and I am very confused. At countless lunches, dinners and at coffee breaks, I have ranted against hedge funds, banks and anything that comes with it. The guys that run these hedge funds are heartless, greedy and selfish. All they want is to make large amounts of money, own huge houses and are never satisfied. They and the banks that supplied the money to leverage their trades are responsible for everything that went wrong in our economies. An average hedge fund borrows 400% and can make a fortune with very little own capital. This is insane, right? Sadly, I realize that I am the same… at the very least when it comes to leverage. I need therapy and I need it like yesterday.
I am you. You probably own a house or want to buy one. You probably have a mortgage, or are looking for one. The interest on your loan is probably deductible, so you are happy when you prepare your taxes. You have income from a company job and your banker was happy to give you a 15-year mortgage at 90% of the purchase price. Wow, you live in your house and after 15 years will you have paid your loan off. Assuming you have a 15-year fixed loan of $300,000 at 4% you will pay $99,431.48 or 33.14% interest. At the end of the term you will have been a prisoner of 15 years monthly payments and will have paid one third more for your house. Did anyone tell you that? Well, this is normal, right? Everybody does it.
It won’t take much of a downturn in the housing market to wipe out your equity. Like running a leveraged hedge fund, this is a very dangerous game. Many smart people have gone broke because of leverage. Now this is not to say you cannot win, but you take your changes and it comes at a cost. When pressed to pay your monthly mortgage you will notice that your friendly banker suddenly has a lot of rules, regulations and bosses to answer to, so watch out. You see, we can make a lot of money with leverage for quite some time. Everybody, and I mean everybody will be impressed with you right up to the last second… before it all explodes and you go broke.
Now let’s assume you want to be different and invest your down-payment plus saving the same amount per month as your mortgage payment over 15 years. Let’s take the historic average return of the S&P500 of roughly 9%. You can use this calculator to play around with the numbers. After 15 years you would end up owning a bit shy of one million dollars. Without leverage! I bet everybody will be impressed with you, right from the first second and then for years to come.
So don’t be what you dislike in others. Dare to be different. Leave leverage to the hedge fund professionals and realize they blow up at an alarming rate. Take time to calculate some numbers before you do like others do, it is not that hard. You can do it: get involved. Read more about our unleveraged wealth creation by joining our growing community at i-Cthru.