4 in 10 Investors Take on Debt to Invest. Here's When You Can Use Debt to Invest

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  • Using debt to invest is both risky and potentially profitable.
  • The risks involved make the strategy a bad idea for short-term and all-in investors.

Be young and be cautious.

Using debt to invest will supercharge your gains and losses. It's risky. Investing on margin cost me thousands during the 2022 bear market. Despite the risks, 4 in 10 investors are taking on debt to invest.

It's a bold move, as interest rates are going up big-time. At the beginning of 2022, interest payments were less than 3%. Now, it costs more than double that on the Robinhood brokerage app. The biggest borrowers, Gen Z and millennials, are poised to feel the heat.

But investing with debt isn't always a bad thing. In the following circumstances, it might be okay to use debt to invest.

When you have a solid investment plan

Don't even think about taking on debt without a solid investment plan. This plan should outline your investment goals, how much you're willing to invest, and how you will achieve your goals.

After I invest in a stock, I write down why I'm investing in an investment journal. If I ever feel like selling, I can consult my journal and read my initial thesis. I can answer the question: does my initial thesis still hold? If so, I won't sell.

Without a plan in place, it's easy to get in over your head -- and that's when things start to go wrong.

When you can service the debt

You should be able to repay debts, and have enough income to cover the interest payments and still have money left over for living expenses.

You can go above and beyond. After my initial margin-call scare, I've committed to taking on no more debt than cash in my bank account. That way, I can always make repayments.

If you can't service the debt, you're putting yourself at risk of defaulting -- and that could have serious negative consequences for your financial future.

The best budgeting apps help folks keep track of their savings.

When you're leveraging a diversified portfolio

Diversify your portfolio. Investing in, say, more than 25 different stocks makes you less likely to lose everything. It's the same logic that applies to regular investment portfolios, but when you're leveraging, it's even more important to hedge your bets.

I do this by investing in 25+ stocks and ETFs. While some of my investments have dropped over 90% this year, my diversified portfolio has kept me stable. I've still made mistakes and had to slash borrowing, but the most important thing is that I'm still in the game.

No investment is 100% stable. Leverage a diversified portfolio or prepare to lose everything.

When you're investing long term

Invest long term. Give yourself at least five years for your investments to season. That way, you don't feel pressured to withdraw leveraged funds in a bad market. Doing so would mean losing your initial investment and the money you've leveraged.

I'm 25, young enough to plan for decades. Mistakes are forgivable. Under no circumstance do I anticipate needing to withdraw my investments from the market (although I am building an emergency fund, just in case).

If you leverage while under pressure to make money short term, ensure you're capable of dealing with the worst case scenario.

Taking on debt to invest isn't for everybody

Taking on debt isn't for everyone. At the bare minimum, you need a plan, a fallback, a diversified portfolio, and a long investment horizon.

If you're set on leveraging your investment, here are some things to consider:

Be cautious and stick to your plan. Leverage can boost gains, but successfully using it requires a disciplined approach to investing.

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