This week I’m inspired to share several investing lessons prompted by an article I read in Barron’s financial publication about how the wealthiest families are using low cost debt to make money. This article was sprinkled with powerful wealth nuggets that can be used by anyone seeking to smartly grow their money, whether their net worth is $10,000 or $5,000,000.
The article, written by Richard C. Morals and based on an interview with Mark Jordahl, president of U.S. Bank Wealth Management, and overseer of $37 billion in “rich-folk assets”, wisely reasons that by watching the behaviors of the very wealthy, new trends can be spotted. Morals explains that many once new ideas, ranging from hedge funds to IRA’s, became mainstream after getting their footing among the wealthiest.
Investing Lesson 1: The noted trend from the article is that the wealthy investors are borrowing money and investing it to capture opportunities in areas such as real estate and other markets. Investing Lesson 2: They are seeing the slim possibility that a 10-year Treasury bill will offer a positive real return over the next ten years. Remember, a real return is the return after boring but money evil inflation; it’s expected to rise during the next ten years.
The borrowing interest rate mentioned in the article was 3%.
I know that’s really low, but remember, the wealthier you are, the less it cost to borrow, because there’s less risk for the lender. Banks lend easily and cheaper to people who don’t need loans. This leads to….Investing Lesson Three: This is the same principle supporting lower borrowing costs for higher quality credit scores, which we can all aspire to take advantage of through good money habits.
Bear with me, because this is an important point for all financially savvy women….
Investing Lesson 4: While the negative is that debt increases the cost of anything over time, it can be also used as a tool, especially when rates are low. The main point I want to make is how the wealthy investors are being strategic with debt. Investing Lesson 5: They are taking advantage of low interest rates by locking them in, probably for as long as they can. Investing Lesson 6: Then they’re using that money to make more money. That’s called leverage.
Here’s how leverage works. You borrow at 3%, and invest in a way that earns a return of 10%; or borrow at 5% and earn 8%, or borrow at 4% and earn 12%. You can play with the numbers all day long; it’s the same principle. Leverage also works for time, by the way, and I teach this with my private business strategy clients for promoting smart delegation.
Am I suggesting that you go borrow a bunch of money and throw it into the stock market? Of course not! For one thing, I don’t give financial advice. What I do suggest is consider being strategic with your money and the tool of debt in relation to long term interest rates.
Occasionally a woman will tell me with such pride that she’s recently completely paid off her mortgage to become “debt free”, often following a course teaching that all debt is voodoo. Nothing is good or bad all of the time, and I have to wonder about programs that teach that it is.
Remember, interest rates were around 20% in the early 1980’s. Now that would have been an excellent time to pay off a mortgage!
Long term trends in the economy and financial markets drive the opportunities to create more wealth, and blindly ignoring these cycles can destroy the best laid investing plans.
With interest rates near an all- time low I would have to wonder if paying off a low interest mortgage is the best use of capital for someone seeking to create wealth. Not only this, but since the government encourages debt by allowing us to use mortgage interest to reduce our tax bill, this typically huge tax expense is usually lowered through home borrowing.
Look at the big picture. Be strategic. Think like the wealthiest to create wealth. Use their smart investing lessons, wherever you are on your money journey.