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Re: You're missing the point... (archive)

[ Follow Ups ] [ 3-series (E46) Message Board ] [ Msg. Board FAQ ]

Posted by Larry in TN on October 06, 1999 at 14:10:44:

In Reply to: You're missing the point... posted by HR on October 06, 1999 at 09:26:31:

: I agree that if you make only 10% then you're not gaining much compared to taking a 7% loan. But the odds are in your favor to make a lot more (I happen to have made over 19% YTD so far thank you).

So you do understand the math, then. The only problem we have is that you have unrealistic expectation of what your investments are going to do.

Talk to any financial planner and they'll start getting very uncomfortable with expecting anything close to 12% per year from stocks. Most will want to use 10% or 11% max for projections.

28% tax bracket, break even on a 7% loan is 10%
39% tax bracket, break even on a 7% loan is 11.5%
45% tax bracket, break even on a 7% loan is 13%

That's pure break even without any recognition of the additional risk you're taking by investing the money. You'll need a good expectation of exceeding those rates by a few points in order to compensate you for taking the risk. Depending on the volitility of the investment you choose you'd probably want at least 15% ROR before you'd choose the investment over the gaurenteed investment.

15% is simply too high an expectation to base your plan upon. You should have gotten more than that over the last few years but you very well may not for the next few. In fact, the recent strong performance of stocks would lead one to believe that 15%+ returns are less likely than average over the next few years.

Now if you're a gambler then go ahead and finance and invest the money. Just do it knowing that you're going against the odds and that the math doesn't support your decision. The math doesn't support buying a lottery ticket or playing a slot machines either but a lot of people do those things anyway.

To get this to work with reasonable growth expectations you really need to get the financing rate down below 5.5%. That's quite possible with cars that have dealer or manufacturer incentives on financing but be sure that you can't get an alternate incentive in the form of a rebate or a lower negotiated price.

: While a few people here were impressed with your show of financial savvy, I think you missed the point.

This isn't financial savvy, it's 6th grade math. It's the people who think they're being financially savvy who are getting suckered into leveraging their investments.

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