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Thoughts on paying down loans
I know this is going to be anathema to a lot of people here, but it's a topic I'm interested in exploring. I'm the kind of person that likes to pay down loans, whilst at the same time borrowing for investment. Basically the idea is to use spare cash to pay down a loan until it is fully paid out, whilst at the same time using equity to purchase further investments.
I like the idea of fully owning the assets. I may not end up with zillions of dollars worth of assets over time, but I personally am more interested in attaining cashflow for lifestyle right now rather than attaining bragging rights about how much my assets are worth and having to deal with large amounts of debt when I'd much rather be chasing adventure.
Now, I know full well that wise investors manage their loans and take calculated risks to ensure that they have a safety net (this is what I do myself, cause you know, I'm a very wise person). At the same time, I look to successful businessmen and observe how they run their businesses and try to emulate what they do. What I have found is that in a lot of cases, they actively pay down debt in order to reduce the risk. But at the same time, they also aren't afraid to use the power of leverage, so it's a balancing act.
I know it takes an element of risk to be successful, but I also believe that the mantra of 'high returns means taking on more risk' is nonsense. I believe that the more one understands an investment strategy, the less risk they take and the higher the chances of attaining better returns. Warren Buffett is a great example of this - 20%+ compounding returns over several decades all with a strategy that reduces the risk as much as possible. His investment style, once understood, is quite conservative yet he has achieved returns that are better than anyone else in history has been able to achieve over a similar timeframe.
This way of doing business - because let's face it, owning investments is a business whether you like to admit it or not - makes a lot of sense to me.
The reason I've been thinking about this a lot lately is mostly due to what's happened with credit and a lot of businesses, particularly in the property sector really taking a battering because they can't afford to hold assets and not being able to refinance, therefore they have to sell assets and they can't even do that! So now they're in a lot of trouble, simply because they didn't look ahead during the good times. Basically comes down to poor money management. Makes you wonder how, if the pro's don't do it, how the plebs are going to cope.
My own situation is ticking along very nicely, thank you very much and I'm very comfortable at this point in time, able to take advantage of opportunities as they arise and I believe it's all because I actively pay down debt. Now I know it's not everyone's cup of tea and it's only one of thousands of different strategies out there, but it works for me.
Mark
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'If you're going through hell, keep going’ - Winston Churchill
'Success is not about brilliance. Success is about perseverance. Hanging in there is of far more importance than any other single factor.' - Kristine
This is a general comment only and does not constitute advice. Before making legal or financial decisions you should seek advice from a professional adviser, who can take into account your specific circumstances and investment goals.
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