Strategic Debt in Retail Investing and Fundamental Mechanics of a Lån Til Aksjer

At some point, every retail investor reaches this phase. You may wonder whether your own portfolio is the limit. That’s because you’ve gotten a little bit of knowledge on the markets over a few cycles. Besides, you presume you know how they work. It doesn’t have to be so. 

Using the leverage of borrowing to invest has a long history. It carries a real risk and can make sense as part of a personal finance plan if approached with caution. It requires honesty, though. It’s pretty easy to see the upside, and the negative becomes apparent when things go wrong.

It’s about that tension this piece is. What is it to borrow in order to invest? Where does it make sense, and where does it break? What should any investor really know before venturing down that road?

Why Do People Borrow to Invest in the First Place?

The idea is simple – if you can borrow money at 7% and earn 12% in the market, then you have captured the spread. You have used other people’s money to make money for yourself, minus interest, of course. The maths is correct in its written form. 

However, in reality, the rate of return from a market does not always consistently equal 12% per year. They have a yield of 28% the first year, -18% the second year, and 6% the third year. It is at that volatility where leveraged investing becomes complicated.

But the basic concept is not wrong. This is the same concept used in corporate finance, real estate investments, and most institutional portfolio construction. Leverage amplifies. The always-asked question is: what and how much is ample?

For individual investors, the first steps into the world of borrowing investment products typically are margin accounts, personal loans allocated to securities, or special-purpose products, such as securities-backed lending. They all have different mechanics, different costs, and risk levels.

Understanding the Mechanics Before You Touch a Single Krone

A little time really lost on how interest works throughout a downturn on a portfolio beats entering a strategy. Most articles gloss over this topic and jump straight to the fun part – what can you do with the return?

Let’s say you take a loan of NOK 100,000 at an 8% annual rate. Let’s assume you have loaned NOK 100,000 at an annual interest rate of 8%. Irrespective of the market’s development, you have to pay the interest, which comes to 8,000 NOK in year one.

When the value of your portfolio falls 20%, you have 20,000 NOK in paper losses. Besides, you still have to pay the interest. You have lost about 28,000 NOK in net position, but your loan balance hasn’t changed. It’s the one-sidedness that surprises people.

Investopedia states that one of the most psychologically painful things that can happen to retail investors is “when the margin call comes in, it is one of the most depressing experiences in your retail investing life, mainly because you are forced to sell at the worst possible time.

Emotion cannot be ignored – it is more important than people realize. Leverage isn’t simply about altering your financial risk. It’s about altering your knowledge of volatility. In the case of the 10% drop, it’s very different when the dollar is on the line. The decisions that might otherwise be easy to put off are now time-sensitive, stressful, and often not at opportune times.

The Norwegian Context: What Lån Til Aksjer Actually Looks Like

The discussion of forbrukslån.no – lån til aksjer has increased steadily. It mirrors the rise in household participation in the Norwegian stock market. A combination of easily accessible brokerage platforms, the Oslo Børs, international indices, and a general cultural shift towards financial self-management is partly responsible for the increase in Norwegians investing.

One way some investors have done this is by investing in consumer loans (forbrukslån). They aren’t secured, so the lender doesn’t put up collateral, and this is where the borrower has flexibility, but the lender is forced to charge a higher interest rate because of the risk. If the investor thinks a forbrukslån is a good investment in equity, it is mostly because he/she expects the market to move either in favor or against the stock, and knows what he/she will do in case of a downturn in the 12 months ahead.

This is not usually tax-deductible as interest on a personal loan rather than a mortgage. However, it may depend on the structure and the individual’s situation. That’s why it is best to consult a tax adviser to ensure this remains the case, given the constantly changing tax landscape in Norway.

Where This Strategy Can Hold Up?

Not all the usage of borrowed funds in investing is wasteful. It does have some situations that it can hold up in fairly well:

Stable cash flow + long time horizon. Reliable income that can cover the repayment of the loan is less risky when considering short-term volatility. You don’t have to do anything other than sell. Wait the 10+ years to find corrections and let compounding work.

Instead of putting all their bets on one position, they diversified. Speculation is borrowing to purchase a single stock. Leveraging by borrowing to position for a broad index is another risk profile, diversified across hundreds of companies. The spread of performance results becomes much more restricted.

modest leverage ratios. The investors who blow up are those with high leverage. It’s not a 30% borrowing versus a 200% borrowing! However, a conservative approach to leverage is a safe room to play catch-up.

Multiple news pieces on cnbc.com reported that investors with retail accounts who used margin and borrowed funds had their accounts canceled during 2020-2022 due to volatility and their specific risk tolerance.

Where It Falls Apart?

They’re all predictable, and that makes them even more frustrating when they happen.

Possibly the worst error is seeking out performance by borrowing. Two years of market appreciation, viewing returns from others, and catching up with others through the purchase of a loan feels very much like investing, rather than a leap of faith. This FOMO principle plays out in psychology with leverage. That’s how people end up buying when prices are at their highest and paying more than they did before.

Another is under-forecasting the interest charges. High or moderate interest rates over 3–5 years add up to a significant decrease in net returns. It’s easy for investors to calculate gross portfolio profit and fail to account for loan servicing costs before celebrating the success of that strategy.

Plus, there is life. Life’s changes – job change, unexpected expenses, family situation, any of these can alter an ability to service the loan and create portfolio-changing decisions which would otherwise be avoided.

Thinking About Portfolio Construction With Leverage

Once a person has determined that borrowing is part of the investment plan, the question before him will be how to incorporate the debt into the investment plan.

When you’re leveraging, it’s more important for the product quality and liquidity. You can get out of a position rapidly without the price devastating if essential, and you shouldn’t be hesitant to pay a little less for that. One that is not very liquid AND uses borrowed funds is especially worrisome because you may not be able to liquidate it when you want to.

Morningstar has written extensively about factor investing and how the portfolios are tested in stressful market conditions. Their research shows that leverage is invariably more enduring in low-volatility low-yield (revenue-producing) equity strategies than in high-growth, momentum-oriented equity strategies, with the latter standing most likely to experience a big reversal.

A good question to pose: If markets decline by 30% during the first year of the term, what will your portfolio look like? Are you able to afford this loan, and can you sit unaided? Are you psychologically ready to do nothing? If you say no to any of them, it’s likely that high leverage is not for you.

Tax, Regulatory, and Practical Considerations

Norwegians should note that the Financial Supervisory Authority of Norway (Finanstilsynet) provides guidance on consumer credit and the investment products sector. It is not forbidden to use a forbrukslån, and using this type of credit for investment purposes is not necessarily a bad idea, but only because the risk is not quite as similar to that of purpose-built investment credit facilities.

Additionally, it is worth noting that platforms/brokers have their own policies regarding margin and leverage, which may change during periods of high volatility. A peaceful trading environment and conditions can differ from those during a correction, and that’s when flexibility becomes a factor.

NerdWallet offers helpful cost-of-interest comparisons of various types of loans. It offers a breakdown of how each type of loan works in relation to various types of investing. You can use these comparison tools to model the interest costs for various scenarios before buying any loan product.

Final Note

Some of the investors who appear to make a success of leveraged strategies have particular traits; they tell themselves the truth when it comes to knowing their own level of risk, they create scenarios that assume worst-case scenarios, and they don’t confuse a plan they think can sound good in theory with one they think they can always execute.

The idea of investing in stocks on borrowed aircraft is not the road to riches. It’s a tool, and, as with many tools, used correctly, it can be effective; used incorrectly, it can cause damage. 

Buying and selling stocks on loan is an understandable process. The process of knowing yourself well enough to use wisely is difficult to master and does not occur in one article. That’s where you should begin, deduct all the tax, deduct all the insurance, and deduct all the money.

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