Do the maths!
Busy reading a fascinating book at the moment about “the curious science of everyday lives”. It’s called Quirkology and quite a bit of it is about human behaviour and how much of our behaviour is irrational…take for example the curious fact that most people would choose to wear a jersey that had been dropped in dog poo (and was still covered in it) than a jersey that had been dry cleaned but which was once worn by a mass murderer. I know which one I would choose and it would not be the dog poo one!
So on this kind of track, of curious human behaviour, I found myself contemplating the expected cut in interest rates and the potential opportunity that it presents for arbitrage, especially if you have an access bond at 2% below prime…I wondered if there was any merit in taking funds out of the bond (at a possible 7 or 7.5% depending on the cut we get and if we get it) and then putting the money into the RSA Retail Bond for 2 years at 8.5% and thereby stand to benefit from borrowed money. So if I took R20000 out of the bond (at say 7.5%) and put it into the RSA Retail Bond for 2 years at 8.5% I would effectively be able to make 1% on money that did not belong to me…
Sounds great, in theory at least, until you do the maths.
1% on R20000 is R200 (for the year)! And even if I put R200000 into the RSA Retail Bond it would mean a return to me of R2000 for the year. Quite frankly, it is not worth the effort and potential risk of getting caught out by rising interest rates and I still stand by my pervious comments that it is generally not a good idea to borrow money to invest. It sounds good, until you do the maths!