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      02-06-2008, 07:13 PM   #23
linus's Avatar

Drives: 07 E90 335xi, 08 E92 335i
Join Date: Jun 2006
Location: Toronto

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Originally Posted by john970 View Post
I didn't mean it to be offensive and I apologize as you have obviously taken offense. In the short term, something like the stock market is very risky. However, taken over the long term (say 10 years) the risk drops dramatically. Someone who is on a fixed income retirement may make a smart decision and rely on lower yield guaranteed income investments that in most cases are lower than the finance rates available, but again I was referring to the average buyer.

Currently 7% is hard to come by with the recent fed actions, unless you have an existing relationship w/ a weath management group or something similar, but 5.9% is still pretty easy to get at most credit unions here in the states.

I said "not that it matters" as most of this stuff is pretty simple math and I didn't need a degree to learn any of this, I wasn't being arrogant. At least not on purpose.
First off. I agree with your assertion that over the long run equity returns can be quite lucrative. Unfortunately, look at the current state of the US stock markets and you will notice that the S&P500 has returned essentially 0% since 1999 - almost one decade (not including dividends paid). Placing your money in a downpayment on a fairly high lease rate at that time would have been the best option if you had anything from a 3-year to a hypothetical 10-year lease instead of dumping it into the equity markets. And generally speaking, index investing has been demonstrated to have less risk than most actively managed funds. I guess, if you look far back enough, real rates of returns (after considering inflation) have generally been 4% in the equity markets and 1-2% in the bond market. Assuming your real lease rate is 2-3%, you have a fair amount of "risk" to earn that 4% real return. So you really need to have a long term horizon view (perhaps well over a decade) to benefit from this strategy. Time risk.

The key here is that you have to accept a fairly high degree of risk to outperform the obscenely high lease rates that (at least) BMW Canada provides - as recently as high as 8.5% on some models (especially as bond rates of return are so, so low). If you look at that rate another way, that is, on an after-tax basis, in Canada you would have to earn about 14% on a pre-tax basis to breakeven against this cost. If the lease rate is 6%, you would need to earn about 10-11% pretax. How do you do this with little risk given that bond returns are so miserably paltry these days. I personally would sink this money into the lease as a downpayment because it is essentially a pre-tax 10-11% rate of return GUARANTEED with no risk.

I totally understand where you're coming from with your argument, but many people - actually, the average buyer - would, in my view, be better served to reduce their risk and accept a very slightly lower rate of return through the downpayment on their lease. Now, if the lease rates were 2-4%, it becomes a no brainer to take the lease. I'm getting a 3.9% lease rate on my E92 335i which is coming in a few weeks. I'm not jumping for joy at that rate, but it is better than my line of credit rate of 5.75%, so I'll pay nothing down.

By the way, you did not offend me in the least - apology not necessary - and even though I mentioned that your comments may have been arrogant, I'm certain that that's not an appropriate reflection of you. The internet and forums have a way of being so impersonal that it's easy not to get the full flavour of the spirit in which things are written. On that same point, if I have offended you, please do accept my apologies as well. We're all car enthusiasts and enjoy the same passion about the incredible bimmers we've purchased or are about to. :headbang:
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