When I first started out as a financial advisor, twenty years ago, a strategy that was very prominent and recommended by many financial advisors was “borrowing to invest”.
This strategy involves taking out a loan to purchase investments outside of your RRSP. The benefits are that the interest you pay on the loan is tax deductible against your income and as long as you earn a return that is equal to the after tax cost of the loan, you will be successful, and have the ability to dramatically increase your net worth over time.
However, one of the areas that was overlooked, or down played was that when the investment markets go into a big slump as they do from time to time (also known as a bear market) your losses are magnified.
Many people found that they were not emotionally prepared for the ups and downs of this strategy, and as a result this strategy fell out of favour.
Does this strategy still make sense for people today?
My personal opinion is that borrowing to invest can still be a very effective strategy for the investor with the right type of temperament, who understands the risks and the rewards, and has a long term investment horizon.
I encourage you to read the enclosed article-it features comments from Talbot Stevens, who is a highly respected thought leader within the financial community. He was also a guest on our Financially Fit For Life webtalk radio show back in 2014
Click here to listen:to our interview with Talbot Stevens The Smart Debt Coach.
Interview with Talbot Stevens The Smart Debt Coach
I look forward to hearing any comments or questions that you might have.
When borrowing to invest actually makes sense
Borrowing to invest is always a risky strategy, especially so in a climate like this. The bull market is six years old, and nothing lasts forever. Between March 2009, when Toronto share prices touched bottom, and this week, the main Toronto stock market index has almost doubled. Last week’s interest rate cut may be the first of several. The bank’s message is that a bumpy road lies ahead. But each cut also adds a little more energy to the markets. It makes it cheaper for companies to borrow, which improves their profitability and so lifts share prices. It makes it cheaper for us to borrow to buy stocks. But should we? Yes- borrowing for investments can be a good idea, if you do it right.
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