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Just wondering if anyone here is doing leveraged investing - either via a LOC, margin or both. Last year I kept telling myself that it was a buying opportunity of a lifetime and intended to get a LOC and max out. I WOULD have made on the order of 100K+ if I had actually followed through with plans. With the seemingly inevitable second "crash" coming up, it looks as though another opportunity might present itself shortly. As such I'm getting my LOC set up at my bank. What about others?

As a sidenote a friend of mine not only took out a LOC last year but used margin on his trading account and made close to 125K out of thin air. What exactly is the risk here? If equity markets are expected to go up over time, and ones dividend yield from stocks/trusts > LOC interest rate, why doesn't everyone do this?
 

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while many have done ok with this technique...I just can't imagine that now is the time to leverage yourself. One of Warren Buffet's main points is to not leverage yourself.

I think markets are very shaky right now...buyer beware!!
 

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Between October 2008 and March 2009 I used $50k of my HELOC to buy mainly Canadian stocks. I saw it as a thrice in a lifetime opportunity and made about $40k 'out of thin air'.

Problem: I still hold some of them and have borrowed up to their current value. So now I am unemployed, own a house outright and RSP, but cash-wise it is a wash because the HELOC and nonRSP stocks cancel each other out. Asset rich, cash poor. I wish I was deleveraged now, but real life has other plans for me.

I was broke and unemployed in 1982, but maybe there will be a third chance yet.
 

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they cancel each other out...for now. But it is just as likely that you will be underwater as it will be that you stay afloat. I would bail now if I were you...having a paid off house is good...and once done you should dollar cost average yourself back into the market over time...with money you can afford to lose.
 

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I think the problem is that most people leverage too much. I personally use both an unsecured LOC and a margin account to invest, although I only borrow a very small amount on margin. The thought of my stocks being sold when they are undervalued gives me the shivers.

Also be sure to keep good records so you can deduct the interest on your taxes and keep a good relationship with your bank so they don't call the loan :)
 

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I can't see the point of using leverage when there is scarce value in the market. As noted last year was a great time for that.
 

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Continue to look for opportunities like FTS that sold for $20.00 or something like that last week. But keep in mind we are in markets threatened by systemic risks that will go on until all this incredible debt is retired in some way.
 

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Stock Index Futures - leverage 5x for e-mini. Just lost about 50% of my futures account in a week (after I made 500% last year and moved some profits to a normal investing account).
 

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Not that I am against using leveraged investing, but you do see the irony of using debt to get financially ahead in these times.
 

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I have a manageable sized leveraged account that I set up last year with a HELOC. I hold income investments such as REITs, pipelines, BMO preferred and common and a few other dividend stocks. I pay all the dividends against the LOC. Unfortunately I pulled the trigger a little too early with most of my picks, so I haven't done anywhere near as well as your friend (I also suspect that he's borrowed far more than me). I'm currently up about 10%. Two picks have been heavily weighing down the results - HSE and MBT; everything else is up significantly.

I agree with those who say not to do it right now. I would wait until autumn see what's happening in the markets. I also wouldn't do it if I had any other debt.
 

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and we all know...10% could be gone in a week.

Leverage is unwise...and unnecessary. WHy put money you need at risk to make money you don't need?? This is the problem that the world is in...deleveraging will take a few years, and my bet is that stocks will not do well in a world deleveraging cycle as deleveraging is deflationary.
 

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I have a manageable sized leveraged account that I set up last year with a HELOC. I hold income investments such as REITs, pipelines, BMO preferred and common and a few other dividend stocks. I pay all the dividends against the LOC. Unfortunately I pulled the trigger a little too early with most of my picks, so I haven't done anywhere near as well as your friend (I also suspect that he's borrowed far more than me). I'm currently up about 10%. Two picks have been heavily weighing down the results - HSE and MBT; everything else is up significantly.

I agree with those who say not to do it right now. I would wait until autumn see what's happening in the markets. I also wouldn't do it if I had any other debt.
What's the point if you're using the dividends to pay the interest? Smart conservative approach, but still pointless. The idea for using leverage is for a
"back up the truck" investment. Which of course carries risk with that potential reward.
 

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What's the point if you're using the dividends to pay the interest? Smart conservative approach, but still pointless. The idea for using leverage is for a
"back up the truck" investment. Which of course carries risk with that potential reward.


Actually I'm being more conservative than that. I pay the interest out of my chequing account and use the dividends to pay down the principal of the loan.

There are a couple of points to my strategy:

The first is to buy in a lump sum when I perceive that prices are low and then pay off the loan, over time, rather than dollar-cost average over the next few years at potentially higher prices. Of course, I could have miscalculated and prices could even go lower than last year, but I consider buying at severely depressed prices to be a reasonable risk.

The second is to treat these transactions the same way I would if I had bought either a physical business or real estate investment. If I had done either of these things I would be expected to use cash-flow towards the loan, so I see no reason to treat this situation differently. In fact, one reason that I invest in REITs, is to replace actually buying rental property which I've done this, in a small way, in the past and found it was too much hassle. However, I still like to treat my REITs the same way I would if I had actually bought a rental property and use cash-flow towards the loan.

I'm not really looking for a "back the truck" investment but rather slow, steady cash-flow. My HELOC is at 3.25% (which amounts to perhaps 2.25% after tax-deduction) and my dividends probably average at about 6%. I believe this spread leaves a fair amount of cushion on both the potential of interest-rate hikes and dividend cuts. Nothing guaranteed, I know, but a calculated risk. I would be lying if I said that I don't notice variations in equity prices, but I try my best to consider such fluctuations as "noise", especially when the volatility seems to have little threat to the dividend payments.

That all being said, I find it healthy to open my investment ideas to scrutiny and don't mind contemplating any opinions of those who find problems with this approach.
 

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the discipline of this approach is perhaps not evident to the fast reader. The author has combined a controlled degree of leverage with a judicious usage of market timing, increasing his debt a year or two ago to buy sound, carefully-chosen equity when rates & markets were troughing; and then gradually paying down not only interest on the debt but also the principal as markets surged and interest rates followed a year later by commencing a slow rise.

all in all, an approach that marries legitimate risk-taking with prudence & good management. Kudos to our poster.
 

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Spidey,

I've been thinking along the same lines. I am thinking of taking out an RRSP loan and invest it in dividend paying companies.

In 1 year, i will get 40% of the loan back, i would have paid the interest and part of the capital from dividends, exploited the low rates period AND i would have capitalized on the recovery.

It's also doable with a non-rrsp loan, the risk is slightly higher.

Mich
 

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I've used it and I'm currently. One year ago took out 4 year secured at 4% with the intent of investing in div stocks , some income trusts and some bonds with maturities matching 4 year time frame. Intent was just to make money on the spread between yield and interest cost. I thought that the big run up was over. Worked out way better than thought and they were pretty conservative stocks. Ended up making over 20%.
 

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Years ago I used a margin account, one stock went down, had a margin call, didn't have any available cash to cover so I was forced to sell another stock before I wanted to. Haven't dabbled in a margin account since.

This year I've used a bit of my unsecured LOC to buy a stock in our TFSAs which was at an attractive price. It's a small amount so I'm not worried and will have it entirely paid back later this year.
 

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" ... AND i would have capitalized on the recovery."

this is the part that would worry me. Are you really ready to forecast so confidently that there will be further recovery between whenever you take out the loan and a year into the future from that date. I'd kinda put a question mark on that anticipated market rise myself.

the beauty of spidey's timing is that share prices were on sale 30-40-50% when he was buying last year.

working the spread between interest & yield is still do-able i think. Although the hi-yield trust units are cracking. Not an earthquake yet but the divs will drop substantially. Many of the tr units will not become strong corporations.

canadian banks on the other hand aren't likely to cut their divs, but there's a statistical possibility that canadian bank shares could take a 10% or worse haircut in a global bad news kneejerk response.
 

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After taking out an unsecured 95% loan from family to buy a condo, on the strength of my wife's and my future earning power, we took out last year a further HELOC with the intention of using ~70% of the value of the condo to go into a portfolio of diversified ETFs.

Because of additional high risk cash investments of ~50% of my annual, pre-tax income, we ultimately changed our mind in mid-late 2009 and capped our leveraging at about 35% of the condo value.

At the moment, our leveraged investments are costing us 2.5% interest, we get about twice that in annual dividends, we're up ~50k in terms of equity, and I sweat buckets through market gyrations since we're, in essence, nearly 10 times leveraged if I compare our equity exposure to our networth, taking into account her student loans.

That being said, so long at least one of us keeps our job, I don't see a scenario where we will be truly screwed over.
 
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