Was it a flyer from TD by any chance? Because we got one too.

So for starters, what avrex said. There's no "safe" portfolio. So you have to decide what you would do if you couldn't repay the principal. Also, in the mean time, you'll be on the hook for at least monthly interest payments, but your investments - if they have yield - will most likely pay quarterly. Do you have the cash to cover the interest?

It's not a totally crazy idea in and of itself when the interest rate is that low, but you need to be risk tolerant and have enough other assets that you can repay the loan even if this portfolio tanks.

 

It's not a totally crazy idea in and of itself when the interest rate is that low, but you need to be risk tolerant and have enough other assets that you can repay the loan even if this portfolio tanks.

If you have money to pay it off, why not just invest your money and save the interest?

 

@KrissyFair: For sure there is no safe investment , but what I mean some low risk portfolio funds that grow slower but safer , I would borrow the amount that I can pay at least 50% of it from my asset in case any pull back happened that reduce the investment amount. Ideally I want to borrow 20000, which look reasonable amount to me , and even will 25% fell I can make it up and return the amount .
what really hold me back is that a correction might come at any time ti kill all the growth that happened in this year , I have read if any year the growth is more than 10% then expect a correction to come . or I ll do my plan that I cache the gain from time to time to take some money out of game , in this case I ll be able to pay interest and also would done some cache that will make up to any drop.
and yes it was flyer .

 

What do you propose to invest in, i.e. what exactly is the 'low risk portfolio fund' that you refer to?

 

@inverstmentmentjinja, my attempt at humour above, was to make sure that you were aware of the risks involved.
From what you just wrote, it sounds like you are aware and accept these risks.

I will admit that I used the same strategy when I was your age (30).
At that time, I didn't have much in the way of cash or assets, so I utilized a personal line of credit in order to do some investing.
Two year later, when my assets had appreciated a bit and I saved some money, I paid off the line of credit.
One advantage of this strategy, in a non-registered account, is that Section 20(1)(c) of the federal Income Tax Act (ITA) states that interest on borrowed money is tax-deductible. However, the taxable benefit shouldn't be the 'main' reason to use this strategy.

I just wanted you to understand that "leverage is a double-edged sword".

 

One advantage of this strategy, in a non-registered account, is that Section 20(1)(c) of the federal Income Tax Act (ITA) states that interest on borrowed money is tax-deductible.

The wording says that borrowed money has to be used to earn income, so dividends or interest income. Using leverage for a dividend strategy is clearly acceptable, but I'm not sure about a strategy that is meant to produce capital gains. Anyone know? Does any strategy using stocks qualify for this because, theoretically, stocks have the potential to produce income?

http://www.advisor.ca/my-practice/i...my-practice/investment-loans-and-interest-deductibility-be-mindful-of-roc-99887

 

Sounds fishy. I've used line of credit to invest before, in fact I try to keep my net worth composed of at least 20% of borrowed money and pay it back near my predicted market top every 7 years. Line of credit are usually variable so when I hear a fixed 3% rate my spidey sense tingles. What is the catch and be careful. If you can post the info here, we can pour over the condition to see if it is a good deal. Mind you, the reason why line of credit is useful vs a brokerage margin is that you don't have to force sell during a margin call. If the rate is fixed, there must be an attached condition.

 

Sounds fishy. ... Line of credit are usually variable so when I hear a fixed 3% rate my spidey sense tingles.

Assuming OP got the same offer from TD that I did, it is technically prime + 2% but will a 12-month intro rate of 2.99% fixed.

@OP - it sounds like you've thought it out well. So now you just have to have a really firm assumption on that whatever you buy with it will go up in the near term.

 

It's a bad idea. No one will guarantee you 7% but by taking out a loan you are guaranteeing the bank 3%. Do you see now why they are advertising it?

More generally, no, you should go into debt and then incur a liability just to invest. You should first save the money, then consider carefully where to deploy that money, whether it means a new roof, car, computer, paying off debt, or investing and the like. Investing is a risky, long term venture that provides you monthly payment liability if you borrow to do it. Bad idea.

 

I borrowed money 3 times using our payed off house. All were in market corrections and all moneys were payed off with in 6 months.

I don't think TD would have loaned us the money without a payed off house. As it was I negotiated better interest rates, made the bank pay the house assessment cost ($250) all in really shaky market conditions.

I wouldn't borrow in this market I'm just not confident in the market direction.

I've also used my credit card (instant interest) to get money earlier than my gic were coming due. It worked out well but I don't recommend it.

 

Definitely using someone else's money is a good way to get rich fast, unfortunately it's an even better way to get poor fast. I recall going to an IG seminar for fun sometime in 2007 where they were urging people to leverage the 'wasted' equity in their paid off houses because anyone could make much more money in the market than the low cost loan was going to cost. I wonder how that worked out for everyone. Well, actually I'm pretty sure how it worked out for the banks on those loans. Other than student loans and a mortgage which were paid off pretty quickly, never been a big fan of leverage but to each their own. Lots of money to be made... and lost!

 

Agree. Banks offer products because they are seeing the market going a certain way. You'll never see this in 2008 2009 for example. 2008 2009 were the years of 0% cash advance credit cards to lock in the higher interest rate that will be cAused by a mistake the end user will eventually make.

What this offer tells me is that they expect the interest rate to go up in 1 year.

 

Determination for leverage is based on my overall estimate of when the full cycle completes. It's a hit and miss art and I usually do it 1 year ahead of the predicted date cause it's leverage. I also watch out for exuberance by the banks. Indications of instances when they throw profit and margin of safety out in an attempt to outright grab market share at all cost.

Currently, there is a disconnect. between usa and cad cycle. since i am 90% in the us market, My exit point and my sentiments has nothing to do with the canadian cycle. The only thing I want is a Canadian housing crash so I can finally check off an item on my to buy list.

 

good strategy is to already have investments before borrowing... let's say you got $500 a month dividends coming in, then you borrow 20k and it's no problem, even if market sink good solid dividend payers will keep paying those divis.... i borrow all the time, but I do it when there's blood on the streets not when it's 52week high

 

https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2

I want to make sure I understand the above correctly, that if I borrow (say) 10000 USD from IB, they are currently charging 1.59% per year in interest, right?

 

Isn't borrowing to invest the hallmark of real estate investing?

 

Yes, but people need a home. People don't NEED to invest money that isn't theirs.

 

No they don't they can always rent.

 

Assuming OP got the same offer from TD that I did, it is technically prime + 2% but will a 12-month intro rate of 2.99% fixed.

@OP - it sounds like you've thought it out well. So now you just have to have a really firm assumption on that whatever you buy with it will go up in the near term.

So here is the catch , I didnt notice the fixed rate is only for 12-month, thank you for mentioning that(I just checked and it is fixed for one year ) , I was planning to invest them for more than 5 years .
I think interest rate even if it go up will be very slow or else a housing crash will be ahead so I ll not cancel the idea completely.beside that National bank predict that interest rates will stay low for a many of years, new generations of Canadians are not rich as baby boomers was, few will afford to by house with high mortgage rates .
the tax benefits is my other reason , I am employee and pay a huge tax so I can deduct the interest from my taxable income.
For the guys who asked what kind of mutual funds I want to invest in , here is one of the candidates :
http://www.bmo.com/home/personal/ba...nds/growth/bmo-asset-allocation-fund/price-and-performance?params=0&pch=mf02_en
this fund seem steady , even on crashes it hurt less than others . TD also have some steady growth funds , that I might consider them too.

What this offer tells me is that they expect the interest rate to go up in 1 year.

Lets say the interest rate will go up , isn't that mean the economy is performing well , so my investment growth will go up too, It still worth it .

 

So here is the catch , I didnt notice the fixed rate is only for 12-month, thank you for mentioning that(I just checked and it is fixed for one year ) , I was planning to invest them for more than 5 years .
I think interest rate even if it go up will be very slow or else a housing crash will be ahead so I ll not cancel the idea completely.beside that National bank predict that interest rates will stay low for a many of years, new generations of Canadians are not rich as baby boomers was, few will afford to by house with high mortgage rates .
the tax benefits is my other reason , I am employee and pay a huge tax so I can deduct the interest from my taxable income.
For the guys who asked what kind of mutual funds I want to invest in , here is one of the candidates :
http://www.bmo.com/home/personal/ba...nds/growth/bmo-asset-allocation-fund/price-and-performance?params=0&pch=mf02_en
this fund seem steady , even on crashes it hurt less than others . TD also have some steady growth funds , that I might consider them too.


Lets say the interest rate will go up , isn't that mean the economy is performing well , so my investment growth will go up too, It still worth it .

The interest rate go up for several reasons. One of them is that the economy is performing well. The other reasons are and is not limited to:
-The economy is not doing well
-Forced rate hike due to USA rate hike (the worst case scenario)
-CDN Fed losing credibility

Actually, I think the interest rate lowering while the stock market is going up is a weird phenomena because bond price and stock are usually opposites of each other. Hence the 40% bond and 60% stock strategy for retired people.

 

I have done it in the past. But that was back in 2011 when market was tanking. I borrowed at the rate of 0% to 3%. I have since paid back every penny this year.
With that being said, I will never pull that again in today's environment. The upside in stocks is now limited.
Funny thing is that, back then RBC Visa would give me 0% balance credit transfer for 1 year without balance transfer fee with stated interest rate of 0%. I don't even know what they are trying to do. Do they really want me to borrow that money and spend it all and hope that I can't pay it back after the period ends? The normal rate is 19.99%. Now they jacked up the balance transfer fee to 2% with 0% interest rate for 6 months.
Anyways, I would suggest you to pick a better time to leverage up. Now it's the time to de-leverage, not the other way around.

 

I use leverage but I usually employ it in markets where IMO the upside heavily outweighs the downside (ie. markets that have fallen quite a lot). In the current market I would say that the upside only slightly outweighs the downside and there are not a lot of bargains to be had.

 

Hilarious. Leveraging up to buy high fee MFs is a good way to enrich banks.

 

Hilarious indeed. I should buy myself more bank shares. :biggrin:

To OP:

You want to leverage a high-fee mutual fund? This tells me that your investment knowledge is not up to snuff (no offense). Slow down and learn.

Leverage *may* kill you. High fees *will* kill you. You want to combine the two? What a bad idea.

 

^ Agreed. OP doesn't see that and mind seems to be made up. Wasting money in fees, liability and interest to save a few pennies in tax. Sad that our financial literacy is so poor that it leads some to believe this is good for them. I guess they'll have to live and learn.

 

My niece was talked into borrowing $45,000 to max her RSP ,she did this despite needing 5 years to pay it all off and she bought all Mutual Funds.I did this in past but as one poster pointed out we had no issues carrying the debt and there were so many advantages at that time.

 

^That's disgusting. I wonder how the dirtbags who do that to people can live with themselves.

 

OP, if you have a house. Get a Heloc then lock 20k of it into fixed rate mortgage. Yhis is a lot better than your current deal.

Also, don't investthatin mutual fund. Buy bank preferred instead if you are that trusting of banks.

 

You want to leverage a high-fee mutual fund?

I know their fees is high , but the return was 9.08 (average 5 % over years ) this year and already subtract the management fees, I already had 5000 in that fund and it gained to 5500 then I sold it to more aggressive fund . for some one like me who dont have a lot of money it is hard to have a devirsed portfolio without the help of mutual funds.

Do you have any better investment that give me a better return for the same risk level ? I personally couldn't fund some thing better than mutual funds , there are some ETFs there , but most of them their risk is above average.

OP, if you have a house. Get a Heloc then lock 20k of it into fixed rate mortgage. This is a lot better than your current deal.

Did I miss some thing ? can you show me in numbers how I am wrong if you invest it for 5 years ?

 

I know their fees is high , but the return was 9.08 (average 5 % over years ) this year and already subtract the management fees, I already had 5000 in that fund and it gained to 5500 then I sold it to more aggressive fund . for some one like me who dont have a lot of money it is hard to have a devirsed portfolio without the help of mutual funds.

Do you have any better investment that give me a better return for the same risk level ? I personally couldn't fund some thing better than mutual funds , there are some ETFs there , but most of them their risk is above average.


Did I miss some thing ? can you show me in numbers how I am wrong if you invest it for 5 years ?

I think what most people are getting at is that you may have missed the fine print about past performance does not guarantee future performance. They are also pointing out that with a high MER, you'll need to guarantee higher returns in a market environment that may not have that much upside.

Let's put it this way, given the loan rate and MER, you need an investment that pays out at least 5%, not too mention the related taxes to break even. Then in the next year, you're looking at an even higher rate due to the reset rate.

 

Here's another angle.

BMO Asset Allocation is a balanced fund. 32% of the fund is allocated to bonds. Bonds are expected to return 2.5%-2.75% before fees and inflation. Subtract 2.11% MER and 2% inflation. You end up with a guaranteed negative return of 1.6%-1.4% on 32% of your invested money.

If you borrow, 32% of the borrowed amount will earn a guaranteed negative rate of return. This doesn't make any sense.

 

To put this another way:

A bond is a loan you give to someone else. It doesn't make any sense to borrow money to lend money. As a small individual investor, you will always have a negative spread (even before fees).

Therefore, you should change your asset allocation to 100% equities before you start borrowing. Not comfortable with 100% equities? Forget about borrowing to invest.

 

Borrowing to invest is feasible and even reasonable in the right circumstances and with the right mentality. We have had a mortgage we don't need since purchasing our current house in 2007 in order to do leveraged investing. However, 2 important things

a) It is a battle of inches. You can't count on a 10% return. Maybe 7-8% return *over the long term* these days. And that assumes you make sure your investment costs (MERs, advisory fees, etc) are minimal, i.e. well under 1%, not a 2%+ MER. We locked in a below 3% mortgage rate (and in the previous 5 year term were at P-0.9 or so), so even this is an attractive spread but be aware.

b) You need to make sure you have the personal risk tolerance. In 2008-09 we were underwater on our leveraged portfolio. We were OK with that, did not lose sleep, and weren't tempted to pull our money out. Our cash flow situation was such that even if we lost 30-50% we could (unhappily of course) pay the loan back from savings in the interim, i.e. we were borrowing to get ahead of our savings by a few years, not to swing for the fences. Sometime in 2011 we broke even again and since then we've been making money. We were mentally prepared for such an eventuality. However, if watching the markets gyrate in 2008-09 would have given us ulcers how to pay back the loan, it would not have been the right thing to do. And you need a long-term view, multiple years.

BTW, in terms of the CRA requirement mentioned above, I believe it has not been fully tested in the courts, but that the accepted information is that the investments you make must be *potentially able* to generate investment or dividend income. However stocks are fine even if they don't actually pay dividends since they *could*. BTW, you need to do your paperwork and paper trail on the money very carefully. I've gleaned this from the various Smith Manoeuvre threads.

 

+10 Goldstone regarding borrowing to invest rules of thumb.