Online Guide to leverage (borrowing to invest)

Leveraging is a popular concept promoted by the financial industry.  It’s common to hear financial advisors or other so called experts highlighting the benefits of leveraging. To put it in simplest terms, leveraging is simply using someone else’s money to make money.

Most of us have leveraged in our lifetime, for example buying a house. You can put down 5%, 10%, 25% and the bank lends the rest of the value of the house to you. It is your responsibility to pay back the loan in the form of a mortgage.

Investment leverage is where you borrow money (typically though a line of credit) and use that money to invest in stocks, bonds, mutual funds or other types on investments.

Because I get a lot of people asking me if leverage is a good way to invest, I thought I would put together this resource to help people make the decision to leverage or not

The benefits of leverage

There is no question that leverage can have merits by helping people boost returns, create tax deductions and replace a forced savings plan.  When used properly leverage can be a powerful tool to help grow wealth

For more information read The Benefits of Leverage

What are the risks of leverage?

Leveraging can be an extremely productive financial concept but it is not for everyone. Leverage comes with risks and before anyone considers leveraging as part of their wealth building strategy, be sure to understand these risks.

For more information read The Risks of Leverage

When is leveraging appropriate

Leverage has both good points but also bad ones.  Before you jump in and borrow money to invest it, here are some thoughts around some ideas situations where leverage may be appropriate.

For more information, read when is borrowing to invest appropriate

Be cautious when pitched to leverage

Leverage is a concept that has been popularized by the financial industry.  As much as it can be productive for the client, it also can be very lucrative for the financial advisor or institutions.  Check out this real example of where leverage was ‘sold’.

For more information, read Be cautious when pitched to leverage

Leverage can be a conflict of interest

Leverage is one of the many potential conflicts of interest that exist in the financial industry.  Investors must be careful when considering a leveraged investment especially when it is being sold hard by financial sales people.

For more information, read Conflicts of interest in the financial industry

Different forms of leveraging

Leverage can be used in many different ways like buying a house or investment leverage.  RRSP meltdowns are another form of leverage.  This article highlights some of the different forms of leverage.

For more information, read Leverage comes in different forms

Be aware of phony math when borrowing to invest

This article is pretty technical but it’s a great dissection of the math around leverage and borrowing to invest.  Before your leverage, it’s important to know the math of leverage.

For more information, read Be aware of phony math when borrowing to invest

4 Ways to Borrow to invest

Get Smarter About Money has a great little primer on leverage outlining 4 different ways to borrow money and invest it.  The article finishes with 8 great questions to ask yourself before you take the plunge.

For more information, read ways to borrow to invest

My Five Cents

Leverage is not a new concept.  It has been around for years and people have used leverage to buy homes and start businesses.  Borrowing to invest is also not new but it has been popularized by the financial industry as a sales concept.  While leverage has a place, investors should proceed with caution by making sure they really understand the risks associated with leveraged investing.

When it comes to illustrations from financial advisors, be careful about the assumptions.  Far too often the assumptions show the good results without helping the client understand the risks and the potentially bad outcomes.

What do you think of borrowing to invest?  Have you done it and if so, what’s your experience?

 

 

 

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

6 Responses to Online Guide to leverage (borrowing to invest)

  1. The only leveraging I do these days is the mortgages. I tried investing with margin in the late 90s and it didn’t end up well. Where are your share buttons? I want to tweet this post. 🙂

  2. Leveraging is a great way to increase your net worth
    We teach people to leverage their homes with a line of credit that does NOT show on your personal credit reports.

    Leveraging your home is the best way in my opinion to get ahead without it affecting your bank acount.

    You need to know were to invest your funds, so that you get the best return with the least about of risk.

    I highly suggest leveraging 1 to 1 and not 1 to 3 or more.

    Leveraging is not new, but is becomming more popular with the masses with interest rates as low as they are.

    Example take out $100,000 of equity from your home, pay 3.5% per year interest. ( LOC) payments are approx $300 a month to service the loan.

    Invest that money at 10% per year return ( yes thats correct) on SECURE investments. It pays you approx $833 a month interest payments making your monthly cash flow up over $500 after paying the loan itself.

    Happy Investing.

    Dean

  3. I’ve practiced leveraged investing for about 20 years quite successfully. I only started when my mortgage was paid off and I could use a home equity line of credit or remortgage to access god interest rates. and it had to be that I could handle the payments without having to sell any investments. That preserved me from trouble in market downturns. Still, this is not for the faint of heart or those with a short time horizon. No one can accurately predict the market trends in the short term.

  4. yes, did my first at 18
    I borrowed 5k and invested it in Canada savings bonds.
    I paid off the loan in a year and had 5k plus interest
    to show for it.

    I always set things up so that I can handle the loan expense
    with my regular income. I put money in high quality stocks
    and leave it…

Leave a reply