Weekend Reading – To leverage or not to leverage
Welcome to a new Weekend Reading edition, to leverage or not to leverage edition.
I’ll come back to some thinking on that, in a bit!
First up, some recent articles in case you missed them!
I highlighted a MarketWatch article recently that suggested some younger workers need not save for retirement at all, and why.
I’m in the process of giving away a new personal finance book:
Weekend Reading – To leverage or not to leverage – is that the question?
Borrowing money today to invest in the future, for expected higher returns over time, is a legitimate strategy to build wealth.
We do it all the time, at least most of us do – with housing. The same could also be true with your education, that’s an investment in you and your human capital. Same goes for launching a business, borrowing money to grow that as well.
A less common path maybe, but a much more scrutinized path, is borrowing money to build an investment portfolio.
Borrowing for investment purposes essentially means you intend to invest large amounts of capital either all at once or over a period of time, to typcially buy publicly-traded companies.
This approach can also be tax deductible.
If you use borrowed money to buy investments, for investment income, the interest may be deductible. As long as your investments generate income such as dividends or interest, or if you have a reasonable expectation that they will generate income, you can deduct the interest on your loan from your total income. Capital gains are not income for the purposes of this deduction. If you borrow to invest only in shares that don’t pay dividends and rely on capital gains to make money, the interest is not deductible.
This brings me to this new point: borrowing to invest can also trigger major financial consequences.
Folks in their 20s or 30s, or even 40s, growing a career or family or both, likely have many competing financial choices and obligations. Rent, mortgages, car payments, childcare expenses, expenses related to childrens’ activities – let alone saving for your financial future – all compete with each other. Add on too much leverage, and this makes life and your personal finances, much more complicated to maintain.
Leveraged investing comes with many risks:
- the investment made with borrowed money may drop in value, which can trigger bad investor behaviour.
- the investment made with borrowed money may not deliver the desired investment income to cover loan costs.
- any investment made should ideally be aligned with any investor long-term financial goals, measured in years or decades, related to any well thoughtout financial plan.
All too often, I see these risks underestimated.
I think people, including myself, don’t know what you don’t know.
For years now, investors have been able to borrow money against their home through a home-equity line of credit. But such borrowing might only be good for folks who have considerable wealth tied up in their home, and/or who have the financial discipline to pay off any debt should they need to. Tapping a home-equity loan like an ATM machine might be far from smart for many individuals.
Coming back to what you don’t know – risk is generally defined as the possibility of something negative happening: some harm, danger or loss. Risk involves uncertainty about the effects/implications of an activity or impacting things we value. While there are many elements of risk and risk management, most of us would agree it’s the uncertainty part that could deliver undesired effects or significant losses – and risk usually keeps most people financially-worried.
So therein lies the rub for me: unless you are very skilled at risk management (and some investors are) – I would avoid too much leverage. That means, borrowing some money for your house, for your education, for your business and even for your portfolio is all fine and good, but you should only borrow lots of money and take on higher financial risk IF you are a practicing expert in risk management.
Do you know in detail how inflation will work out?
Do you know where interest rates are going and what direct impact that will have on you?
Have you considered what happens if any financial decision doesn’t work as intended, including what you will do next in any of those conditions?
I doubt it, but there’s no shame in that. True risk management work is tedious and ongoing, and quite frankly, most of us don’t have the time for it to become an expert-at-home or keep up our proficiency! Myself included. 🙂
This is why I don’t borrow huge sums of money to invest, in a house or my portfolio, and likely won’t.
Instead, my personal finance recipe is boringly simple but effective for me:
- I do take on debt, mortgage debt, but not too much – I pay it off at a very low-interest rate (1.69%).
- I pay myself first, maxing out my TFSA first and then RRSP next.
- I invest in my/our taxable accounts if and when I have money to invest beyond our TFSAs and RRSPs.
- I live my life and try to spend money leftover as I please, because life is short and time is precious.
No lengthy credit applications to sell my soul. No margin calls. No massive lines of credit to worry about it.
I have full confidence there are many investors out there who are savvy at leverage and are well-suited to borrow and keep borrowing for wealth-building purposes. I’m simply not one of them and it doesn’t bother me one bit.
What are your thoughts on leverage? Do it, still doing it? Avoiding it? Share with me in a comment!
More Weekend Reading – To leverage or not to leverage
Part of my inspiration for this week’s theme was from Rob at Passive Canadian Income, who just deleveraged I suspect for some of the reasons I wrote about above. From Rob:
“While its unfortunate to lose that much in forward income our heloc was charging 6% (and will probably increase before falling down a bit) on 100k those payments would cost $7200 a year…. I wanted to pay off all our debts and will continue dollar cost averaging into positions each month.”
If you want to make a few extra bucks, fast, Maple Money has some ideas.
My friend GenY Money continues to compound money like mad.
“My September 2022 Forward Dividend Income is $27,099 and this is a 3.6 % increase from last month, or $931 increase in annual dividend income.”
“This means that in September:
- I earned $155.41 every day from dividends ($4,662.42 / 30 days).
- I earned $26.49 per hour from dividends (assuming a 9-5pm job).
- I earned $6.48 every hour of every day of the month from dividends.”
Vibrant Dreamer keeps a fine list of monthly dividend income updates, and I’m happy to be on it!
Like most DIY investors in Canada, we like stocks but we really enjoy buying and holding stocks that Beat the TSX index!
Check out our interview with DividendStrategy.ca on Cashflows & Portfolios about when the BTSX investing strategy works and when it doesn’t for your wealth-building ideas.
Further Reading: Can you have too much income from dividends???
Dividend Growth Investor shared his analysis of Microsoft stock, well worth a read.
Watch and listen to me at the 2022 Canadian Financial Summit!
This year’s Summit is coming fast – next Wednesday, October 12th!
Some fast-facts about the Summit:
- I’m speaking 🙂
- The Summit is once again, 100% online, so you can stream all the talks/videos right from your computer/tablet/phone.
- Once again, this event is completely FREE to attend. However, if you can’t make it for the scheduled date/time, you will be given the option to purchase a special any-time, anywhere, Premium All-Access Pass that will allow you stream the entire conference whenever that you fits you best.
I encourage you to get that currently discounted All-Access Pass to watch all speakers, all topics, whenever you wish!!
Once you sign up, from October 13th to October 15th, you’ll get an email each day that will contain the links to all the interviews and presentations for that day.
Remember that if you did not buy the All-Access Pass, those videos will only be available for free viewing for 48 hours from the time that they launch. There are 35+ sessions at this year’s Summit, plus 6 bonus interviews and 4 live Q&A sessions for those who purchase the All-Access Pass from my link.
Feel free to head on over to the Canadian Financial Summit, sign up for free, AND be automatically entered to win one of the free Premium All-Access Passes the team will be giving away when the event goes LIVE on October 12th.
A final reminder that the Early Bird Discount on the All-Access Pass will end on October 12th, so this is one of your last chances to get it at the reduced price. Once the Summit starts on the 12th, the price will increase to $97, and after the Summit is over the All-Access Pass will immediately revert back to its full $197 price tag.
Here is my link again to secure your Early Bird Discount (at 56% off!) before the price goes up October 12th.
Have a great weekend!