What are your thoughts on borrowing money to invest?

Discussion in 'Investing' started by MrMike, Feb 9, 2021.

  1. TomB16

    TomB16 Well-Known Member

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    As I mentioned early in this thread, we chose to carry a couple of mortgages further than we had to in favour of investing the money. It worked out well and we lived happily ever after.

    ... but, for the grace of God, we might have made that move right before a crash and taken a pretty severe net worth hit.

    The point is, it may have been a smart move but succeeding with it does not prove that. We took a calculated risk and got away with it. To be fair, we could have carried the debt even if the investments had gone to zero so it wasn't the biggest risk.

    Best wishes to anyone carrying debt.
     
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  2. MrMike

    MrMike Member

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    Thanks! Yes, I'm very happy with how things are going except, I can admit that investing my HELOC during covid is the reason I'm doing AS well as I am. If I started more recently, I'm still confident in this strategy but it would take me much longer to build up the profit I have now.

    Thanks for sharing that story. A loan against the value of your portfolio - sounds like margin which IS TERRIBLE for this exact reason. By using a HELOC, that allows my stocks to drop in value and allows time for them to recover. Like him, if they're all good companies like many blue-chips are (I wouldn't call Amazon blue-chip) then they will recover. All the while, paying you dividends.

    Stocks go up and down all the time and crashes happen! Your loan shouldn't be tied to their value - ever. That is not a good plan.

    I had $1K on margin once just to see how it was - I couldn't handle it. The stress was too much for me haha I paid it back that same month and wont ever use margin again.
     
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  3. MrMike

    MrMike Member

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    Hey! haha "throwing up on itself" I like that. It's still going great - over the past few months, I've been down 9% ($30K) from my height. But I don't see it as losing $30K; I look at it like I'm up $66K which is my total profit. Plus, my dividends are still coming in - except FFN (a split-share fund), it's price fell below NAV so they wont be paying in June 2022, at least.

    I don't mind this correction because now my reinvested dividends can buy more shares than they otherwise could have!!! Things will go back up - if that takes a year or 2 or 5, that's fine. During all that time, I'll continue to collect dividends and buy more shares of cheap stock. Then when it does recover, I'll have more shares that will increase in value! :)

    Interest rates continue to increase so that is eating into my profit as well.

    Current Update
    • $1,818/month in dividends
    • $808 in interest (I use to pay $541/month... those were good days haha)
    • NET $1,010/month in dividends
    • My portfolio is still up $66K from my principal investment. I was close to hitting $100K for awhile :( oh well

    New Plan
    Currently I'm using my HELOC to invest in my TFSA, RESP, RDSP and a non-registered account. But I can only claim the interest on the amount that's being used for the non-registered account.

    So in my TFSA, I'll keep reinvesting dividends into blue-chip Canadian companies and growth ETFs/companies - I have all the covered call ETFs and split-shares I want - I wont buy any more.

    The dividends from my non-registered account I'll use to pay down the HELOC (the portion used to invest in the registered accounts). Since the TFSA loan portion is be going down, monthly interest will go down and the available credit in my heloc will rise. Then at a later date, if there is more of a crash or a deal, I can use that available room to take out money again and invest - and this time, that amount will be tax deductible (which it wasn't before in a TFSA).
     
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  4. MrMike

    MrMike Member

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    Hi all - another month, another interest rate increase. I wanted to give an update regarding the recent interest rate increase of 1%!!!

    Pre Interest Hike
    Interest: 3.9% or $808/month
    Net profit: $1,010/month

    After Interest Hike
    Interest: 4.9% or $1,011/month - an increase of $203/month
    Net profit: $819/month

    Amount invested: $280,000 ($246,400 is from HELOC)
    Market value: $325,609
    NET: +$45,609 (down more than half from $94,109 height in March 2022 - was really hoping to hit $100K)

    My Plan Going Forward
    Hasn't change. Reinvesting TFSA dividends into Amazon and Apple (to increase Growth in my portfolio), while withdrawing my non-registered account dividends to pay down the portion of my HELOC that I used in registered accounts.

    Today was actually the first day I withdrew $1,100 [​IMG] Sad times but it's the best decision long-term. And if the market continues to fall, I can always take back out the amount I've put back on, only this time, I can claim the interest since it will be in my non-registered account.


    Happy HELOC investing!
     
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  5. TomB16

    TomB16 Well-Known Member

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    Good job, Mike. :thumbsup:
     
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  6. T0rm3nted

    T0rm3nted Moderator
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    Thanks for the update, glad this is working out for you!
     
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  7. MrMike

    MrMike Member

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    Just posted an Update video - nothing different than what I posted above.

     
  8. Curbdog

    Curbdog New Member

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    Just about every book I have read about trading advice from the experts, they all suggest never trading on leveraging money.

    They suggest never trading with money you cannot afford to lose.

    They suggest never trading while unemployed or when/if trading is your only source of income/relying upon it.
     
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  9. TomB16

    TomB16 Well-Known Member

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    Mr. Mike is not trading. He is investing.
     
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  10. Spud

    Spud Well-Known Member

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    Running right along on house money to. Mr.Mike put his house to work.
     
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  11. TomB16

    TomB16 Well-Known Member

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    This is where investing is diametrically different to trading. People who think investing means buying and selling stocks should not borrow money to trade with. I know several people who have trading debt that far out strips their trading account balances. To be fair, they were trading crypto and slowly but surely lost a lot of money over time while they shared stories of people who made a ton of money from crypto and subsequently lost it in a hard disk crash.

    Buying a distributing company that is publicly listed, with the intention of long term hold, is an investment. I don't think borrowing to invest is a great idea but it's also not the worst idea.

    If borrowing to invest was evil with a high chance of failure, nobody would ever start a business or buy a home. A business or a home has the potential to lose a lot of money but, over time, they usually do pretty well and justify the debt costs with the offsetting cost of inflation.
     
    #111 TomB16, Aug 9, 2022
    Last edited: Aug 9, 2022
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  12. MrMike

    MrMike Member

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    By and large, most people shouldn't use leverage. The majority of the general public can't handle short-term volatility and panic sell. My dad had a friend who bought cruises during the early days of covid. That's not for me but if was going hold for long-term, I'm sure he would have made money..... but he didn't. The more they went down, the more he got scared and eventually sold at a loss. Someone like him, shouldn't use leverage.

    But if you're buying sold companies/ETFs with the mindset of holding long-term, what's the difference between you money and borrow? I don't want to lose either and investing in companies like TD or Enbridge isn't risky at all (outside of the normal risk that's inherit with any investing).
     
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  13. Rayak

    Rayak Active Member

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    I understand what you are saying, but I think it might be a little disingenuous to draw a parallel between borrowing money to invest in the stock market and borrowing money to buy a home or a business - or to start a business.

    If borrowing to buy a home that you will be living in, that home has much utility value in addition to it's potential value as an investment. If borrowing money to invest in the stock market, those investments have no utility value other than as investments. For example, if you borrow money to buy a home, and the mortgage payment is $2,000 a month, immediately you have utility value of the amount it would cost you to rent a comparable home or apartment, which might cost, say $1,500 for example purposes. You're actual 'investment cost' of your home would be $500/month + maintenance costs, rather than the full $2,000. There are other details involved, but you get the point, I'm sure.

    If borrowing money to invest in a business, in most cases there is "sweat equity" that goes into the equation, as well as many other factors and variables.

    I'm not looking to argue or disagree with you, I just don't want some person who doesn't know any better to come to the forums seeking investment advice or seeking to learn more about financial matters, and somehow come to believe that borrowing money to invest in the stock market is not much different than borrowing money to invest in a home or a business.

    It is very different, in my opinion. None of the three should be entered into lightly, but special care, consideration and caution should be exercised even more so if borrowing to invest in the stock market!
     
    #113 Rayak, Aug 11, 2022
    Last edited: Aug 11, 2022
  14. MrMike

    MrMike Member

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    I believe the issue with the comparison is that you don't invest in "the stock market". The stock market is made up of ALL sorts of different companies and funds and they are not all created equal. Investing in bitcoin is very different than investing in TD bank. Day trading is very different than investing. Investing in a company because it's cheap and you believe the price is going to sky rocket up is different than investing in a blue-chip company for small growth and small dividend increases over time.

    It can be but a house is a solid investment (but even this depends on the area - "location, location, location" as they say) and as long as you choose another solid company to invest in, it can be exactly the same. The problem is when people want to get rich quick and start investing in startups or Gamestop back in January 2021.If you borrowed money then and lost it all, that is disastrous..... then again, I wouldn't call that "investing".

    100% agree :)
     
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  15. MrMike

    MrMike Member

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    Right, you absolutely need discipline and have the right mindset. I know people who try to get rich quick or simply pick questionable investments - those people should not use leverage.

    Case in point, all that hype with bitcoin, you would be down more than 50% this year (and they don't pay a dividend). I also know people who, during covid, invested in cruise ships and airlines - not great choices in my opinion, Especially with leverage!!!

    All the more reason why I'm trying to show people another way. It's slow and boring but it works.
     
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  16. TomB16

    TomB16 Well-Known Member

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    It is astonishing how many people do not understand that buying a stock is buying a business. They seem to think that because it is a fractional portion of a business, it is different. It is not.

    The thing that makes it different is they don't care about the business, they just want to make money fast by selling the stock to someone else for more than they paid in the shortest period of time possible. This is trading; AKA: gambling.

    If you had about $2M, you could set up a large, modern, grocery store. You would need to leverage that $2M with some debt. Once you have the store, shelves, signage, and all the stuff a grocery store needs, you are going to need to staff the store. If you work hard, understand the business, and do a decent job running the store, you will make a reasonable profit.

    Albertsons has a market cap of $15B and a network of 2250 stores. That comes to $2M of market capital per store. You could put your $2M into Albertsons stock and you would own the equivalent of roughly one grocery store.

    In some ways, these two things are different but in many ways, they are the same. With the stock, you are also buying a management team. When you buy a store, you can decide if you want to rent a management team or if you want to manage it yourself. The value of owning a grocery store is it's ability to generate revenue. The value of Albertsons stock is it's ability to generate revenue.

    There are businesses behind the symbols and changing share prices.

    The vast, vast majority of people look at a stock and they think, "I think this is going to go up" or "I think this is going to go down". They base this on intuition that is disconnected from any objective metrics. The reality is, the stock will *trend* up over time if the business is run well and it will *trend* down over time if the business is operated poorly.

    Buying and selling stock is not investing. It is trading.

    Buying and owning a business is investing whether you own a piece of the business or the entire thing.
     
    #116 TomB16, Aug 20, 2022
    Last edited: Aug 20, 2022
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  17. TomB16

    TomB16 Well-Known Member

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    Cocaine helps with the stress. I learned that from Wolf of Wall Street.
     
  18. Spud

    Spud Well-Known Member

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    Until you run out.
     
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  19. MrMike

    MrMike Member

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    haha This made me think of:
    [​IMG]
    [​IMG]
     
    #119 MrMike, Aug 20, 2022
    Last edited: Aug 20, 2022
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  20. Spud

    Spud Well-Known Member

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    A little humor never hurts. Enjoy watching your strategy.
     
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