subscribe to the RSS Feed

Sunday, April 23, 2017

How Low Can We Go?

Posted by Tim Stobbs on July 10, 2008

Was it me? I got back to work and the stock market starts taking a huge dive down. I swear the gods are teasing me here. I’m hard pressed to have much cash and there is all this potential on dirt cheap pricing of stocks. I want to be able to buy a few things!

So I’ve been thinking about my little leverage experiment. I’m actually getting some what used to the idea of borrowing money to make money. So should I just expand it for the short term and pick up some deals? My monthly cash flow would be the same as I’m not up to my minimum payment each month in interest. Then I can just pay it back as time permits. The other side of it is am I falling into a trap of buying stock on credit and not keeping enough savings for this purpose.

What I need here is some rules to direct myself.  I rather like the idea of having no more than 10% of my investing net worth as leverage.  So that would mean I can borrow up to $6000 and still be under that target currently.  I’m so far at just under $3000 being leveraged right now.

This is really the problem with investing isn’t it?  We have all these great ideas, but emotion makes decisions so difficult some days.  So I’m thinking of expanding the leverage by perhaps $2000 for now.  That way I can pick up one deal and then sit on my hands happy that I did get something during this fall of the markets.

Comments

10 Responses to “How Low Can We Go?”
  1. Four Pillars says:

    I can’t say whether you should do it or not but a couple of observations from my experience – I’ve been leveraging for about a year.

    1) It’s a bit of a hassle – more work at tax time and every time I get a dividend I have to log in and transfer it to my checking account since I use the dividends to pay the interest on the loan.

    2) It does add a bit of stress since you are increasing your risk. Obviously with a small amount, you won’t feel much if any stress.

  2. I have not dabbled in leverage to date. The main reason is because I have not yet obtained a HELOC. I am a bit leery about getting one because of the hassle as 4P mentions above. For now I am quite happy investing savings and lowering debt by paying my mortgage off slowly. Nobody knows where the market is going anyway so I figure that if I just save and invest all of the time I’m bound to buy cheap. I also feel like I know enough about how to value a stock that I won’t overpay too bad for anything.

  3. Pragmatic says:

    Hassle, sure, but…It’s worth it. Take the money and use the leverage. You want passive income? Well this is definitely one way to do it.

    Think about the hassles of being a landlord and this leveraging is way easier than that.

  4. How do you prove the money was used for investment outside of an RRSP at tax time?

  5. Four Pillars says:

    MG – you don’t actually prove it at tax time. You just write off the interest.

    If you get audited then you will have to show some sort of paper trail ie $1000 coming from a HELOC (which can’t be used for personal use by the way) transferring to your bank account and then $1000 transferring from your bank account to the broker. I believe that should be sufficient.

  6. Doug says:

    I have been saving cash…. waiting to jump in the market… I have $19,000 sitting in ING and
    was thinking of putting $1000 into an ETF once a month ( a diff one each month )… Don’t like the idea of owning more money to a bank…

  7. Sarlock says:

    The problem for us amateurs is that timing of the markets is pretty much just a crap shoot. Sure prices look cheap right now, compared to recent highs, but there could be a long, long way down before these markets settle, if things come together like they indicate they might. You might wish, in 6 months or a year from now, that you had waited to buy shares on leverage as the markets could easily drop 10% or 20% more by year’s close.

    Take Freddie Mac for instance. It looked cheap last week and many people bought it because of that. Then it dropped another 40% this week. But hey, it’s yielding a 12.5% now based on its most recent dividend! :-P

    I have held myself back from leveraged buying because I don’t consider my investment knowledge to be sufficient to add more risk to my portfolio. Perhaps after 10 years of equity market investing I will consider myself ready.

  8. Matt says:

    I’ve only been investing for a couple years but even Warren Buffett writes that he avoids investing with debt or in highly-leveraged companies.

    Maybe that tells you something.

  9. Canadian Dream says:

    Interesting discussion everyone. I can understand people avoiding debt. After all we keep saying all the time in the blog world: PAY YOUR DEBTS. We often fail to mention debt is really a tool. Yes often people cut themselves with it, but if you use it right it can be a great way to make some money.

    I’ve actually decided on another rule for myself on my leverage. I won’t spend more than $50/month on interest. That way if rates go up I pay down the total debt to ensure I don’t take up too much of my cash flow on leverage.

    @Sarlock

    You have to be careful about looking at yields. If they can’t pay the dividend, does it matter how cheap it really is? You have to watch those value traps.

    Tim

  10. Sarlock says:

    Yeah, was a joke… I expect Freddie’s and Fannie’s next dividend to not be a dividend… :)

home | top