# Investing with borrowed money



## potato69 (Mar 21, 2018)

I just received a letter for a LOC at 2.99% - I was thinking of using that LOC to invest for 6 months in the Canadian index.

What do you think of this? Crazy plan?


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## newfoundlander61 (Feb 6, 2011)

Investing borrowed money for just 6 months, yes this is crazy but that is my opinion.


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## spiritwalker2222 (Nov 7, 2017)

Seems more like an impulse than a plan. What tweaked you to do this, your sudden ability to access a LoC?


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## james4beach (Nov 15, 2012)

I must admit I've had similar ideas when I received those offers... but the problem is the time horizon. 6 months is NOT long enough to have a reasonable assurance of a "good return" in stocks. It's not a good idea.

You will not be able to find anything with a 6 month horizon which has a high probability of > 3% return.


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## Rusty O'Toole (Feb 1, 2012)

I may be nuts but not nuts enough to play the market with borrowed money. That is one of the biggest hoodoos there is.


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## Mortgage u/w (Feb 6, 2014)

sure. buy a penny stock with the borrowed funds and keep your fingers crossed.


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## james4beach (Nov 15, 2012)

Here's the only variation on this which I've actually done myself.

I have a cash/savings account (daily needs and emergency fund), and then my investments. Throwing out some numbers here to illustrate, normally I have a goal of keeping 40K in cash and never want to go below that. I invest everything else.

When I got my hands on an unsecured LOC, I did allow my cash balance to drop a bit lower than normal, investing a bit more than I normally would. Maybe I let the cash go down to 30K anticipating that I would have enough income to replenish the cash anyway.

So this isn't leverage, but rather, letting my "cash reserve" run a bit thin because of the LOC back-stop. No $ has been borrowed from the LOC. But I am being a bit more aggressive, and the result is more $ invested than before the LOC existed.


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## OptsyEagle (Nov 29, 2009)

There are two major problems that investors experience when they borrow to invest. 

I won't bother explaining the difference you will experience when you see borrowed money dropping quickly in value compared to watching your own money do the same thing. Most people think they will act the same. Very few do. It is different.

The 2nd issue I will point out because I think you are just about to make this mistake. It is very rare that people think that borrowing to invest is a good idea, when the stock markets are reeling from bad news and falling precipitously. Usually an investor needs to acquire the confidence in the stock markets, that only a long upward movement in them can offer, before they are willing to take the risk of borrowing to invest. Hopefully you can see the problem with this. Not buying when stocks are very cheap and only buying when stocks have risen to much higher valuations. This issue has little to do with issues around borrowing to invest and more about how investors tend to want to approach it. They almost always buy at the wrong time.

Those are the two bigger issues. The other one unique to you is if you have to close out this plan in 6 months, then it is a very bad idea. The risk reward sucks.


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## MarcoE (May 3, 2018)

potato69 said:


> I just received a letter for a LOC at 2.99% - I was thinking of using that LOC to invest for 6 months in the Canadian index.
> 
> What do you think of this? Crazy plan?


I never invest with borrowed money but that's me.


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## Manestream (Dec 3, 2020)

OptsyEagle said:


> There are two major problems that investors experience when they borrow to invest.
> 
> I won't bother explaining the difference you will experience when you see borrowed money dropping quickly in value compared to watching your own money do the same thing. Most people think they will act the same. Very few do. It is different.
> 
> ...


Listen to THIS! Very well said. You are planning to gamble not invest in stocks. If you don't know what you are doing and do not have the experience of managing your emotions through up and down markets do not borrow on your LOC to invest for 6 months.


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## Rusty O'Toole (Feb 1, 2012)

The only way I would borrow money to invest would be to take out a mortgage to buy property. Playing the stock market with borrowed money is a good way to jinx yourself, like deciding beforehand that you will make a certain amount of money in a certain time.


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## Rising Tide (Jun 5, 2019)

Like others have said, 6 months is to short of a time frame to borrow to invest.

However, I think that if you have a stable income and would be paying off the LOC with money you were going to invest anyway, one could take out a reasonable amount to invest in certain circumstances with a longer time horizon. The risk/return proposition is much worse now with the huge run up in stocks, so I think you've missed the boat and I'd be hesitant to use leverage at this point. Like OptsyEagle said, behaviourally people want to borrow to invest at the wrong times.


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## potato69 (Mar 21, 2018)

Thank you everyone for your thoughtful comments

I know you're all right - this is not a great idea. I did borrow money to invest similar to what Rising tide said this past year, put my 6K of TFSA on my LOC for a couple months to just get it in all at once when the market was reasonably low That's up 20% in 6 months. I know that's unreasonable now and really if I had done it normally it would have likely still been up 10% - - past performance of an approach is not any indication of future success. I am being dumb - hence my post and thanks for talking me down


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## MrMike (Sep 30, 2020)

As long as you pick good companies and not get greedy, this can be a great idea. The most stressful part is the first 3-9 months. After that, you should receive enough dividends to compensate for any drops that may happen.


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## potato69 (Mar 21, 2018)

Well turns out I should have done this!! Haha. Although if I was really smart I would have bought GME a year ago! har har.

So I got another TD offer which is even better. Apparently they will put my LOCc down to 0.99% for 6 months. 

So here's my plan and I agree it's not without risk but I don;'t think the risks are crazy.

Basically if there is a 10% correction in the TSX (i.e down to 18K) I'll buy 30K and hold it for 6 months.

Will keep you posted.


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## james4beach (Nov 15, 2012)

potato69 said:


> So I got another TD offer which is even better. Apparently they will put my LOCc down to 0.99% for 6 months.


I'm curious how you are getting these low rates. Is this the TD "fixed rate advantage" promotion?

I guess it locks in the low rate for a fixed amount of time, but then the rate goes back to normal, right?


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## Money172375 (Jun 29, 2018)

james4beach said:


> I'm curious how you are getting these low rates. Is this the TD "fixed rate advantage" promotion?
> 
> I guess it locks in the low rate for a fixed amount of time, but then the rate goes back to normal, right?


Correct. Algorithms target customers who have “a propensity” to “buy”. Algorithm seems to have worked for this OP.


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## potato69 (Mar 21, 2018)

james4beach said:


> I'm curious how you are getting these low rates. Is this the TD "fixed rate advantage" promotion?
> 
> I guess it locks in the low rate for a fixed amount of time, but then the rate goes back to normal, right?


I assume that's what it is. 

My issue to be honest is that I'm at a stage in my life that I'm too frugal. I need to lighten up a little, save less and live for now.

I think what I propose is not hugely high risk. Yes, I agree that you need 5+ years to have all but guaranteed returns in a globally diversified investment portfolio - i don't deny that at all.

Borrowing money at 0.99% for 6 months in a inflation heavy environment and investing it in global indices IF a 10+% correction occurs does carry some risk but I don't think it's very, very high. I can, for example, afford a 50% loss of this - it wouldn't massively affect my financial goals (but would suck).

Anyway, it's all random to see if there is that 10% correction within the next month.


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## james4beach (Nov 15, 2012)

Money172375 said:


> Correct. Algorithms target customers who have “a propensity” to “buy”. Algorithm seems to have worked for this OP.


Do you have any suggestions on how I can trick the algorithm into offering me a reduced LoC rate?


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## Money172375 (Jun 29, 2018)

james4beach said:


> Do you have any suggestions on how I can trick the algorithm into offering me a reduced LoC rate?


I was never privy to that info, but I’ve been told the following play a part:

evidence of other credit facilities that flow through your account (ie. credit card payments or loan payments (from other lenders) that flow through the chequing account
evidence of new credit facilities elsewhere. I believe this where the credit “soft” hits occur. Not certain of this, but I believe a bank can tell when you get credit elsewhere. I could definitely be wrong here….the whole world of “soft” hits is murky
having a previous LOC that is now closed. Looking to “win back” the account.
unlike in the past, the back offices do much of the processing when a debt consolidation is done. Ex. You obtain a loan at BNS to pay out debts at TD and RBC. The folks at TD and RBC will know that the debt has now moved to BNS.

if you have an existing ULOC, or HLOC…..you always ask for a rate exception based on relationship. Helps to have a competitive offer. Or you could simply say you’re shopping around and willing to move the full relationship to whoever offers the best borrowing rate. Doubt you would get 0.99%….but they may knock down the variable rate. At TD, these decisions were made by the back office product group….just needed to find an advisor in branch who was willing to believe “your story” and send out the exception request.


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## Tostig (Nov 18, 2020)

Sounds like quite a few people are opposed to borrowing to invest.

How do you feel about the RRSP meltdown strategy ? This is borrowing to invest so that the interest of the borrowed money equals and cancels out the RRSP withdrawal amount.


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## Covariance (Oct 20, 2020)

Tostig said:


> Sounds like quite a few people are opposed to borrowing to invest.
> 
> How do you feel about the RRSP meltdown strategy ? This is borrowing to invest so that the interest of the borrowed money equals and cancels out the RRSP withdrawal amount.


If I understand this strategy correctly the efficacy turns on three things; validity of the tax impact in the specific situation, a good investment(s) for the borrowed funds, and a loan used exclusively for the investment. If it were me I would break it up into these pieces and see if they make sense independently. And start by seeing how much tax I would actually save.

Said differently I would not see it as a way to “justify” or finance an investment that can’t be justified on its own.


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