Getting Started with Leveraged Investing

I’ve finally started a new investing strategy that I have been thinking about for a long while—leveraged investing. It’s not without risks, but follow along as I make my case and present my strategy for leveraged investing in the stock market.

Motivation for Leveraged Investing

Up until 2019, my wife and I were saving aggressively to buy a home. This was a short-term goal and meant we couldn’t risk our savings by investing in the stock market. As a result, our assets haven’t been invested in the market for very long, and the bulk of our net worth is tied up in real estate.

Our home represents the bulk of our net worth.

Now, we’re finally in a position to take a more long-term view towards saving and investing. And despite our aggressive savings, we feel that our portfolio is underexposed to the broad equity market. We hope to use a bit of leverage to gain more exposure to the global stock market as we stay invested for the long term.

Having the Right “Stuff”

However, it’s not enough to learn about leveraged investing. Since leveraged investing can amplify your losses, you must have the right mindset and position, financially, to take on the risks associated with leveraged investing.

Having a good credit score can help you access cheaper financing.

So what is the right mindset to have as a leveraged investor?

Well, in my view, being patient and disinterested are the ideal qualities of a successful leveraged investor. Patient, because it may take a long time for your strategy to yield positive results. And disinterested because the short-term gyrations of the stock market may otherwise make you regret your decision.

These two qualities describe us quite well. We’re in the position to be patient; our housing needs are met, and we are focused on saving for retirement. And despite my interest in personal finance, we are undoubtedly disinterested. We never look at our investment accounts other than to add funds (or write an article!).

As for being in the right financial position: we’re aggressive savers with stable, long-term employment. We have a single defined-benefit pension, which will provide us with a relatively high “floor” for our income in retirement.

How I Got Started

The idea of leveraged investing sounds perfectly straightforward: invest with a loan, and whatever you earn above and beyond the loan’s interest rate is your profit. But the problem for most people—me included—lies in the execution. For one, how do you get a loan with a rate low enough to use for investing?

Technically, any loan with an interest rate lower than the stock market’s long-term returns could be suitable for investing. But if you’re like me, having a 1 or 2% margin of error isn’t enough to make me jump at the idea of leveraged investing.

What made me decide to get started is actually an email I received from Tangerine. An offer for a $25,000 line of credit at 1.99% for 90 days, rising to 2.45% afterwards. This offer was so enticing to me. Even if I manage to earn a modest 6% by investing over the long-term, I’d be earning 3.55% before taxes—all without investing a dime of my own money.

The lucky offer I received from Tangerine.

Up until now, the best I received was for a 7% line of credit with TD. And given that I’m a new homeowner, there’s not much equity in my home for me to access. And besides, getting a line of credit at Tangerine Prime is a great way to get started as their prime rate has been historically competitive

Leveraged Investing Strategy

After accepting Tangerine’s offer, I next opened an account with Interactive Brokers. Why Interactive Brokers, you may ask? Well, margin.

Interactive Brokers is famous for their low margin rates.

By opening an account with Interactive Brokers, I’ll get access to their insanely low margin rates. Best of all, by using a taxable account, the margin loan’s interest can be deducted against my income. Effectively, Interactive Brokers is allowing me to borrow to invest at just 1.12%.

So, my plan is to use this account to purchase shares of VEQT (Vanguard’s All-Equity ETF Portfolio ETF). VEQT is an excellent choice because it’s eligible for reduced margin requirements. Vanguard keeps VEQT in balance, and since I’m investing in a taxable account, I can recover a portion of the foreign withholding taxes paid.

I’ve started buying VEQT using a 1.7 leverage ratio.

With each purchase of VEQT, I’ll use a leverage ratio of up to 1.7 to increase my total investment. A leverage ratio of 1.7 would allow me to avoid a margin call unless global equities encounter a steep, 40% decline in values—not too unlikely, given today’s sky-high equity valuations.

Long-Term Plan

So how does leveraged investing fit into our long-term plan? Well, our immediate goals are basically unchanged. We’ll continue working towards our goal to max out our TFSA accounts, which we hope to achieve sometime in 2022.

What’s new for us is that while contributing to our TFSA, we’ll also contribute to our taxable account using our Tangerine line of credit. Over the next couple of months, I plan to dollar cost average into this account until the full line of credit is invested. I’ll invest another 70% or less by using my Interactive Broker’s margin loan with each contribution.

After maxing our TFSAs, we’ll distribute extra savings into our RRSP and taxable account. With each additional investment in our taxable account, we’ll seek to reduce our leverage ratio over time. And when our current mortgage term is up, we’ll consider using the Smith Maneuver to gain access to even more investible cash.

Thanks for Reading!

Thank you for checking out my first post on leveraged investing. What do you guys think? Is my plan too risky? What are your views on leveraged investing? I’d love to chat in the comments below!

I recently wrote a few articles that you may be interested in. This includes my list of the best REIT ETFs in Canada and my guide to closing costs when purchasing a home. Consider giving those a read if you think they’ll help you on your financial journey!

As always, please consider following me on social media or signing up for my monthly newsletter if you’d like to get notified when I post new content. 

12 comments

  1. This is awesome. I sadly forgot to call Tangerine and the offer disappeared. I have to wait for them to give me a new offer. Maybe this time they give me a better one. The initial one was for 4.45% so yours is much better!

    However, I didn’t have plans to invest this in the market. I wanted to use it as an Emergency fund for just in case.

    So, your plan is to maximize this. How about emergency fund? Are you keeping some cash aside or using your TD Line of Credit?

    1. Hey Mr. Dreamer!

      We keep $10k in a proper emergency fund. And then the balance on our chequing accounts is usually another $10k or so. If we had to, we could open up a LOC with TD. I’ve been ignoring their offers for a LOC since the rates have been quite bad.

      I hope you can get a good offer from Tangerine soon. I was so shocked that I got such a good rate from them.

  2. Couple of questions:

    1. BoC is going to raise the rates in 2022 and hence the prime rate will also change. How does that alter the equation and risk.

    2. Since you have contribution room in your TSFA and RRSP why not use leverage and contribute in registered accounts. That way you are getting tax free investment returns.

    1. Hi Meraki,

      Those are two great questions!

      1. Yes, I expect rates to increase, as right now they are extremely low. My investment is essentially betting that the long-term returns of global equity markets will be higher than the interest I’m paying on my loans. In the short term, if I had to guess, I would say rates will rise, and equities will underperform (perhaps by a lot!) compared to the past couple of years. However, even under those conditions, I still think this is the right long-term strategy for my finances and risk appetite; the payoff would just be less.

      2. That would be a decent strategy. I’m not going that route because I lose the tax deductibility of the loan interest if I invest it in a registered account. Also, my wife and I are on a glide path towards maxing our TFSAs relatively soon. And as for our RRSPs, we’re not 100% sure we’ll need to max them going forward, as our pension gives us a relatively high income in retirement. By using a taxable account, if we decide to buy a new home in the future, we can do that without the hassle of withdrawing from our RRSPs.

      I hope my answers help you understand my thinking. I’m really interested in your feedback, so thank you for commenting!

    1. Thanks, Mr. Money Mechanic. I figured this was right up your alley, so glad to see you approve!

    1. Hi Tawcan! I did it with a spreadsheet, but here are the basics:

      $25k cash invested at a 1.7 leverage ratio gives $42.5k invested. If the investment were to fall 42%, we’d end up with $7,150 cash remaining, and we’d still owe our original margin loan amount of $17.5k. Under this scenario, if you take the current value of the investment and divide that by the cash, you’d get a margin rate of 29% ($7,150 / $24,650), which is low enough that we’d be margin called with VEQT.

      Note that the actual leverage ratio is infinity since even our “cash” is from a line of credit.

  3. Great choice of ETF to use leverage on.
    Short term anything can happen, but VEQT is a fantastic long term hold.
    Buffett invests with a 1.6x leverage ratio so pretty close to what you’re doing.
    Good luck with your new IB portfolio.

    1. Thanks a lot, Liquid! Your blog inspired a lot of this post. You’ve been posting more often lately, and I’ve enjoyed reading your insights. Cheers!

    1. Yea, the tax deductions are a pretty nice treat. Especially when your marginal tax rate is high!

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