Last updated on May 15th, 2022 at 09:39 pm
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.
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.
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 (sign up using my Orange Code 46870461S1). 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.
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.
By opening an account with Interactive Brokers (referral link), 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.
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.
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!
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