Is borrowing to invest a good idea? All you need to come out ahead is a return on your investment that’s greater than the interest you pay on the loan. That makes it especially tempting when the market is climbing and interest rates are low, such as right now.
Say that an investor contributes their maximum allowable amounts to their Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). This individual also invests in a non-registered account, and they’re thinking about borrowing to increase their non-registered investments. The extra boost can help them retire earlier or more comfortably. It all sounds good. What could go wrong?
CONSIDER THE RISKS
Borrowing to invest means accepting three risks. First is the impact of a falling market, which no one can predict. Your loss is not only your investment’s decreased value but also the loan interest you’re paying. When you invest with borrowed funds, market losses are magnified.
The second risk is rising interest rates. Any increase in the cost of borrowing reduces your potential gains. Finally, your financial situation could change. Whether from illness, job loss or any unexpected calamity, you could find yourself in a position where loans become a burden.
WE’RE HERE TO HELP
Borrowing to invest can be an effective way to meet a financial goal, but it must be practised with caution – and it’s certainly not for everyone. If you’re thinking about this strategy, please talk to us. We’ll offer guidance based on your financial situation, investment objective, time horizon and personal risk tolerance.
This material was prepared for and published on behalf of your financial advisor and is intended only for clients resident in the jurisdiction(s) where their representative is registered. This material is provided solely for informational and educational purposes and is not to be construed as an offer or solicitation for the sale or purchase of any securities or as providing individual investment, tax or legal advice. Consult your professional advisor(s) prior to acting on the basis of this material. Insurance products are available through advisors registered with applicable insurance regulators. Individual equities are available only through representatives of Assante Capital Management Ltd. In considering any particular investment, please remember that past performance is no guarantee of future performance. Although this material has been compiled from sources believed to be reliable, we cannot guarantee its accuracy or completeness. All opinions expressed and data provided herein are subject to change without notice. Neither CI Assante Wealth Management or its dealer subsidiaries Assante Capital Management Ltd. and Assante Financial Management Ltd., nor their affiliates or their respective officers, directors, employees or advisors are responsible in any way for any damages or losses of any kind whatsoever in respect of the use of this material. CI Assante Wealth Management is a registered business name of Assante Wealth Management (Canada) Ltd. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Assante Financial Management Ltd. is a member of the Mutual Fund Dealers Association of Canada and the MFDA Investor Protection Corporation (excluding Quebec). © 2022 CI Assante Wealth Management. All rights reserved.