Comments on: The Opportunity Cost of Paying Interest over an Investment Loan http://www.thefinancialblogger.com/the-opportunity-cost-of-paying-interest-over-an-investment-loan/ This is where your finance takes place Thu, 08 Jan 2009 20:44:37 +0000 http://wordpress.org/?v=abc hourly 1 By: The Financial Blogger | Playing on Words with the CRA http://www.thefinancialblogger.com/the-opportunity-cost-of-paying-interest-over-an-investment-loan/comment-page-1/#comment-2739 The Financial Blogger | Playing on Words with the CRA Wed, 16 Jul 2008 10:01:09 +0000 http://www.thefinancialblogger.com/the-opportunity-cost-of-paying-interest-over-an-investment-loan/#comment-2739 [...] fact, it is a line that is quite important for someone who is interested in leveraging. For example, the legibility of the Smith Manoeuvre depends on this tax [...] [...] fact, it is a line that is quite important for someone who is interested in leveraging. For example, the legibility of the Smith Manoeuvre depends on this tax [...]

]]> By: Canadian Capitalist http://www.thefinancialblogger.com/the-opportunity-cost-of-paying-interest-over-an-investment-loan/comment-page-1/#comment-121 Canadian Capitalist Fri, 08 Jun 2007 14:53:19 +0000 http://www.thefinancialblogger.com/the-opportunity-cost-of-paying-interest-over-an-investment-loan/#comment-121 FB: I'll admit that leveraging (moderately) to invest in a broadly diversified portfolio of low-cost funds is less risky than investing in small cap value stocks without leverage. It also allows you to tailor the risk level. Still, I hope investors are realizing that they are taking more risk and are sure that they are comfortable with it. FB: I’ll admit that leveraging (moderately) to invest in a broadly diversified portfolio of low-cost funds is less risky than investing in small cap value stocks without leverage. It also allows you to tailor the risk level. Still, I hope investors are realizing that they are taking more risk and are sure that they are comfortable with it.

]]> By: The Financial Blogger http://www.thefinancialblogger.com/the-opportunity-cost-of-paying-interest-over-an-investment-loan/comment-page-1/#comment-120 The Financial Blogger Fri, 08 Jun 2007 14:26:18 +0000 http://www.thefinancialblogger.com/the-opportunity-cost-of-paying-interest-over-an-investment-loan/#comment-120 MDJ, I prefer to leave all investment gains into my portfolio as compounding interest makes miracle. However, once you have built a good portfolio (after 10 years maybe), it is definitely a good idea to use part of your investment return to pay off the investment loan. Then, no cash flow is required and your are making money by doing nothing. Life is great ! CC, you are right about the tax implication. You are really good at pinpointing problem in calculation, second nature I guess J I’ll work something’s up during the weekend. Thx for the extra work ;-) I don’t consider huge drop in the market as you should not leverage to invest massively into small caps or penny stocks unless you are really rich and can afford to lose it all. If you buy index fund for example and wait 20 years, chances are you are going to average more than 7% base on stock markets’ history. MDJ, I prefer to leave all investment gains into my portfolio as compounding interest makes miracle. However, once you have built a good portfolio (after 10 years maybe), it is definitely a good idea to use part of your investment return to pay off the investment loan. Then, no cash flow is required and your are making money by doing nothing. Life is great !

CC, you are right about the tax implication. You are really good at pinpointing problem in calculation, second nature I guess J I’ll work something’s up during the weekend. Thx for the extra work ;-)
I don’t consider huge drop in the market as you should not leverage to invest massively into small caps or penny stocks unless you are really rich and can afford to lose it all. If you buy index fund for example and wait 20 years, chances are you are going to average more than 7% base on stock markets’ history.

]]> By: Canadian Capitalist http://www.thefinancialblogger.com/the-opportunity-cost-of-paying-interest-over-an-investment-loan/comment-page-1/#comment-119 Canadian Capitalist Fri, 08 Jun 2007 12:14:37 +0000 http://www.thefinancialblogger.com/the-opportunity-cost-of-paying-interest-over-an-investment-loan/#comment-119 Sorry to nitpick, but you must account for the taxes that must be paid. In the above example, after five years capital gains must be paid on $41K for the leveraged investor and only on $3,700 for the investment without loan. The gap will be more like $11,000. The point is not that leverage is not rewarding. It is judging whether you can accept the risks that come with it. What good is a strategy if you are going to panic and sell when markets are going in the wrong direction. In the above example, a 30% fall in the markets will wipe you out after 5 years. You've paid all that interest over 5 years and have nothing to show for it. It is hard enough taking market risks, it is unwise to counsel taking on even more risk with leverage. You can take risks in other ways than leverage - you can invest your entire portfolio in small cap value stocks or invest in penny stocks on the Venture exchange or even buy lottery tickets. We instinctively recognize the risks in above strategies. Why is it that when leverage is recommended, there is no mention of the risks? Sorry to nitpick, but you must account for the taxes that must be paid. In the above example, after five years capital gains must be paid on $41K for the leveraged investor and only on $3,700 for the investment without loan. The gap will be more like $11,000.

The point is not that leverage is not rewarding. It is judging whether you can accept the risks that come with it. What good is a strategy if you are going to panic and sell when markets are going in the wrong direction.

In the above example, a 30% fall in the markets will wipe you out after 5 years. You’ve paid all that interest over 5 years and have nothing to show for it. It is hard enough taking market risks, it is unwise to counsel taking on even more risk with leverage.

You can take risks in other ways than leverage - you can invest your entire portfolio in small cap value stocks or invest in penny stocks on the Venture exchange or even buy lottery tickets. We instinctively recognize the risks in above strategies. Why is it that when leverage is recommended, there is no mention of the risks?

]]> By: MillionDollarJourney.com http://www.thefinancialblogger.com/the-opportunity-cost-of-paying-interest-over-an-investment-loan/comment-page-1/#comment-118 MillionDollarJourney.com Fri, 08 Jun 2007 11:18:40 +0000 http://www.thefinancialblogger.com/the-opportunity-cost-of-paying-interest-over-an-investment-loan/#comment-118 Cash flow risk is also not an issue if you "capitalize" the interest. ie. use the heloc to pay for itself. Cash flow risk is also not an issue if you “capitalize” the interest. ie. use the heloc to pay for itself.

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