May 1, 2007, 3:44 am

Is leveraging for everybody?

by: The Financial Blogger    Category: Leveraging Strategies
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So you are looking at your neighbour, brother-in-law and colleague making money with the stock market and you are wondering how the hell can they do it? They are not making more than you do. However, they have 50K, 100K even 250K invested somewhere. There is a good chance that they are using leveraging and that they have a debt related to this big chunk of money sitting on their investment portfolio statement. Should you do it? Does it worth it for you? Not necessarily.

In fact, leveraging strategies such as the investment loan and the Smith Manoeuvre were built for wealthy individual. Before contracting a $100,000 debt, you must know that sooner or later, you will have to reimburse this loan. Regardless where your investments stand at, the bank will give you a call to pay it back. This is why most institutions are looking at lending half of their clients’ net worth.

However, if you have a net worth of $50,000 and you have extra monthly cash flow, nothing should stop you to apply for a $25,000 investment loan. I personally think that everybody who has a little bit of investment knowledge should leverage. Even if it’s only with $10,000, it is still a good start. This money will grow as you gain confidence and experience on the stock market.

Most leverage strategy loans are interest only. The main reason being that in most countries, interest paid on these types of loan are tax deductible. Therefore, the monthly payment is minimal. For example, a $25,000 at 7% will cost $146 per months, so not even a car payment.

Besides the minimum net worth required and the monthly payment, there is another crucial aspect related to the leveraging strategies. Can you sleep at night knowing that you owe $25,000 but your investments worth $15,000? The market risk is one of the most important aspects of this strategy. You also have to consider the psychological factor related to the fluctuation. Everybody is smiling the market jumped 10% in one months. Unfortunately, it is not always the case.

Before starting a Smith Manoeuvre, contracting an investment loan or using a line of credit to invest, you must establish an investment plan and complete your investor’s profile with a financial professional. With your investment profile, your financial planner will be able to determine with you can benefit from any leveraging strategies.

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