The economics of borrowing to invest make sense right now, but it's not for everyone - TheChronicleHerald.ca | Canada News Media
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The economics of borrowing to invest make sense right now, but it's not for everyone – TheChronicleHerald.ca

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Over the past six weeks, our clients have come to us with a wide array of emotions and questions. They’ve ranged from great concern to unabashed enthusiasm, and everything in between. On the upbeat calls, one question initially caught me off guard —

“What do you think of me borrowing money and investing in bank stocks?”

I was surprised because usually this strategy comes up when markets have been good, and lenders are begging us to borrow money. Obviously, our current circumstance is quite different. Markets are down and have been hyper-volatile, partially due to the use of debt. Margin calls have caused forced selling which in turn has exaggerated price declines.


Look in the mirror

Nonetheless, I’m delighted by this contrarian thinking. After all, money is cheap and stocks are down, so the economics of borrowing to invest make sense. In the case of banks, the Big Five now have an average yield of over six per cent.

Even so, I don’t spend much time discussing the math when responding to these queries. My focus is on the behavioural challenges that go along with markets and leverage. Market gyrations like we had last month are difficult to navigate at the best of times, let alone when your market value has dipped below the loan value.

Investing with borrowed money can lead to disastrous results if you flinch when markets are down. Since this happens every two to three years, leverage is only for experienced investors who have successfully survived a bear market before.


Due diligence

It’s encouraging that the borrowing question is coming up at a time of upheaval and decisions are being based on the prospect of better future returns as opposed to great past returns. But the timing doesn’t make it a slam dunk. You still need to methodically go through a series of steps to determine if you’re ready to run your own hedge fund.


First, maximize the return from your existing portfolio.

This means dialling up your equity content, which will increase the return potential and importantly, serve as a trial run for your leveraged strategy. If you can’t stomach the volatility that goes with an all-equity portfolio, then borrowing to invest is not for you.


Assume modest returns and higher interest rates.

Make sure the strategy works even if stocks are slow to recover and the prime rate goes up. When debt is involved, you need a cushion.


Assess the stability of the loan, not just the investments.

Remember, your interests aren’t aligned with those of the bank. You’re trying to buy low and sell high, but when stocks are down, your banker is more likely to be pressuring you to sell, not buy. Banks will do whatever it takes to get their money back, whether it suits your timing or not.


In for the long haul


Make a five-year commitment.

This strategy must fit in with an overall financial plan that takes into account your future cash needs (i.e. renovations; college tuition; travel) and RRSP/TFSA contributions. You can’t count on the debt capacity you’re using to invest being available for other purposes for the next few years at least.


Diversify.

It’s psychologically and aesthetically pleasing when dividends cover the interest payments, but this should be a secondary consideration. Diversification is job one, which means not limiting yourself to high-dividend stocks in a few industries (i.e. banks, REITs and telcos) that operate in one economic region (Canada).


Buckle in

. We did some modelling a few years ago that compared an unlevered, all-stock portfolio to a balanced portfolio that was bought using borrowed funds. We went through a myriad of scenarios and kept coming up with the same conclusion. The returns and volatility of the two strategies were similar. A conservative portfolio that’s levered behaves much like a pure stock portfolio. In other words, you’re going to feel every little market wiggle, even if you’re invested in the bluest of blue-chip stocks.

Long-term investors should be taking advantage of lower stock prices, but using debt to do it is an aggressive strategy. It’s only suitable for investors who plan carefully, are already fully invested, and who know how they’ll react when the math isn’t working.


Tom Bradley is


chair and chief investment officer


at Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at

tbradley@steadyhand.com

Copyright Postmedia Network Inc., 2020

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Tesla shares soar more than 14% as Trump win is seen boosting Elon Musk’s electric vehicle company

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NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.

Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.

“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”

Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.

Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.

Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.

Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.

In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.

The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.

And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.

Tesla began selling the software, which is called “Full Self-Driving,” nine years ago. But there are doubts about its reliability.

The stock is now showing a 16.1% gain for the year after rising the past two days.

The Canadian Press. All rights reserved.

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S&P/TSX composite up more than 100 points, U.S. stock markets mixed

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TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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S&P/TSX up more than 200 points, U.S. markets also higher

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TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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