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THE RISKS OF LEVERAGE
9/22/2017 8:22:25 PM
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Fund Library Q&A
Your questions about financial planning, investments, and portfolio management answered by an industry expert



By Robyn K. Thompson  | Friday, May 02, 2014


Q – Do you recommend using leverage when investing in the stock market? Interest rates continue to be low, money is cheap, and stock markets keep going up. Should I borrow to invest now? – George H., Midland, Ontario

A – Investing with leverage is a risky play, and you need to be able to keep financing the debt when interest rates rise. Keep in mind that stock markets are volatile, and there is no guarantee that the return you get warrants the cost of the interest on the loan. You’ll also have to be prepared for the eventuality that the value of your investment drops below the amount of the loan. If you’re using a margin account (borrowing from the brokerage using other stocks as collateral), you’ll be asked to pony up more funds (a “margin call”) to maintain your position if the value of the stock falls. This type of leverage magnifies both returns and losses, so you really have to know what you’re doing here.

If you’re going to play in the leverage arena, be sure not to overleverage, and be sure to factor in the worst-case scenario. You will want to have enough cash on hand to pay off the loan if interest rates rise (or if you need to meet a margin call) and your investment is not performing commensurately (that is, with a return exceeding the cost of your loan).

Leverage works best over the longer term, and only for those with a very high tolerance for risk and with deep pockets. I don’t recommend leverage for the average investor. – Robyn

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Submit a question on investments, financial planning, or portfolio management. We cannot reply personally and cannot guarantee your question will be used.

Notes and Disclaimer

© 2014 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

 
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