The pros and cons of borrowing to invest

Canadians borrowing to invest in the stock market is at its highest level since 2000, according to the Investment Industry Regulatory Organization of Canada.

Mark Ting, an investment advisor with HollisWealth, a division of Scotia Capital, says there are benefits and drawbacks to leverage investing,

"On the surface it makes sense. You can take the borrowing rates which are very low, 2.85 per cent. Had you embarked on this strategy two years ago and invested in the TSX, you would have seen a 20 per cent return," said Ting.

"There are lots of pros that are told by people that are promoting this strategy. They can almost make it seem like a no-brainer."

Ting says the decision is all about timing because markets are volatile and can swing quickly. 

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"The time was six years ago when it was the peak of pessimism. You talk to people like Warren Buffett who say 'buy on fear, not on greed,'" Ting said. "Right now I think people are buying on greed because markets are up. You see these nice beautiful trend lines, six years without too much interruption."

Firsthand Knowledge

Ting shared a personal story about how he borrowed $10,000 to invest in equities in 2008.  Over the next six months, his investment declined and his life became an emotional roller coaster.  

"I was watching that $10,000 worth of stocks so much every day, watching it go up and down. It was really taking a strain on my health, I was losing sleep," Ting said. "Which was weird because I had a lot more money invested in other things."

Eventually the market rebounded and he recouped the money, but it taught him a lot about his risk tolerance. Ting's says five clients recently inquired about borrowing to invest and he dissuaded all of them.  

"If it affects me that much, I just see other people who are borrowing hundreds of thousands of dollars, what happens to them? I see a lot of it ending in disaster."

Exercise Caution

Ting warns people who have had success with leverage investing to be cautious about encouraging friends and family to do the same.

"As long as things goes well, everyone is making money. But as soon as something goes wrong, and something will go wrong, guaranteed, There will be a huge strain on that relationship."

Ultimately, Ting wants potential investors to seriously examine their objectives when considering leverage investing,

"Know yourself. How will you react when things go bad? Will you be up nights worrying? If the answer is yes, do not leverage."

To hear the full interview with Financial Advisor Mark Ting, click on the audio labelled Borrowing to Invest