Anyone brave enough to shovel money into stocks late last year has been well rewarded in early 2019.
Lesson to investors: Market declines are shocking and stressful, but they’re also great buying opportunities. A thirtysomething reader seems to have absorbed that lesson well. He’s looking for comment on a plan to borrow money when the next market downturn happens.
“Once equities have fallen 25 per cent, I would borrow $30,000 from my home equity line of credit to invest in an ETF portfolio in my TFSA,” he wrote. “If the market continues to fall to 35 per cent off the peak, I would borrow another $30,000 to put into my TFSA. If the the market falls to 45 per cent off peak, I would take out enough money to max out my TFSA and then put $10,000 into my RRSP.” This reader is single, debt-free, mortgage-free and hasn’t started a TFSA yet. He believes that sticking to his plan will be no problem, and he understands it could take years to pay off.
One concern is that this investor’s market-timing backfires. For example, he might wait on the sidelines while markets post decent gains, then lose heart after a big crash and remain on the sidelines until a lot of the recovery has already happened. He might be better off by simply investing on a monthly basis.
But I have seen a borrow-to-invest strategy like the one he’s talking about pay off. In a column written two years ago, I documented how an investment adviser borrowed $250,000 during the worst of the financial crisis and turned it into gains he described in spring 2017 as being “between a double and a triple.” His investment actually fell about 10 per cent before starting a long climb higher. Being comfortable as a long-term investor, he never thought about selling.
Investing money in stocks after a market plunge is one of the best long-term investing strategies of all. But it’s also one of the hardest because you have to ignore the panicky emotions of most other investors. Figure on doubling your stress level if you borrow to invest at a market low instead of using cash on hand. You may well find yourself in the position of making payments on debt incurred to buy stocks that are falling hard in value and worth less than you paid. Some investors can handle this, but many cannot. We’ll leave it to this reader to decide whether he’s up for the roller coaster ride ahead.
A few additional notes: This reader would borrow to invest in registered accounts, so the interest he pays wouldn’t be tax-deductible. Using his line of credit and not a margin loan from a broker means there are no concerns about a margin call (where you’re required to pay down a loan taken out to buy securities that have fallen in price). All he has to do is pay the interest on his balance owing every month.
Rob Carrick