The history of investing is full of cautionary tales regarding the use of leverage to enhance returns, and how it is your best friend until it becomes your worst enemy.

But many times, the trigger that causes great losses resulting from leverage has nothing at all to do with the quality of the underlying investments.

The story is quite simple. Let’s say there is a good idea with a fair return. Since the idea is so good, borrowing money to invest more capital for that idea barely increases risk while significantly increasing returns. Since borrowing a little money works just fine, borrowing a lot of money will work even better. Until it doesn’t.  Read More…

10 Comments

  1. I wish the article talked about credit card arbitrage and how one would go about using it in investing. I’ve done this using MBNA’s 0% and i didn’t know what to put the free money into so it just sat around in my low interest bank account 🙁

  2. Does anyone remember the time when savings accounts paid 4-5%? That was the heyday when you wanted to borrow debt to put into your accounts. Wonderful times! Now you’d be lucky to find ones higher than 1.5.

  3. And this is why most Canadians are in debt because their desire isnt so much about investing as it is spending.

  4. Is this related to brokerage accounts taht allow one to buy on margin?

  5. Entire industries only exist due to leveraging. So the world wouldnt run without it. Knowing when to use it efficiently is the key. Sadly most people don’t even have a clue what it even means.

  6. I was thinking of buying some interesting REITs since they are related to real estate and renting but i just feel the housing bubble is about to end here in Vancouver and the rest of Canada.

    I’ve never borrowed against anything but there was a time i was thinking hard about doing so for the sake of REITs.

  7. The closest i’ve come to doing something like this was to borrow against our RRSP to buy our first home.

    Although CRA allows for a one-time withdraw from our RRSP it was a risky move for us because we weren’t sure we could pay it back in time but we did eventually.

  8. LOL! This sounds like something i should look into more often. I am not much of an investor but i am always looking for ways to get more to kite it to pay down my existing debt. You know like having two credit cards and shuffling the money back and forth to avoid late charges 🙂

  9. Most people get their taste in this kind of debt is mortgages and i never understood why the obsession people have with needing to own a home. Why put onself into deeper obligations for something that has no real value.

  10. What baffles me is when you hear in the States how their Fed gives banks money on next to 0% interest and then quickly sell it back to the people at a giant price. Why would they do that? It is stealing from the taxpayer. I really hope Canada doesn’t have that.

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