Are you for real? Look at your foolish comments about the market not being overheated. I am a novice investor and I have been in cash since October. When all the suckers panic, I buy.

I’ve just returned from the CFP conference in Calgary. Quite interesting.

Regarding your question: “Do you believe in leveraging at this point..with the markets overheated……”

Which market is overheated? Most Canadian investors and even most advisors have this wierd drive to invest primarily in Canada. This phenomenon is common in most of the world. Even in Iceland, 70 of all equity investments are into Iceland stocks. (Can you name one?)

I agree, there are some risks investing in Canada now, where we are 75% in rocks, trees and banks – all of which are quite high. This is true of other resource-based economies.China is also very high and probably will have a major crash.

The global and US markets, however, have just recently made it up to their last high from 2000. This is over 7 years, which is the longest time they have had without growth since the 1930’s. If you invest globablly or in the US, they are definitely not over-heated.

Leverage is a very effective strategy if done right and invested effectively, so it is smart to minimize your exposure to over-heated markets. At the moment, I would suggest keeping your Canadian equities to a max of 25%.

Ed

http://www.ultracrepidate.com/?p=1080

do you believe in leveraging at this point..with the markets overheated……

thanks

Proper investment theory states that the best way to increase returns is to stick with sound investments and then leverage them. This is an important concept and a big part of why I am such a believer in leverage as a strategy.

Your quote is exactly why leverage is a good strategy: “You hope to make a greater return by assuming a higher risk. You can do the same thing without leverage by investing your entire portfolio in small-cap value stocks. Or you can assume even more risks by buying lottery tickets or looking for penny stocks on the Venture exchange. Yeah, you are taking risks, but the rewards…

Investing in more risky investments is much less likely to work than leveraging into sound investments. In fact, it is a common myth thatt more risky markets have higher returns. I’ll explain this in my next 2 articles posted this Thursday and next.

The broad markets and top fund managers tend to have reasonalby predictable returns in the long run, and leveraging into them provides higher returns with a reasonable risk generally. This is unlike buying high risk sectors, penny stocks or lottery tickets that are far less predictable, even in the long run.

Ed

[...] I read a post on milliondollarjourney.com about Myths about leveraging into Equities. I decided to add more details regarding the interest risk. [...]

That’d just be too easy.

I never said that interest rate exposure was exclusive to investments loans. Anyone is who borrowing money for any reason should think about interest rate risk.

In regards to the interest risk, I’ll write a full post for tomorrow on my site : http://www.thefinancialblogger.com
because I think your point deserve a full explanation.

As in regards to being unemployed for a long period of time, I pretty sure most individuals will buy a house and get a mortgage knowing that they could lose their job one day. If it ever happens, you have much higher risk to lose your house than losing with investments.

If you ever need more cashflow, you simply cash in your funds and pay off your loans. It is not that simple with a mortage and people are still buying properties.

There are always uncontrolable factors in life that can mix up your plan. However, you have to live on and hope they won’t happen to you at the same time!
FB.

FB – what happens if the borrowing rate goes from 6% to 12%? What happens if you are unemployed for a long period of time? Are those not risks to consider as well?

For example, if I borrowed 1000 at prime rate. After a year, I have to pay $60 interest. If I deduct that for tax and say I am taxed at 40%, it means that I get $24 back? So the effective interest I paid was $36. I am sure I made a mistake somewhere since it’s not the same number as the one you arrived at.

Like I pointed out in my comment on the first post, leverage is not a free lunch. You hope to make a greater return by assuming a higher risk. You can do the same thing without leverage by investing your entire portfolio in small-cap value stocks. Or you can assume even more risks by buying lottery tickets or looking for penny stocks on the Venture exchange. Yeah, you are taking risks, but the rewards…

By investing in blue chips, dividend stocks and market index, you minimize your risk and still can hope to reach 7%-8% a year. In fact, you need less than 6% yield (prime rate) to make money out of leveraging.
FB.

To say this is a myth is just not true. The whole point of leverage is to increase risk in order to increase the potential return (positive or negative). I’ll agree that most people don’t understand exactly how much risk is involved in leveraging but there is always some.

Another thing is that you never mention interest rate risk which is one of the basic risks with long term borrowing. The risk from rising interest rates is less on investment loans than on normal debt because of the tax write-off but it still exists. Before leveraging, the investor should calculate how much their potential payments will be in the future if rates go up by 2%,4%,6% etc. This way they can determine an appropriate amount (if any) to borrow.