Leverage Loan for Investing

R

ross1985

Two years ago, I consulted a financial advisor at London Life (Canadian provider of life and health insurance) as my investing knowledge at the time was very limited. I was advised that since I carried no debt, the best way to make money would be using leverage to invest. The plan was to borrow $100 000 at 3.5% interest and invest it into London Life segregated funds chosen by my advisor. It’s been just over two years now, and the account is currently at $103 000. So I’ve paid $7000 in interest, but the fund value has only grown by $3000.

Obviously, this hasn’t been a good investment strategy. I’m just not sure if I should call it quits now before I lose more money or if I should wait for the fund to increase in value. The investment was started right before the price of oil dropped (November 2014), so the timing wasn’t great as I was initially invested all in Canadian equities. The fund was at a low of $88 000 at one point, but has since recovered. The investment is now more diversified with 40% in global equity, 40% in Canadian equity, and 20% in US equity. Any suggestions or advice would be greatly appreciated. Thanks.
 
You didn't consult an advisor--you consulted with a sales person. Those seg funds have huge MERs. I'm not opposed to the responsible use of leverage so if you want to remain invested, I would steer towards TD's e-funds which have MERs in the 0.3% range. You could also just buy a diversified set of ETFs like VTI and XIU for Canadian exposure. But you have to get out of those seg funds.
 
^ There's no reason to hold out one more day with these funds as there are better ways to maintain exposure to the markets. These funds have MERs between 2-3%! To put it into context, for every day you wait, you're throwing away $100k x 2.5% / 365 = $6.85
 
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I was looking heavily into this about 1 yr ago. I didn't pull the trigger because all the products offered were in house and absolute shit. None of the loan providers would allow allocation into your own choice of asset(obviously).

As others have said: sell your stuff, fire your advisor and put it into low cost index funds.
 
If your advisor put you into 100% equities in total without regard to a bond/fixed income component on your personal balance sheet. Then, he obviously wasn't advising according to your best interests. Not foul play, but it's gross negligence.

You need to cut risk and put funds in a short-term cash alternative until you figure out what is right for you. This is not trading money...yet. :)
 
^ You might be jumping to conclusions as the OP hasn't provided enough information. OP provides the current allocation, but not the original allocation from two years ago. OP may also have a large DB pension plan which could be a proxy for a fixed-income component of one's portfolio.
 
xandman said:
If your advisor put you into 100% equities in total without regard to a bond/fixed income component on your personal balance sheet. Then, he obviously wasn't advising according to your best interests. Not foul play, but it's gross negligence.

You need to cut risk and put funds in a short-term cash alternative until you figure out what is right for you. This is not trading money...yet. :)
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I'm just not sure what a "short-term cash alternative" is
 
ross1985 said:
Two years ago, I consulted a financial advisor at London Life (Canadian provider of life and health insurance) as my investing knowledge at the time was very limited. I was advised that since I carried no debt, the best way to make money would be using leverage to invest. The plan was to borrow $100 000 at 3.5% interest and invest it into London Life segregated funds chosen by my advisor. It’s been just over two years now, and the account is currently at $103 000. So I’ve paid $7000 in interest, but the fund value has only grown by $3000.

Obviously, this hasn’t been a good investment strategy. I’m just not sure if I should call it quits now before I lose more money or if I should wait for the fund to increase in value. The investment was started right before the price of oil dropped (November 2014), so the timing wasn’t great as I was initially invested all in Canadian equities. The fund was at a low of $88 000 at one point, but has since recovered. The investment is now more diversified with 40% in global equity, 40% in Canadian equity, and 20% in US equity. Any suggestions or advice would be greatly appreciated. Thanks.
More...

This sounds like a neighbor who got second mortgage just before real estate meltdown to flip houses, he ended up bankrupt, divorced and with child support payments bigger than old mortgage. I recall him laughing at me when I said I had stopped buying properties to rent out, year earlier. He made very little on flipping a couple of them and that gave him incentive to buy many more.

Markets are long overdue for huge correction here in USA. I would have never taken a loan of this large and have no knowledge of what you are going to do with the money. Best to take the loss and get out, start learning about how to invest. It is so easy for you to lose so much more.
 
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