Borrowing money today to invest in the future is a strategy many successful investors have used to reach their personal and financial goals — whether it’s buying a house, paying for an education or starting a business.
A less common, but equally forward-looking strategy for some, is borrowing to build an investment portfolio that includes stocks, bonds and investment funds.
Taking on debt to secure investments may seem counterintuitive to some but the potential returns may be lucrative if done strategically, says Tony Maiorino, head of the RBC Wealth Management Services team.
“Borrowing is something people do every day — for a car, a home or a vacation property,” says Maiorino. “The question is, should you borrow to invest money in the markets? The answer to that question is much more complex.”
Borrowing to invest means you can deploy large amounts of capital either all at once or over a period of time. The interest, for those investing in publicly-traded securities, may also be tax deductible. One risk is an investment made from borrowed money may drop in value, which could be less of a concern if it's a long-term move. Additionally, the cost of the loan over time may become higher than the profit made from it.
Maiorino says investors looking to leverage their investment portfolio need to ensure this strategy meets their overall financial goals, and tolerance for risk.
“Done in a diversified and careful way, borrowing to invest can be as valuable as investing in a home over the long term,” he says. "To me, it's about the individual and ensuring the strategy is right thing for them.”
According to a survey conducted by The Economist Intelligence Unit (EIU), commissioned by RBC Wealth Management, 53 percent of investors in Canada say growing their wealth is a top investment strategy.
The New wealth rising survey targets high-net-worth individuals (HNWIs), adult children of HNWIs, and high-earning professionals across Canada, the U.S., UK, China, Hong Kong, Singapore and Taiwan. It looks at the shifting landscape of global wealth, where wealth will be, what it will be invested in, how it will be invested and who is investing.
In Canada, 31 percent of younger generations* say they borrow to invest, with 49 percent preferring stocks and 44 percent preferring mutual funds.
Starting early to build wealth
Borrowing to invest can begin even before someone has built up a sizeable investment portfolio, Maiorino says. For instance, an investor in their 20s and 30s might consider borrowing to contribute to a registered retirement savings plan (RRSP) each year. Deductible RRSP contributions can be used to reduce personal income tax.
Investors can then use their tax refund to repay a portion of the loan and then, ideally, work to repay the remainder later in the year, Maiorino says. The process can then be repeated to build wealth.
“If you can afford it, and can make the payments, it's a no-brainer,” says Maiorino, who used this strategy earlier in his career to build up his personal investment portfolio.
“The one thing you can't get back is time,” Maiorino says. “If you start retirement savings at 25, by the time you're 35, you'll have 10 years of investments,” plus any accumulated growth. “That's something a person who starts investing at age 35 is never going to have.”