Author Topic: LEVERAGE: what is ok for you and why?  (Read 5335 times)

Le Barbu

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LEVERAGE: what is ok for you and why?
« on: May 01, 2017, 08:11:23 AM »
while there is a zillion of thread around here about paying debt or invest, I really think it's not THAT simple...

If you bought to much of a house with to much mortgage, low income, no other assets, no EF, I would not recomend to invest instead of ré paying debt, I would just advice you are in a fragile situation, fix it first! I dont care if someone convince you that mathematicaly it's better to invest, save you ass first!

On the other end of spectrum, there are people saving >50% for decades, NW over 1-2M$, stable/safe job with DB pension etc arguing "I just want to sleep well at night" well, ok then! You already won the race anyway even if you stop working tomorrow and invest in a 50/50 stocks/bonds portfolio.

For simplicity of discussion, I rounded up every numbers here. I just want to know what you think about it and what boundaries do you set for yourself.

Over the last 20 years, my overhall leverage (debt/assets) went from 70% to 20% and debt (mortgage & HELOC only since I have no other debt) always been between 75k$ and 240k$

NW went from 20k$ and lately crossed the 1M$ mark. I now decided am comfortable keeping leverage between 15-20% @ 240k$

Actual interest rate is below 2% net and 1 year payment is 10k$ P+I

House represent about 25% of assets and keep decreasing, the rest is 100% low cost stocks broad index ETFs, no bonds. Average MER below 0.10%

I keep 3 months of living expenses in HISA (1% of total NW) and have acces to 100k$ overnight through remaining HELOC, LOC and CC
« Last Edit: May 01, 2017, 09:20:16 AM by Le Barbu »

talltexan

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Re: LEVERAGE: what is ok for you and why?
« Reply #1 on: May 01, 2017, 09:05:55 AM »
Without knowing age and savings rate, it's hard to evaluate.

Le Barbu

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Re: LEVERAGE: what is ok for you and why?
« Reply #2 on: May 01, 2017, 09:36:32 AM »
Without knowing age and savings rate, it's hard to evaluate.

I understand these two variables can move the needle a bit, but no more than any other individual specs. This is why I do not agree that investing or killing debt is not a one size fits all!

For discussion purposes, lets say age is from 25 to 55 and saving rate is anything from 25% to 75% all other things being equal. My own exemple started at 25yo (now 45) and saving rate always been 40% give or take 5% on any particular year. I plan to downshift work & income so, saving rate will decrease in the 20% range

RichMoose

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Re: LEVERAGE: what is ok for you and why?
« Reply #3 on: May 01, 2017, 10:22:06 AM »
I'm a big fan of smart use of leverage for investing in the right circumstances.

Le Barbu, you are clearly a good candidate for smart use of leverage. Good job, little other debt, huge asset base, good cash cushion, and excellent savings rate. You're also disciplined, having been through 2008-09 keeping your head straight.

I am ready to use leverage as well, but I'm keeping it in my pocket. We all know that markets are fully valued and that means future returns are likely to be lower than they were the last 8 years.

If we have a -20% year, I will reconsider my current position. If we drop >30%, I will take a serious look at leverage. I have a lot of faith in market recoveries. My biggest hesitation around leverage is that it makes the most sense to leverage into Canadian stocks for tax reasons. I don't really like Canada right now.

Le Barbu

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Re: LEVERAGE: what is ok for you and wh
« Reply #4 on: May 01, 2017, 10:55:35 AM »
I'm a big fan of smart use of leverage for investing in the right circumstances.

Le Barbu, you are clearly a good candidate for smart use of leverage. Good job, little other debt, huge asset base, good cash cushion, and excellent savings rate. You're also disciplined, having been through 2008-09 keeping your head straight.

I am ready to use leverage as well, but I'm keeping it in my pocket. We all know that markets are fully valued and that means future returns are likely to be lower than they were the last 8 years.

If we have a -20% year, I will reconsider my current position. If we drop >30%, I will take a serious look at leverage. I have a lot of faith in market recoveries. My biggest hesitation around leverage is that it makes the most sense to leverage into Canadian stocks for tax reasons. I don't really like Canada right now.

Mr. Rich Moose, I understand you have no debt now wich is a good position to be in!

What do you think of people that are leveraged without understanding the pros & cons? Most common situation I see is household with 300k$ mortgage on a 400k$ house, income in the 100k$/year range, saving rate from 0-10%, less than 50k$ portfolio and less than 200k$ NW. On top of this, 2 cars payments, kids in private school, high end vacations, etc. Leverage is in the 50-75% ballpark, P+I represent 25-50% of income, house is >80% of assets, etc. Do they feel overleveraged? Not at all!

I do not recommend to get MORE leverage now, P/E are above historical average, bull market runs for more than 8 years now, etc. I just think that some leverage levels are ok to keep if the big picture is good.

RichMoose

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Re: LEVERAGE: what is ok for you and wh
« Reply #5 on: May 01, 2017, 11:18:06 AM »
Mr. Rich Moose, I understand you have no debt now wich is a good position to be in!

What do you think of people that are leveraged without understanding the pros & cons? Most common situation I see is household with 300k$ mortgage on a 400k$ house, income in the 100k$/year range, saving rate from 0-10%, less than 50k$ portfolio and less than 200k$ NW. On top of this, 2 cars payments, kids in private school, high end vacations, etc. Leverage is in the 50-75% ballpark, P+I represent 25-50% of income, house is >80% of assets, etc. Do they feel overleveraged? Not at all!

I do not recommend to get MORE leverage now, P/E are above historical average, bull market runs for more than 8 years now, etc. I just think that some leverage levels are ok to keep if the big picture is good.

As Moosey Mustachians we're not too concerned with the herd mentality and what other people think is OK. I bought my first house 20% down. Bought my first and second vehicle cash. And never got into credit card debt. I suspect you were close to the same.

Thankfully I shook myself off the disease of homeownership in a country with ridiculous rent-price ratios. That eliminated all my debt and I'm happier than a clam renting my current place and investing my money to its fullest potential.

We are both saving good amounts of money, wouldn't stress one bit if we lost our jobs, live happy lives, and can make any monthly payments (leverage investing cost included) without breaking a sweat. That's smart use of leverage.

Let the rest of the herd live paycheque to paycheque and payment to payment if it pleases them, but hopefully we can convince a few to choose a wiser path. :)

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Re: LEVERAGE: what is ok for you and why?
« Reply #6 on: May 01, 2017, 11:45:13 AM »
Good question, I'd like to learn more.

I have an available HELOC of $200K, currently $100k in debt with a secured loan invested in stocks, about 15% leverage.  I could get more, I choose not to because I'm timid from a bad experience. The small amount is okay because I can fund an instant 30-50% drop in the event of a market call. Having dealt with the wrong side of a margin call in 2008 I remember being very concerned and almost forced to liquidate everything in 2008. Now I keep a buffer to make sure I can be in control and never forced to sell. At all times when dealing with leverage the risk of a market call is very real and could destroy everything.

On the flip side I like to think after the next market drop I'll buy on leverage, we'll see if I'm too scared. Just like we mock people who sell during a crash, shouldn't I be mocked for not buying more?

RichMoose

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Re: LEVERAGE: what is ok for you and why?
« Reply #7 on: May 01, 2017, 11:52:49 AM »
On the flip side I like to think after the next market drop I'll buy on leverage, we'll see if I'm too scared. Just like we mock people who sell during a crash, shouldn't I be mocked for not buying more?

I don't think so. Those who sell during a crash pretty much seal their financial fate. Those who buy on leverage in a market crash are risk takers. Yes, the risk can be smart and should work out well, but risk aversion shouldn't induce mockery.

While it's overly cautious in my book, I wouldn't laugh at someone invested 50/50 in stocks and bonds, especially if that means they will stick to the strategy during a market crash. They will still do well in the long run and will probably sleep more soundly than I in the process.

Le Barbu

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Re: LEVERAGE: what is ok for you and why?
« Reply #8 on: May 01, 2017, 12:27:43 PM »
Good question, I'd like to learn more.

I have an available HELOC of $200K, currently $100k in debt with a secured loan invested in stocks, about 15% leverage.  I could get more, I choose not to because I'm timid from a bad experience. The small amount is okay because I can fund an instant 30-50% drop in the event of a market call. Having dealt with the wrong side of a margin call in 2008 I remember being very concerned and almost forced to liquidate everything in 2008. Now I keep a buffer to make sure I can be in control and never forced to sell. At all times when dealing with leverage the risk of a market call is very real and could destroy everything.

On the flip side I like to think after the next market drop I'll buy on leverage, we'll see if I'm too scared. Just like we mock people who sell during a crash, shouldn't I be mocked for not buying more?

What is the rate of this margin?

I prefer HELOC because it's more unlikely to be recalled than a broker margin and my actual rate is 2.05% (<1.5% net)

As Mr. Rich Moose pointed out, I do not think it's good time not to leverage more. But if your plan is to increase leverage, I doubt a crash will convince you. Very hard to catch a failling knife!

Blissful Biker

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Re: LEVERAGE: what is ok for you and why?
« Reply #9 on: May 01, 2017, 03:21:37 PM »
Personally, although my house is paid for, I do not leverage any of the equity for a couple of reasons:
- It is very satisfying for me to have no debt.  I feel free and it makes me happy.
- Knowing that I own the house outright and have a nice nest egg of investable assets ($1MM) allows me to be more aggressive in my asset allocation than I would be otherwise.

The more I learn the more I see how subjective these questions are.  Everyone has their own comfort level.  Interesting discussion. 

GreatLaker

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Re: LEVERAGE: what is ok for you and why?
« Reply #10 on: May 01, 2017, 03:47:05 PM »
I have bad karma when it comes to borrowing.
- had leveraged investments when Black Monday 1987 hit and the Dow dropped 22.6% in one day. That one literally made me feel ill.
- purchased a property in 1995, and just before closing the Mexican Peso Crisis happened, pushing interest rates up and stock markets down
- bought a pre-construction in 2000, closing in 2002. Who remembers the tech crash?

Everyone has a high risk tolerance when markets are stable or going up. 

Le Barbu

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Re: LEVERAGE: what is ok for you and why?
« Reply #11 on: May 01, 2017, 03:48:01 PM »
Personally, although my house is paid for, I do not leverage any of the equity for a couple of reasons:
- It is very satisfying for me to have no debt.  I feel free and it makes me happy.
- Knowing that I own the house outright and have a nice nest egg of investable assets ($1MM) allows me to be more aggressive in my asset allocation than I would be otherwise.

The more I learn the more I see how subjective these questions are.  Everyone has their own comfort level.  Interesting discussion.

About 10 years ago, my total debt was 50% of total assets while portfolio was 75/25 stocks/bonds wich was incoherent. I do not see any good being into debt in any form while owning debt (bonds)!

Now, I think that in the grand scheme of life, even if I own my house outright, I am still in debt to my futur self. I will always have to pay my taxes, shelter, food and clothes. Inflation on top of that! There is no other way around, so cashflow is king!

Le Barbu

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Re: LEVERAGE: what is ok for you and why?
« Reply #12 on: May 01, 2017, 03:50:51 PM »
I have bad karma when it comes to borrowing.
- had leveraged investments when Black Monday 1987 hit and the Dow dropped 22.6% in one day. That one literally made me feel ill.
- purchased a property in 1995, and just before closing the Mexican Peso Crisis happened, pushing interest rates up and stock markets down
- bought a pre-construction in 2000, closing in 2002. Who remembers the tech crash?

Everyone has a high risk tolerance when markets are stable or going up.

And this is why a household with a gross salary less than 100k$ has no worry taking a giga-mortgage now! Real estate price can only go up!

RichMoose

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Re: LEVERAGE: what is ok for you and why?
« Reply #13 on: May 01, 2017, 04:07:20 PM »
I have bad karma when it comes to borrowing.
- had leveraged investments when Black Monday 1987 hit and the Dow dropped 22.6% in one day. That one literally made me feel ill.
- purchased a property in 1995, and just before closing the Mexican Peso Crisis happened, pushing interest rates up and stock markets down
- bought a pre-construction in 2000, closing in 2002. Who remembers the tech crash?

Everyone has a high risk tolerance when markets are stable or going up.

Let me know when you buy something with debt. ;)

bigchrisb

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Re: LEVERAGE: what is ok for you and why?
« Reply #14 on: May 01, 2017, 06:39:49 PM »
I've not been shy about debt/leverage.  However, I've gotten much more conservative as my total wealth has grown (and have more to lose).

2008 part way into the GFC I started with margin loans on stocks.  Augmented this with balance transfers from credit cards.  Ended up margin called and learning some lessons (but surviving, and re-leveraging up through the recovery).

2010 borrowed 3x my current net worth to buy into my workplace.  My parents were kind enough to act as guarantor for a mortgage.  Kept buying listed stocks on margin.  Since this point, share debt hovered around 500-600k.

2011 another margin call (although not a lot of damage this time).

Kept debt hovering around 500k, buying more stock to 2014.  Sold business (fortunately profitably).  Bought a house with 20% down. 

Debt roughly flat, new savings to new investment through to 2016.

2017 has been some significant deleveraging.  Partly as my circumstances are changing (got married, having a kid, health issues that may impact on career), partly as the market timer in me sees asset prices pretty frothy with interest rates likely to rise, and partly as I now have "enough".  From this point, a wipeout would be catastrophic, where as the upside of additional returns won't result in a meaningful increase in my quality of life. 

Its worked out well, but not without its lumps and bumps.  If I could go back in time, I'd tell my younger self to be more cautious with leverage.  My younger self would not have listened, until learning the hard way.

Summary:
             assets       liabilities       net worth 
2007:   66k            50k              16k
2008:   206k          140k            66k
2009:   213k          120k            93k
2010:   953k          525k            428k
2011:   1080k        461k            619k
2012:   1233k        518k            715k
2013:   1593k        618k            975k
2014:   1783k        500k            1283k
2015:   2546k        1058k          1488k
2016:   2793k        1080k          1713k
2017:   3380k        500k            2880k

As you can see, its the last couple of years where things have gone crazy.

I keep debating with myself what to do with the remaining 500k in debt.  My current thinking is to pay this off with any savings over time, as opposed to selling things.  I'm leaving the lines of credit open ($1.2m available), in case another meltdown opportunity occurs.

Keen to see what others are doing and why.

Le Barbu

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Re: LEVERAGE: what is ok for you and why?
« Reply #15 on: May 01, 2017, 07:04:05 PM »
I've not been shy about debt/leverage.  However, I've gotten much more conservative as my total wealth has grown (and have more to lose).

2008 part way into the GFC I started with margin loans on stocks.  Augmented this with balance transfers from credit cards.  Ended up margin called and learning some lessons (but surviving, and re-leveraging up through the recovery).

2010 borrowed 3x my current net worth to buy into my workplace.  My parents were kind enough to act as guarantor for a mortgage.  Kept buying listed stocks on margin.  Since this point, share debt hovered around 500-600k.

2011 another margin call (although not a lot of damage this time).

Kept debt hovering around 500k, buying more stock to 2014.  Sold business (fortunately profitably).  Bought a house with 20% down. 

Debt roughly flat, new savings to new investment through to 2016.

2017 has been some significant deleveraging.  Partly as my circumstances are changing (got married, having a kid, health issues that may impact on career), partly as the market timer in me sees asset prices pretty frothy with interest rates likely to rise, and partly as I now have "enough".  From this point, a wipeout would be catastrophic, where as the upside of additional returns won't result in a meaningful increase in my quality of life. 

Its worked out well, but not without its lumps and bumps.  If I could go back in time, I'd tell my younger self to be more cautious with leverage.  My younger self would not have listened, until learning the hard way.

Summary:
             assets       liabilities       net worth 
2007:   66k            50k              16k
2008:   206k          140k            66k
2009:   213k          120k            93k
2010:   953k          525k            428k
2011:   1080k        461k            619k
2012:   1233k        518k            715k
2013:   1593k        618k            975k
2014:   1783k        500k            1283k
2015:   2546k        1058k          1488k
2016:   2793k        1080k          1713k
2017:   3380k        500k            2880k

As you can see, its the last couple of years where things have gone crazy.

I keep debating with myself what to do with the remaining 500k in debt.  My current thinking is to pay this off with any savings over time, as opposed to selling things.  I'm leaving the lines of credit open ($1.2m available), in case another meltdown opportunity occurs.

Keen to see what others are doing and why.

You started at 75% leverage and decreased to 15% so on this side, your path looks like mine

Whatever you do now, keeping debt at 500k$ or slowly reducing it, you are ok now! Good job!

Interest rates will increase significantly only when inflation will kicks in, now close to happen...

bigchrisb

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Re: LEVERAGE: what is ok for you and why?
« Reply #16 on: May 01, 2017, 07:25:01 PM »
Indeed.

I found it interesting that my thought process changed over time:

Early days - what is my gearing ratio, how much can I borrow, how much can I fall before hitting margin
Middle - How does my total liability compare to income?  I was reluctant to have total debt more than 2-3 times gross annual income.  It blew out beyond this when I bought my house.
Late - Does it still make sense?  More focus on tax and wealth preservation, than maximizing the expected rate of growth.   

Livewell

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Re: LEVERAGE: what is ok for you and why?
« Reply #17 on: May 01, 2017, 07:29:54 PM »
Some leverage properly used can be a very good thing.  however I saw a lot of people in 2000 and 2001 over do leverage and get taken to the cleaners.

This is an individual thing of course - no wrong answer.  for me I don't like too much leverage, mainly because my job is highly leveraged (100% commission) and so I'm more conservative in other areas of my financial life (no mortgage, investing in index funds, etc.).

I would just say that anybody evaluating this should also take the career you have (and your SI's) into account before determining the amount of financial leverage that you apply.

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Re: LEVERAGE: what is ok for you and why?
« Reply #18 on: May 02, 2017, 09:59:25 AM »
To the extent that I am not paying off the home mortgage early (at 3 3/8 %) but instead I am maxing out the tax-deferred accounts in index funds, I guess I am using leverage.  I anticipate however that once I hit my magic number, I will pay off whatever balance remains on the mortgage before I FIRE.  I don't think I would ever intentionally borrow money in order to invest.

Le Barbu

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Re: LEVERAGE: what is ok for you and why?
« Reply #19 on: May 02, 2017, 10:28:46 AM »
Interesting enough that LEVERAGE almost automaticaly refer to "I use a margin to buy stocks"

You have a mortgage, you are leveraged! Same thing for a car loan, CC debt, student loan etc

Whatever the kind of debt you carry, you are leveraging

Heckler

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Re: LEVERAGE: what is ok for you and why?
« Reply #20 on: May 02, 2017, 09:21:58 PM »
Zero debt, no levers.  We are quite happy that way.  We broke our American Express card (22%??) - they keep mailing us 3% offers we kindly decline with a shredder.

Le Barbu

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Re: LEVERAGE: what is ok for you and why?
« Reply #21 on: May 03, 2017, 04:48:10 AM »
Zero debt, no levers.  We are quite happy that way.  We broke our American Express card (22%??) - they keep mailing us 3% offers we kindly decline with a shredder.

Do you still own at least 1 CC?

I prefer using CC than cash in most situations. I recently got  an Amazon card wich charge no conversion fees when buying in USD

Le Barbu

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Re: LEVERAGE: what is ok for you and why?
« Reply #22 on: May 03, 2017, 07:32:05 AM »
I plan to sell my house +/-10 years from now, worth 350-400k$ actualy

I use my HELOC for 200k$ now and intend to keep that level ´till the end (sale)

This way, instead of having 375k$ sitting still in home equity for 10 years, then cash it when I sell and invest a lump summ, I will "only" have to handle 175k$ wich probably be invested in short term bons at that time

If I was renting instead, I would probably not be into borowing to invest


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Re: LEVERAGE: what is ok for you and why?
« Reply #23 on: May 03, 2017, 04:11:35 PM »
Le Barbu

Are you using the Smith maneuver?

Le Barbu

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Re: LEVERAGE: what is ok for you and why?
« Reply #24 on: May 03, 2017, 05:12:57 PM »
Le Barbu

Are you using the Smith maneuver?

Yes I do for SM for 150k$

45k$ mortgage remaining

195k$/350k$ is at work! My max would be 220k$ without refinancing

Heckler

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Re: LEVERAGE: what is ok for you and why?
« Reply #25 on: May 04, 2017, 08:04:22 AM »
Zero debt, no levers.  We are quite happy that way.  We broke our American Express card (22%??) - they keep mailing us 3% offers we kindly decline with a shredder.

Do you still own at least 1 CC?

I prefer using CC than cash in most situations. I recently got  an Amazon card wich charge no conversion fees when buying in USD

We bought a $700 dishwasher and a $1200 gas range on credit from Home Depot. 0%, no fees for 12 months.  Had a careful plan to pay back in exactly 11 months, and maxed out my TFSA last year instead of paying cash for the dishwasher.   Also have two major credit cards and have never paid a dime of interest or fees on them although 80% of our spending is using them.
« Last Edit: May 04, 2017, 08:06:02 AM by Heckler »

Heckler

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Re: LEVERAGE: what is ok for you and why?
« Reply #26 on: May 04, 2017, 08:07:09 AM »
Installed both myself btw, to recover badassity

talltexan

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Re: LEVERAGE: what is ok for you and why?
« Reply #27 on: May 04, 2017, 08:12:12 AM »
I, too, have enjoyed several 0% financing deals over the years on major purchases. But then I ask myself: "Would I have bought the $1,100 refrigerator instead of the $1,800 refrigerator if I'd forced myself to use the cash I had right then?"

Le Barbu

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Re: LEVERAGE: what is ok for you and why?
« Reply #28 on: May 04, 2017, 10:19:26 AM »
Zero debt, no levers.  We are quite happy that way.  We broke our American Express card (22%??) - they keep mailing us 3% offers we kindly decline with a shredder.

Do you still own at least 1 CC?

I prefer using CC than cash in most situations. I recently got  an Amazon card wich charge no conversion fees when buying in USD

We bought a $700 dishwasher and a $1200 gas range on credit from Home Depot. 0%, no fees for 12 months.  Had a careful plan to pay back in exactly 11 months, and maxed out my TFSA last year instead of paying cash for the dishwasher.   Also have two major credit cards and have never paid a dime of interest or fees on them although 80% of our spending is using them.

I use my CC to pay for about any regular expenses like groceries, gaz, clothes, booze, restaurants, etc. But I realise that for many trades, I increased my cash uses because I buy and sell more than ever on Kijiji: Bikes, cars, sports goods, tools, appliances, etc. I always keep +/-500$ on hand and never visit the ATM more than 3-4/year. I really dont know why some people go to the ATM once or twice a week! I even visit my bank branch at most once per year!

Prairie Stash

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Re: LEVERAGE: what is ok for you and why?
« Reply #29 on: May 04, 2017, 11:20:55 AM »
Good question, I'd like to learn more.

I have an available HELOC of $200K, currently $100k in debt with a secured loan invested in stocks, about 15% leverage.  I could get more, I choose not to because I'm timid from a bad experience. The small amount is okay because I can fund an instant 30-50% drop in the event of a market call. Having dealt with the wrong side of a margin call in 2008 I remember being very concerned and almost forced to liquidate everything in 2008. Now I keep a buffer to make sure I can be in control and never forced to sell. At all times when dealing with leverage the risk of a market call is very real and could destroy everything.

On the flip side I like to think after the next market drop I'll buy on leverage, we'll see if I'm too scared. Just like we mock people who sell during a crash, shouldn't I be mocked for not buying more?

What is the rate of this margin?

I prefer HELOC because it's more unlikely to be recalled than a broker margin and my actual rate is 2.05% (<1.5% net)

As Mr. Rich Moose pointed out, I do not think it's good time not to leverage more. But if your plan is to increase leverage, I doubt a crash will convince you. Very hard to catch a failling knife!
I believe its around 3.5%, its not mine and I'm fuzzy with the details. My wife has a financial advisor (long other story) who set it up; since we're a couple I'm liable of course. Its a variant of the SM where all the gains are taxed in the lower income earners hands, as opposed to the regular SM where we would share in the profits. By setting it up through her, exclusively, CRA has ruled that none of the profits are attributed to me. The trick is to make it crystal clear with the paperwork. Its lower tax deduction but also lower tax owed; all dividends are tax free in her hands for example.  It makes calculating the actual loan rate comparison harder; it will be higher than yours but her tax rate is lower.

I'm comfortable with the amount. Its less than 2 years savings to pay it completely off, that's a better way of figuring out leverage; how many months would it take to break even if you lost it all? If you're saving $10k/month a $100K loan isn't terribly risky. If you're saving $1k/month there's a lot more risk because of the timeframes involved.

I was still small in investing in 2008, I had no money. However when I saw RBC paying 6% dividends I bought some, back then dividends made me happy and I didn't consider ETF in those days. They dropped some more but the rebound was fantastic, hopefully I have the same fortitude next time. If I don't its no loss, I'll still sleep well.  I'd rather sit out than lose sleep, stressing about stocks is bad for your health (not a joke, I factor stress into my purchases).

Le Barbu

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Re: LEVERAGE: what is ok for you and why?
« Reply #30 on: May 04, 2017, 12:41:35 PM »
Good question, I'd like to learn more.

I have an available HELOC of $200K, currently $100k in debt with a secured loan invested in stocks, about 15% leverage.  I could get more, I choose not to because I'm timid from a bad experience. The small amount is okay because I can fund an instant 30-50% drop in the event of a market call. Having dealt with the wrong side of a margin call in 2008 I remember being very concerned and almost forced to liquidate everything in 2008. Now I keep a buffer to make sure I can be in control and never forced to sell. At all times when dealing with leverage the risk of a market call is very real and could destroy everything.

On the flip side I like to think after the next market drop I'll buy on leverage, we'll see if I'm too scared. Just like we mock people who sell during a crash, shouldn't I be mocked for not buying more?

What is the rate of this margin?

I prefer HELOC because it's more unlikely to be recalled than a broker margin and my actual rate is 2.05% (<1.5% net)

As Mr. Rich Moose pointed out, I do not think it's good time not to leverage more. But if your plan is to increase leverage, I doubt a crash will convince you. Very hard to catch a failling knife!
I believe its around 3.5%, its not mine and I'm fuzzy with the details. My wife has a financial advisor (long other story) who set it up; since we're a couple I'm liable of course. Its a variant of the SM where all the gains are taxed in the lower income earners hands, as opposed to the regular SM where we would share in the profits. By setting it up through her, exclusively, CRA has ruled that none of the profits are attributed to me. The trick is to make it crystal clear with the paperwork. Its lower tax deduction but also lower tax owed; all dividends are tax free in her hands for example.  It makes calculating the actual loan rate comparison harder; it will be higher than yours but her tax rate is lower.

I'm comfortable with the amount. Its less than 2 years savings to pay it completely off, that's a better way of figuring out leverage; how many months would it take to break even if you lost it all? If you're saving $10k/month a $100K loan isn't terribly risky. If you're saving $1k/month there's a lot more risk because of the timeframes involved.

I was still small in investing in 2008, I had no money. However when I saw RBC paying 6% dividends I bought some, back then dividends made me happy and I didn't consider ETF in those days. They dropped some more but the rebound was fantastic, hopefully I have the same fortitude next time. If I don't its no loss, I'll still sleep well.  I'd rather sit out than lose sleep, stressing about stocks is bad for your health (not a joke, I factor stress into my purchases).

Not to bad then, but she could probably pay less interests if the loan was on a repayment schedual. Interest rate only financing cost a bit more. I was @ 3.2%, set a 30 years amortization @ 2.05% (variable rate) and make the monthly payments with the revolving margin (interest capitalisation) wich keep everything tax deductible.

Retire-Canada

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Re: LEVERAGE: what is ok for you and why?
« Reply #31 on: May 04, 2017, 01:31:55 PM »
I'm at ~$750K invested and need $1.1M to FIRE at 4%WR. I keep no cash on hand and use a $30K LOC as my EF and for the occasional opportunistic investment purchases. $420K house with ~$115K equity so too little to leverage using a HELOC at this time.

My plan currently is to extend my amortization at the next 5yr mortgage renewal [2020] from 15yrs back to 25yrs so I can reduce my mortgage payments and either add to my investments if I am still working or if I am FIREd [likely with a 4.5% - 5% WR] I'll be able to draw less each year allowing that extra money to keep compounding to [hopefully] push me down to an effective 4%WR.

When I get enough equity in my house to pull out $100K to invest I'll consider it.

I suspect that at some point in the next 20yrs the GF and I will jointly buy our forever house. If mortgage rates are favourable relative to market returns I'll likely put down as small a down payment as I can get away with leaving any remaining equity in my investments to work for me there. I don't feel any urge to have a paid off house nor will I sleep better at night without a mortgage.

I can see a scenario where my portfolio is so large relative to my needed FIRE budget where bothering to leverage seems pointless and I'd just let my mortgage run out. I'm nowhere near that point yet, but I won't be sad if I get there. ;)

I've never had any debt related issues in my life so my perspective is not coloured negatively towards using borrowed money to further my financial goals.

RichMoose

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Re: LEVERAGE: what is ok for you and why?
« Reply #32 on: May 04, 2017, 02:00:08 PM »
I'm at ~$750K invested and need $1.1M to FIRE at 4%WR. I keep no cash on hand and use a $30K LOC as my EF and for the occasional opportunistic investment purchases. $420K house with ~$115K equity so too little to leverage using a HELOC at this time.

My plan currently is to extend my amortization at the next 5yr mortgage renewal [2020] from 15yrs back to 25yrs so I can reduce my mortgage payments and either add to my investments if I am still working or if I am FIREd [likely with a 4.5% - 5% WR] I'll be able to draw less each year allowing that extra money to keep compounding to [hopefully] push me down to an effective 4%WR.

When I get enough equity in my house to pull out $100K to invest I'll consider it.

I suspect that at some point in the next 20yrs the GF and I will jointly buy our forever house. If mortgage rates are favourable relative to market returns I'll likely put down as small a down payment as I can get away with leaving any remaining equity in my investments to work for me there. I don't feel any urge to have a paid off house nor will I sleep better at night without a mortgage.

I can see a scenario where my portfolio is so large relative to my needed FIRE budget where bothering to leverage seems pointless and I'd just let my mortgage run out. I'm nowhere near that point yet, but I won't be sad if I get there. ;)

I've never had any debt related issues in my life so my perspective is not coloured negatively towards using borrowed money to further my financial goals.

You've obviously done well with your plan as it is, but if I could offer a suggestion read the Smith Manouvre book. I'm guessing that a good portion of your investments are outside of registered funds and you might be a really good candidate for a SM and save yourself a good chunk of change each year on taxes.

Your overall leverage ratio will be the same, but instead of a mortgage you would have a tax-deductible investment loan.

Retire-Canada

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Re: LEVERAGE: what is ok for you and why?
« Reply #33 on: May 04, 2017, 02:12:48 PM »
You've obviously done well with your plan as it is, but if I could offer a suggestion read the Smith Manouvre book. I'm guessing that a good portion of your investments are outside of registered funds and you might be a really good candidate for a SM and save yourself a good chunk of change each year on taxes.

Your overall leverage ratio will be the same, but instead of a mortgage you would have a tax-deductible investment loan.

Thank you for the suggestion. Currently my RRSP/TFSA/NR accounts look like this - $605K/$62K/$86K so mostly registered. I am self-employed with ~30% of my home a detached studio office so I am at least able to deduct 30% of my mortgage interest and property taxes from my business income.

I'm going to have a lot more free time as I downshift over the next couple years so I'll have a look at the Smith Manouvre as well as other strategies to lower my taxes.

Le Barbu

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Re: LEVERAGE: what is ok for you and why?
« Reply #34 on: May 04, 2017, 02:39:49 PM »
You've obviously done well with your plan as it is, but if I could offer a suggestion read the Smith Manouvre book. I'm guessing that a good portion of your investments are outside of registered funds and you might be a really good candidate for a SM and save yourself a good chunk of change each year on taxes.

Your overall leverage ratio will be the same, but instead of a mortgage you would have a tax-deductible investment loan.

Thank you for the suggestion. Currently my RRSP/TFSA/NR accounts look like this - $605K/$62K/$86K so mostly registered. I am self-employed with ~30% of my home a detached studio office so I am at least able to deduct 30% of my mortgage interest and property taxes from my business income.

I'm going to have a lot more free time as I downshift over the next couple years so I'll have a look at the Smith Manouvre as well as other strategies to lower my taxes.

I dont know if your 86k$ invested in NR would imply a lot of capital gain if sold now, but it may worth to sell everything, repay the mortgage, pull back the 86k$ from a HELOC and reinvest. Now, this portion of the debt is interest decutible. This version of SM is called "debt miracle"

Have a read at Million Dollar Journey, it's very well explained!

SeattleCPA

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Re: LEVERAGE: what is ok for you and why?
« Reply #35 on: May 06, 2017, 12:10:54 PM »
This is a very theoretical (so not very practical) answer, but if someone was going to go hogwild with leverage, it might be interesting to read what I think is one of the classic books about leverage:

https://www.amazon.com/Manias-Panics-Crashes-Financial-Investment/dp/0471467146

BTW, IMHO this is a terribly written book. But it's really insightful and pretty much the explanation for what happened with the Great Recession.

talltexan

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Re: LEVERAGE: what is ok for you and why?
« Reply #36 on: May 08, 2017, 07:19:18 AM »
I'd just accumulated about $8,900 on a 0% offer, recently paid 4% to transfer to another card where it will be zero interest until November 2018.

As long as I don't mess something up. Messing something up always seems like a possibility with these credit cards...