A little over a month ago, with the stock market sloshing around its low point for the past year, Andrew Guilfoyle did something gutsy and brilliant.
Or maybe crazy and destructive. Only time will tell how smart Mr. Guilfoyle, a married 36-year-old financial adviser with three young boys, was to borrow $250,000 and invest it in stocks.
"My thesis, which is not a unique one, is that markets generally go up over time," said Mr. Guilfoyle, who holds chartered accountant (CA) and chartered financial analyst (CFA) designations. "Full libraries have been written about investing, but nothing has ever put it quite as right as those four words, 'buy low and sell high.' "
The markets have done okay since Mr. Guilfoyle made his investment, but there's no sense of a true recovery from the losses of the past year. Investors who fled equity mutual funds show no signs of returning, and the pros are nervous, too. Sample comments heard in the past several months: "I don't want to catch a falling knife," and "I don't mind missing the first 10 per cent of the next bull market rally."
Mr. Guilfoyle believes it's impossible to time the exact right moment to get into the market. His thinking is that the market is low, and it's bound to rise at some point.
"Please keep in mind that I have a very long horizon," he said. "I think the minimum time frame to look at something like this is five years."
What Mr. Guilfoyle is doing is called leveraging - borrowing to get more exposure to the market than you could with your own cash. It's a risky strategy, so much so that Mr. Guilfoyle has never actually had one of his clients use it.
Some advisers have promoted leverage to clients, in some cases to generate fees and commissions. But Mr. Guilfoyle worries about the emotional state of someone who loses a lot of money in a portfolio bought with borrowed money. "How could you ever push leverage on somebody? It's a dynamite stick waiting to blow up."
Mr. Guilfoyle has reduced the risks of leveraging by securing a loan that stipulates he will not face a margin call, which is where you're required to pay down a loan taken out to buy securities that have fallen in price. The terms of the loan also allow him to pay just interest on a month-to-month basis. He sees himself liquidating the portfolio at a profit at some point and paying off the entire loan at once. Meanwhile, he can use the interest paid on his loan as a tax deduction.
It all sounds so well thought out. And so stressful, even with the markets ending the year with a flourish.
In the first couple of days after making his investment, Mr. Guilfoyle recalls checking the markets frequently. But he says he's never been the kind of person to watch the markets on an hour-by-hour basis. "Two years ago [before the financial crisis] you could have called me on an average day on the way home from work and I wouldn't have been able to tell you if the market was up or down."
The choice to invest $250,000 was partly a "go big or go home" decision, but there was a practical element to it as well. Mr. Guilfoyle's money went into a pair of dividend mutual funds offered by Standard Life that offer low fees to investors who make large contributions.
One of the funds holds Canadian dividend-paying stocks, while the other focuses on global dividend stocks. Mr. Guilfoyle has arranged things so that half the dividends paid out by the funds are reinvested, while the other half are used to help pay a monthly interest bill on his loan that tops $800. His dividends are, of course, eligible for the dividend tax credit.
The idea of taking out the loan came to Mr. Guilfoyle around Thanksgiving, when the markets seemed almost to be in freefall. He talked the move over with his wife, Cheryl, and made his move early last month. Right away, he got a lesson in the futility of market timing.
"I said that if you're going to buy low, you might as well buy really low," he recalls. "The market opened down, down, down one day and I said let's get it done and we put in the order. And then there was a huge rally - the market ended up rising 2 or 3 per cent."
So far, Mr. Guilfoyle's leveraged leap into the stock markets has left him pretty much where he started. With his eye on the long term, he remains committed but also a little wary.
"For the right person, I think this is a marvellous opportunity," he says. "But tell me if you think I'm nuts."
The man who bought low
Andrew Guilfoyle is a financial adviser who recently borrowed $250,000 to invest in the stock market. Here are his thoughts on various financial subjects.
On his personal debt level prior to taking out the investment loan: "I'm 36 years old and I live in Toronto. Those are code words for 'I have a large mortgage.' "
On what he tells clients and friends: "I would never go out and push this. But when people say, 'what should I do about the markets, should I stay, should I get out,' I can honestly say, well, here's what I did."
On the uncertainty of borrowing to invest in uncertain markets: "I'm quite comfortable, given my long time horizon."
On the futility of trying to time the next bull market: "No one sends a memo saying the market is up 10 per cent and this isn't a false rally."