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If the stock market crashes, should I borrow money to buy low?
Anyone brave enough to shovel money into stocks late last year has been well rewarded in early 2019.
Lesson to investors: Market declines are shocking and stressful, but they’re also great buying opportunities. A 30-something reader seems to have absorbed that lesson well. He’s looking for comment on a plan to borrow money when the next market downturn happens.
“Once equities have fallen 25 per cent, I would borrow $30,000 from my home equity line of credit to invest in an ETF (exchange-traded fund) portfolio in my TFSA (tax-free savings account),” he wrote. “If the market continues to fall to 35 per cent off the peak, I would borrow another $30,000 to put into my TFSA. If the market falls to 45 per cent off peak, I would take out enough money to max out my TFSA and then put $10,000 into my RRSP.” This reader is single, debt-free, mortgage-free and hasn’t started a TFSA yet. He believes that sticking to his plan will be no problem, and he understands it could take years to pay off.
One concern is that this investor’s market-timing backfires. For example, he might wait on the sidelines while markets post decent gains, then lose heart after a big crash and remain on the sidelines until a lot of the recovery has already happened. He might be better off by simply investing on a monthly basis.
But I have seen a borrow-to-invest strategy like the one he’s talking about pay off. In a column written two years ago, I documented how an investment adviser borrowed $250,000 during the worst of the financial crisis and turned it into gains he described in spring 2017 as being “between a double and a triple.” His investment actually fell about 10 per cent before starting a long climb higher. Being comfortable as a long-term investor, he never thought about selling.
Investing money in stocks after a market plunge is one of the best long-term investing strategies of all. But it’s also one of the hardest because you have to ignore the panicky emotions of most other investors. Figure on doubling your stress level if you borrow to invest at a market low instead of using cash on hand. You may well find yourself in the position of making payments on debt incurred to buy stocks that are falling hard in value and worth less than you paid. Some investors can handle this, but many cannot. We’ll leave it to this reader to decide whether he’s up for the roller coaster ride ahead.
A few additional notes: This reader would borrow to invest in registered accounts, so the interest he pays wouldn’t be tax-deductible. Using his line of credit and not a margin loan from a broker means there are no concerns about a margin call (where you’re required to pay down a loan taken out to buy securities that have fallen in price). All he has to do is pay the interest on his balance owing every month.
-- Rob Carrick, Globe personal finance columnist
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Stocks to ponder
Tesla (TSLA_Q). David Einhorn’s Greenlight Capital renewed criticism of Elon Musk and Tesla Inc, saying the electric car company appeared to be “on the brink” of failure again, according to a letter sent to clients of the hedge fund on Friday. The letter cited a lack of demand, “desperate” price cuts, layoffs, “closing-and-then-not-closing” stores, closing service centers, slashing capital expenditures, rushed product announcements and “a new effort to distract investors from the demand problem with hyperbole over TSLA’s autonomous driving capabilities.” Read more from Reuters
Rob Carrick’s 2019 ETF Buyer’s Guide: Best U.S. and global dividend funds
The Canadian stock market’s problem with diversification is a particular challenge for dividend investors. The S&P/TSX composite index is close to one-third weighted to financial stocks. Because so many financials are good dividend-payers, investors seeking dividend income can end up with much higher levels of exposure to banks, insurers and investment firms. In the instalment of the 2019 Globe and Mail ETF Buyer’s Guide covering Canadian dividend ETFs, there were funds with as much as 65 per cent of their portfolios in financial stocks. Adding some U.S. or global dividend ETFs to your portfolio is a way to break the dominance of financial stocks in a dividend portfolio. In this final instalment of the buyers’ guide, you’ll find funds with much lower exposure to financials than their Canadian counterparts and much bigger holdings in sectors like health care and technology, where the Canadian stock market is weak. Rob Carrick reports (for subscribers).
The decline in home sales is trickling down to TSX stocks well beyond the big banks
The housing slowdown has cast its shadow on some segments of the Canadian stock market. A dramatic decline in national home sales is proving a hindrance on everything from mortgage activity to retail spending, and is weighing on equities exposed to the housing market in the process. “Think about how far residential investment spreads across the economy,” Bank of Montreal economist Robert Kavcic said. “Retail spending is one area where it has a big impact, like furniture and renovation activity.” That impact is apparent when looking at the stock charts for companies such as Leon’s Furniture Ltd. and Sleep Country Canada Holdings Inc., which have declined by 15 per cent and 33 per cent, respectively, over about the past six months. Tim Shufelt reports (for subscribers).
Wall Street calling! World market themes for the week ahead
Here are five big themes likely to dominate thinking of investors and traders in the coming week. Reuters reports. (For subscribers).
U.S. industrials’ gains put to test as earnings ramp up
Investors betting on industrial stocks this year have been rewarded, with the group among the best-performing sectors so far, but that strength will be tested in the coming weeks as companies report results. Caroline Valetkevitch from Reuters reports.
U.S. stocks ‘fear gauge’ at 6-month low as Wall Street eyes new highs
With U.S. stocks a stone’s throw away from hitting a record high, Wall Street’s so-called “fear gauge” slipped to a fresh six-month low on Friday, in a sign investors expect the good times to keep rolling. The S&P 500 crossed the 2,900 mark for the first time since early October on Friday, boosted by a jump in Walt Disney shares and as bank stocks surged after strong results from JPMorgan Chase & Co. The stock index’s recent gains spell a striking reversal in fortunes for investors, who just a few months ago had been staring at the demise of the longest bull market for stocks. Saqib Iqbal Ahmed reports for Reuters.
Others (for subscribers)
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Question: I’m concerned that the dividend gross-up will increase my Old Age Security clawback. Isn’t this a reason to avoid dividend stocks?
Answer: No. I had a tax expert crunch the numbers in a previous column. His conclusion was that, even with the OAS clawback, dividend income can still be more advantageous from a tax perspective than interest income. Also keep in mind that many dividend stocks offer yields that are substantially higher than the yields on bonds or guaranteed investment certificates.
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Compiled by Gillian Livingston