The Companion Advisor: Techniques & Methods
Borrowing to invest - an Overview
Are you an experienced investor? Do you have a good credit history? Are you looking for alternative strategies to grow your wealth? If so, leveraging or investing with borrowed money may be right for you.

A Companion Advisor Article

Consider this:

• Although some people are hesitant to borrow to invest, it can be a powerful wealth-building strategy.
• Properly used, it can help increase your investment returns and accelerate your portfolio's growth.
• While borrowing to invest magnifies both positive and negative returns, you can reduce risk by adopting a strategy that reflects your personal risk tolerance and financial circumstances.

Exploring the advantages

Accelerated capital growth. Potential for enhanced tax savings. Improved investment discipline. The potential for increased returns. These are just some of the benefits that can be realized through a carefully structured leveraging strategy.

Here's why:

• Leveraging can help you accelerate your capital growth by taking advantage of the long-term benefits of compounding investment income. That's because the income you may earn on your leveraged investments is likely to be in the form of capital gains, which are taxed more favourably than interest income.
• If you borrow to invest in a non-registered investment, the interest payments on your loan may be tax deductible', allowing you to save taxes - even while investing outside of an RRSP.
• Because an investment loan must be repaid on a regular basis, borrowing to invest can help increase your level of commitment and discipline.

Considering all the options

While borrowing to invest is not for every one, since it can magnify both positive and negative returns, it can help you reach your financial goals more quickly. That's why it makes sense to consult a trusted Financial Planner, Investment & Retirement Planning, who can help you develop and implement a responsible, conservative leveraging strategy which can help you manage the added risk of leveraged investing, as part of your financial plan. For instance:

• Rather than maximizing your borrowing capacity, conservative leveraging recommends borrowing 10% to 50% of what you can handle. That way, you can reduce the financial or emotional strain that may result if interest rates rise or your cash flow decreases.
• Rather than risking a margin call, look for an investment loan without a margin call component.
• To help reduce investment risk, globally diversify your portfolio in long-term holdings. This will also help you benefit from potentially higher returns e.g. if your North American holdings decline in value, a rise in European markets could smooth out your investment returns and reduce the risk you would face if you were invested only in the North American market (see chart below).

Source: BMO Mutual Funds. Based on $10,000 invested for 20 years. Markets are represented by 55P 500, MSCI Europe, MSCI EAFE, lSX and MSCI Japan. All indices and returns ore in $(on. Examples provided here are for illustrative purposes only and are not a forecast of future returns.)

Is borrowing to invest right for you?

Before implementing a leveraging strategy, it is important to understand your risk tolerance and comfort level with market volatility. If you are uncomfortable with market fluctuations, this strategy may not be right for you. It is important that you understand and are comfortable with the fact that borrowing to invest involves greater risk than a purchase using cash resources only. Conversely, you may benefit from borrowing to invest, if you are an experienced investor who has:

• Sufficient long-term reliable cash flow to service your loan payments
• A long-term investment focus and commitment
• Little or no debt, beyond your mortgage
• A solid credit rating that allows you to qualify for an investment loan
• A moderate to high tolerance for investment risk, and
• Experience investing in the equity markets.

Editors note: Any plan that calls for borrowing money to purchase securities involves greater risk than a purchase using cash resources only. If you decide to purchase securities, your responsibility to repay the loan and any interest required by its terms, remains the same, even if the value of of the securities purchased decline. Fiscal Agents nor any other firm mentioned in this article or website should not be construed as providing legal or tax advice, each individuals personal situation is different and as such consulting your own legal and or tax advisor is advised.

This article was constructed using material marketing from Bank of Montreal and Advantage Advisors Trust.

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