Thursday, October 9, 2008

leverage use in this bear market

The equity markets are now offering up some unprecedented bargains in high quality, dividend paying stocks. I will continue to buy stocks that I feel offer exceptional value if the S&P 500 index continues to drop to (year) 2003 levels and beyond. I feel that as part of my long term strategy I have a responsibility to take advantage of massive downswings in the equity markets. I am now borrowing a very small amount of money from our unsecured line of credit, at a low interest rate, to fund purchases of quality dividend paying stocks. Aside from my attempts to time the market....I am able to claim interest paid on this loan when I file my taxes. Also, I gain the benefit of receiving the dividend income sooner, instead of later if I had waited to purchase the equities in 2009. We have established ourselves as great net savers. The saved money normally went directly into stocks (would occur in 2009), if this strategy is needed the money will be used instead to lower the line of credit balance (in 2009).

This strategy does not come without its risks, as any investing strategy does. I feel that given our current personal financial situation, age, and given the recent events in the market, the timing is ideal for such a strategy. If the S&P comes roaring back several percentage points I will likely halt stock purchases and dedicate funds to pay back the line of credit. The total quantity of leverage used will likely be modest when compared to my portfolio value.

To read an informative series on leveraged investing please look here at Quest For Four Pillars.


Sami said...

I have no problem using leverage for investment as long as you keep debt level manageable and covered by your monthly cash flows (dividends and salary)

A lot of the dividends paying stock can easily cover interest on your borrowing.

good luck!!!

Anonymous said...

MG: if you had 100K sitting in cash right now, would you commit them all to the stock market? or would you do it at different stages?


MG (moneygardener) said...

Jay, Assuming the money is not needed for at least 7 years: no I would not commit the entire 100K to the market right now. I would still buy periodically in different traunches. Nobody can pick the bottom. An investor would be better off just easing the money in over a few months when they see value.

Potato said...

I've been considering using my LoC to do some leveraged investing myself... however, I've been sitting on my hands the last few days, just terrified out of my skull. On the one hand, things are looking to be good values -- the S&P500 is almost as low as it was in the trough of the tech bust, so how much worse could it get?

On the other hand, the losses this week have been fast and furious, and who knows where it will end? More to the point, though, is that I would have to essentially pick just one dividend-payer for my situation), and I just don't know what to pick. I'm at a loss as to what the heck is going on with GE, the Canadian banks, or RUS these days, though those would otherwise top my list. I think IPL.UN is then my lead pick for a leveraged move, but I'm going to sit on my hands for today (Friday) anyway...

On the gripping hand, I can psychologically handle big market losses much better when I'm buying :)

Let us know what you end up grabbing.

Four Pillars said...

Hi MG - thanks for linking to the series!


Arthur said...

Hi MG,

I also have a LOC dedicated for leveraged investing. Question about calculating the Enhanced Dividends Tax Credits: My wife is in a lower tax bracket than me. Based on my calculations, she would pay 7.52% taxes on dividends, while I have to pay 25.3% (based on 2008). From my spreadsheet, it looks like generally the lower income earner gets better performance than the higher income earner. Do you know if there is a rule on which spouse must declare the dividends in their tax return?