Borrowing to invest can help to bulk up your portfolio. But Nancy Grouni, a certified financial planner with Objective Financial Partners in Richmond Hill, Ont., says great caution is advised. And she adds that borrowers have to ask about the suitability of the investment and whether they’ve already taken on too much debt.
Grouni: Yeah, it does make me nervous, to be honest. And I have seen it before where someone has, for example, a margin account at an investment firm and they’ve taken on debt that they can’t even fully appreciate the risks. In addition to that, they have credit card debt and really they wouldn’t have been a suitable candidate for something like a margin account or even a home equity line of credit. So, there are many questions that it would really be advisable for an investor to ask themselves when it comes to this topic, when it comes to the strategy, and you know, first and foremost is the actual investment that you’re considering suitable for you. Is it suitable based on your risk tolerance, your time horizon, your investment objectives?
Does it make sense? Also, are there other hidden costs and commissions that you’re not aware of that come into play? What is your ability to fully pay back that loan if your investment falls in value? Is your salary secure? Do you have other forms of income that you can rely upon? These are all things that should be going through your mind.