Why I'm Not Borrowing to Invest Right Now
There have been a lot of posts on here lately about portfolio lines of credit, and a few people have asked me what I think of them. Personally I'm not touching one right now, and it comes down to two things.
The first is valuations, and I'm not predicting a crash when I say that, since I'd never try to time one. But the way I see it, the stock market is already incredibly leveraged, and it wouldn't take that much to trigger a fairly large sell-off at this stage. When the whole system is already stretched, I'd prefer to not be leveraged at this point.
The second is that I'm already somewhat leveraged, just not in the way people usually mean. I have some student loans sitting at 0% interest, and every dollar I invest instead of paying them down is essentially a dollar invested with borrowed money. At 0% that's a comfortable amount of leverage for me. Adding a second loan at 4% to 5% on top of it is a different decision entirely.
Wealthsimple's portfolio line of credit is prime plus 0.5% for most people right now, which works out to about 4.95%, and 3.95% if you're at the top tier. FP Canada's 2026 planning guidelines put expected returns on a diversified stock portfolio at roughly 6.3% to 6.6% a year before fees. So most people borrowing at 4% to 5% are hoping to clear about 1.5% to 2.5% a year on the borrowed money, and that's the average case. On $35,000 borrowed, that's roughly $500 to $900 a year, before tax.
I don't feel comfortable with the majority of people paying 4% to 5% interest to invest right now, because expected returns over the next number of years aren't significantly higher than that. You're taking a lot of risk for not much potential gain.
Say you have $50,000 invested and you borrow another $35,000 to buy more, so $85,000 is in the market. If stocks drop 30%, which they've done plenty of times, your $85,000 becomes $59,500. You still owe the full $35,000, so what's left of your own money is $24,500. The market fell 30% and you fell 51%. The interest bill of about $1,700 a year keeps coming the whole time you wait for the recovery, and if the drop is big enough, the lender can ask for some of the money back at the exact moment you'd least want to sell.
I'm not against borrowing to invest in every situation, and I don't think the people doing it are being reckless. Someone with a steady income, a long timeline and a rate well below what they can reasonably expect to earn can make a case for it, and that's their call to make. For the amount of upside on the table today though, I'll keep my leverage where it is, at 0%.
If you're using a portfolio line of credit, what rate are you paying, and what return are you counting on?
