Financial Jungle

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Two of my most admired personal financial blogs are pressing the hot button on a very sensitive topic: leveraged investing. To read more on the lively discussions, check out The Canadian Capitalist and Million Dollar Journey.

The pro-leverage group believes that when done properly, leveraging is an effective way to build wealth. The anti-leverage group advocates the old fashion method, which is to pay off your mortgage and invest with cash. It is not necessary to leverage your portfolio in order to reach your financial goals. As The Canadian Capitalist put it:

If you are like me, you want to pay off your home, save for retirement, send your kids to University and eventually, not having to depend on a paycheck. You are not aiming for a spot on the Forbes 400 and couldn’t care less about the list. Do you need leveraged investments to achieve your goals? Not really. A far simpler and less-risky path is to spend less than you earn and invest the difference in a low-cost, diversified portfolio. Why take more risks than you need to?

Just to throw in my two cents. I pick the middle of the road. Most investors concentrate on capital appreciation, but my investment strategy is cash flow centric. Since time is on my side, a moderate amount of leverage is safe as long as I’m getting a positive cash flow out of the portfolio. In Canada, investment loan interests are tax-deductible, while dividends are tax-free for most people. If you’re in the 33% tax bracket, a 3.85% dividend yield is enough to cover a loan interest rate of 5.75% after-tax assuming you leverage your entire portfolio. At the moment, my portfolio has about 17% cash in a high interest saving account, but I’m comfortable with up to a 15% leverage. There’s still plenty of free cash flow left for reinvestments, or paying down debts.