Borrowing $25,000 From A Credit Card For Investment Purposes

by Mike Holman

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This is a guest post by Rat from Ending The Rat race – a good Canadian blog.  Check out his site and subscribe to the RSS feed.

The Rat is a young investor and entrepreneur hailing from the east coast. After earning a Bachelor of Commerce, he returned home at the age of 21 to work in various capacities, most of which were in the private sector. There, he had the opportunity to accumulate over ten years of business experience in a range of senior management levels, take advantage of real estate opportunities, and invest in equities and other types of investment vehicles. In January 2010, he was able to retire and hence “end the rat race” in his early 30’s.


Taking The Plunge

After researching and reading various articles from some of the prominent personal finance sites in the blogosphere over the span of the past few weeks, I found myself constantly revisiting Four Pillars’ thought provoking “Leveraged Investments” series.

In retrospect, aside from being inspired by Four Pillar’s series, I believe the motivation behind wanting to take the plunge and borrowing funds for investment purposes probably originated from a thread I published back in March, titled, “Borrowing Against Your Home”.

If I had to stress one thing in relation to implementing my leverage plan, is that the strategy I used differs significantly from what many would consider to be the more generally accepted or contemporary way of leveraging funds for investment purposes.

In fact, there were some stipulations that needed to be met in order for me to come to terms with borrowing to invest.

My Requirements & Stipulations

In order for me to get over the mental hurdle of being comfortable with leveraging, a few of my own requirements had to be met.  Here they are:

  • Interest rate on the loan had to be among the best available in the country.
  • Under no uncertain terms did I want to borrow against the equity of my home. To be frank, the prospect of having to pay a mortgage twice frightens the hell out of me.
  • The total amount borrowed had to be an amount that I could easily circumvent and get out of should a cataclysmic event occur in the markets.
  • The potential for high share price appreciation in a relatively short period of time had to be a possibility. The intention of this plan is not one that involves ‘being in it for the long-haul’ as with my regular investments. This plan has an expiry date.

Pertinent Details About My Plan

In terms of discussing some of the more intricate details surrounding the borrowed funds, I have to say, I’m pleased with the terms.  As I alluded to above, my goal was to be able to get the lowest possible rate without having to get a secured loan against the equity of my home.  In reality, I could have borrowed a lot more, but the terms weren’t favorable, at least for my purposes.

For example, with my BMO InvestorLine account, I was approved for a margin account. If I wanted to use the available funds today, I could borrow over $100,000, but the rate for doing so is 3.50%.  This rate did not appeal to me, nor does the prospect of getting a margin call on my account if market conditions deteriorate significantly.

A second source of funds I could have used was from my CIBC personal line of credit. At my current lending rate of prime + 2% (2.25% + 2.0%), which amounts to 4.25%, I wasn’t interested in utilizing any of the available $35,000 for investment purposes.

Despite the fact that the interest on the investment loan is tax deductible come tax season, I just wasn’t interested in securing any assets or diving in with a higher interest rate situation. Besides, many will attest that rates are poised to soon rise, so if I’m borrowing funds that are tied to the prime rate, the interest expenses will also increase.

There just had to be something better…and there was.

The Lowest Rates I Could Find: MBNA

If you haven’t heard of MBNA, it is an affiliate entity of the Bank of America. The institution offers a host of financial products such as credit cards, insurance, and so forth. This is where I borrowed the $25,000.

Over the past week or two, I called MBNA to see if they had any promotional offers on balance transfers for existing customers, and it turned out they did.

They offered me a promotional 0.99% interest rate until January 2011.  I presently own three MBNA cards: the Platinum Plus
(credit limit of $15,000), the Eco-Logique (credit limit of $5,000), and a University Card (credit limit of $5,000). Because they were willing to offer me a total of $25,000 at 0.99% interest, I decided to go with all of the promotional offers for each of the cards.

In fact, after confirming details with a representative over the phone, the interest is actually closer to 1.99% because of the fact that there are some extra fees associated the monthly interest charges.

Regardless, based on the math, my monthly expense for the $25,000 borrowed should amount to about $40-$50 a month. Not bad for being able to get access to $25,000!

In the interest of transparency, one thing to keep in mind is that there is a one-time charge of 1% on balance transfers, so by borrowing  $25,000, I had to pay a one-time fee of about $250.  This is not a recurring expense.

Despite this irritation, I still felt it was worth availing of these funds. What I like about MBNA is that once things are in place, there are no surprises when it comes to the monthly interest I have to pay, as long as I don’t miss a payment along the way.  Unlike my PLC, I won’t have to make large payments that focus on paying down the principal while paying interest; the promotional rate will be in full effect until early 2011.

The Overall Objective

As I mentioned, this plan has an expiry date. The end date will be January 2011, when the promotional rates expire. My hope is that I will have earned sizable capital gains on the investments purchased and get out before the promotional rates on the cards expire and rise dramatically. Sounds risky, right? That’s because it is.

One of the core objectives of this plan was to aim for high share price appreciation in a relatively short period of time; as a result, growth stocks are considered to be of paramount importance with this plan.

The Investments I Purchased

The following is the list of stocks I bought under this plan; I feel many of them offer share price appreciation in the months to come:

1.    New Millennium Capital Corp (NML.T): I bought 4500 shares at $1.13 per share. If you’d like more information about this company, I wrote a guest post for the Intelligent Speculator a while back – feel free to read up.  Total amount of transaction: $5,085.

2.    Labrador Iron Mines (LIM.T): I purchased 800 shares at $6.42 per share. Total cost of transaction: $5,136.

3.    Aurizon Mines (ARZ.T): I bought 1,036 shares at $4.86 per share. Total cost of transaction: $5,005.80.

4.    Goldbrook  Ventures (GBK.T): I purchased 15,000 shares at $0.31 per share. Total cost of transaction: $4,650.

5.    Consolidated Thompson Mines (CLM.T): I bought 240 shares at $9.89 per share. Total cost of transaction: $2,376.

6.    Baffinland Iron Mines (BIM.T): I purchased 3472 shares at $0.72 per share. Total cost of transaction: $2,499.84.

Total amount invested after 1% transfer fees (and leaving a bit of room so the borrowed funds do not exceed the respective card limits): $24,752.64

Ten Month Waiting Period

That about sums up the details of my leverage plan! I’ll know in 10 months or so if the strategy was a success. Who knows, maybe Four Pillars will invite me back for a guest post to report on how things materialized?

At any rate, it’s important for you to know that I am not a professional of any kind. I am also the furthest thing from being a financial advisor, so be sure to do your own diligence before embarking upon a leverage strategy of any kind. The same applies when considering investing in any of the stocks that I have mentioned in this post. A lot of the stocks mentioned are junior mining companies and investing in them certainly brings an element of risk.

Readers, what are your thoughts about this plan or leveraging in general? Have you ever borrowed to invest in any way? If not, is it something that interests you? Regardless, I’d like to know.

Ending The Rat Race would like to thank Four Pillars in allowing for this guest post to become a reality. Many thanks!

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{ 47 comments… read them below or add one }

1 Potato

You’re nuts!

What exactly is the fear surrounding borrowing against your home with a HELOC? You’re paying roughly 3% for the MBNA advance (1.99% + 1% for the up-front fee), and have a very near-term payback due on that, plus a whole host of nasty fees if something goes awry; you could get a HELOC for about the same (or margin from your broker for not much more). The only benefit seems to be that you get to lock in your rate for a whole ten months. I’m all for using these credit card offers when you can save big bucks on the interest, but it really doesn’t seem worth the hassle here.

I understand the appeal of borrowing outside the broker margin account to avoid margin calls (plus at least two of your listed stocks would not be marginable), but still, if they’re willing to give you $100k in margin, you should be pretty safe if you’re only looking to borrow $25k.

2 Mike

Potato – I have to agree. For a small amount, so what if it is against your house?

3 Mr. Cheap

I shouldn’t have read this before bed. I’m too afraid to sleep now… :-(

I hope this works out for you rat.

4 Charles in Vancouver

I do hope this works out for you too. The thought I just wanted to chime in with though, is: How do these credit cards react if you start making other purchases while the loan is in place?

My understanding is, say you make a $500 purchase and you’ve got a $10K balance transfer on the card. You get the bill, you pay the $500 off. But wait, MBNA will actually apply the $500 against your balance transfer! Not against your purchase. Which means that you’ll start paying full (20%+?) interest on the purchase and any others you may make. Furthermore, triggering this interest rate on a purchase *may* bump up the interest rate on your entire loan.

5 The Rat

@Potato: Thanks :)
The bottom line is that I don’t want to borrow against my home. It’s paid off and I suppose it’s more of a psychological factor that comes into play by just not being comfortable in doing so.

I really like the fact that I’m locked into a rate. And even though the total rate may indeed be closer to 3%, it’s still a better rate and the numbers don’t lie IMO. I’ve used MBNA and I don’t see it being a hassle or overly difficult to manage. I have pre-authorized arrangements setup to pay practically all of my utilities and I can setup something similar with MBNA. It’s no different than borrowing to invest any other way in a sense that you still have to do a bit to track what’s going on.

Regarding the margin, it’s more so the rate that I wanted to beat more so than the worry of having a call on $25,000. My rate still tops my margin account rate of 3.5%.

@Mike: I guess it’s just the mental thoughts of borrowing against my home that I just can’t get passed. I can certainly respect your viewpoint.

@Mr. Cheap: LOL! Believe it or not, I’m quite comfortable with this plan and in my view the numbers don’t lie. I would actually have a harder time sleeping knowing that I had funds borrowed against the equity of my home. When we hear of how many people have varying levels of ‘risk tolerance’, I suppose that comes into play on a very unique level in this case.

@Charles in Vancouver: You have to be careful if you’re considering such a plan. Under no uncertain terms should you start making purchases after you borrow most of the funds for investment purposes.

In my case, my wife and I make a lot of purchases through our CIBC Aerogold Visa in order to earn points. For example, groceries and gas earn us 1.5 the miles. In addition, most of our utility expenses are pre-authorized with the card for points and ease of payments. We basically have only one stopping point to pay things off, and this is it. Now that I just leveraged with MBNA, I’m either going to set the payments up online as I have in the past or take a new pre-authorized route, depending on what’s available.

It would be a foolish endeavor to make purchases with the card if you’re not far from the limit allowed for borrowing. In my case, if there were some miscalculations and for some reason the higher interest rates kicked in, I would just pay off the balance (s) with my line of credit (prime +2). That would automatically reduce the interest rate by about 15.75% from 20%.

From a personal standpoint, I rarely use my MBNA cards. In fact, for the most part, I’ve only really used them for leveraging purposes. My rewards card is basically our card we roll with for most purchases.

6 Mike

I gotta say that the nutty part of this plan is the short investment time horizon (of 10 months). This is definitely a trading strategy. The source of the borrowed money isn’t really crazy.

7 Mich

Good luck with your venture The Rat. I would included some dividend paying stocks. Dividends would cover the interests easily. I might be heading the same road as you, take a loan and invest. The crash is behind us, opportunities lay ahead!

8 The Rat

@Mike: Yeah, that is definitely the nuttiest part of it all :)

@Mich: About 50% of my whole portfolio (describe in My Asset Allocation thread on my site) is attributed to dividend or distribution paying stocks.

A sizable part of the core of my investment strategy that I have in place (and that enabled me to leave the workforce) involves heavily on creating cash flow streams through dividend and interest producing investments.

You’re absolutely right – let’s say I invested the whole $25,000 in the Bank of Nova Scotia (BNS). With a dividend yield of 3.92% (as of this morning), the average monthly dividend payment would be about $81.66 [I realize the stock pays quarterly but I'm doing a monthly average for our purposes]. That kicks the crap out of the monthly expense, and you’re in the money, on average, of about 35 bones a month. That’s the beauty of this plan; because of the low rate, you don’t have to look far for quality stocks in order to cover the expenses. Sure, the interest in borrowing is tax deductible come tax season, but you’re also not tying up cash flow in the process – because you can cover it.

I could have easily used the lion’s share of the $25,000 to buy several solid Canadian blue chip stocks that have a great history of dividend payments, but the intent of this plan is not a ‘buy and hold’ scenario for the long-haul and what I have in place with my regular ‘core’ portfolio.

That is not to say that I wouldn’t consider doing this in the future. For now, I don’t want to have too much debt tied up for an extensive period of time. If I had borrowed the $25,000 from MBNA to buy the investments you mention, I would have ‘mentally accepted’ a long-term period – which is not my intention for at least the time being.

Thanks for the wish of good luck. Hopefully, I’ll be reporting progress in 10 months time!

Cheers

9 Alexandra

You’re crazy!!!

But you just may be crazy like a fox. I guess we’ll see in 10 months.

10 Thicken My Wallet

The strategy is only nuts if The Rat doesn’t know much about mining companies. In some ways, isn’t The Rat rooting for inflation?

11 The Rat

@Alexandra: Thanks for the vote of confidence; maybe I’m a fox in a rat’s body :) Ten month’s will likely tell the story!

@Thicken My Wallet: I spent ten years of my life in the mining industry before leaving the workforce; let’s hope I can put my money where my mouth is for a round of personal finance success in relation to this strategy! This is not to suggest that anybody should follow suit.

P.S. I won’t comment on inflation :)

12 Aolis

I have trouble believing that this made it as a serious article. The title might have been “Leveraging $25,000 From A Credit Card For 25,000 Lottery Tickets”.

You are making a short term bet on the stock market. This has nothing to do with investing. It would make more sense if you invest in something with no risk and a fixed return like a savings account.

Half the discussion is about the benefits of credit cards versus other types of loan for a short term bet. You shouldn’t be making a short term bet on the stock market to start with. If we decide this is entertainment money, you shouldn’t be borrowing money for it, it should come out of your entertainment budget.

I really doubt that you could convince the tax man that the interest is deductible should you be audited. Especially if you have used the credit card for other purchases.

Long term, you can’t keep that kind of interest rate up on a credit card. You haven’t considered the risk of loosing the money and having to pay credit card interest rates. At twenty percent interest, you risk paying back a lot more than the original amount.

This is a highly irresponsible plan and no one should consider doing this at home.

13 Causalien

As someone who’ve been through this and have a lot of experience in managing leveraged risk I have a few points for you.

What you did, is the equivalent of a guaranteed margin call in 10 months.

2.99% and 3.50% is a difference of $175 dollar for the benefit of not getting that guaranteed margin call in 10 months. Make some calculations about the time risk and you’ll see that it’s worth that $175 for protection.

Borrowing against the house is the same as borrowing against your credit card. You have to pay it off either way. Repeat after me:”It’s the same money no matter how you try to transform it”

What you need to do is to buy put options in iron mines to protect against any downward movement in 10 months . Since 50% of your stocks are focused on iron mines and the ones you bought are penny stocks that tends to be what we call “casino stocks” where it either doubles or go bust to nothing.

Mbna has a better card with 0% interest for life. Find it use it and get rid of your current one.

You have not simulated what will happen if the leveraged portfolio has a negative outcome in 10 months. What are your plans to unwind your position or roll over the debt? Do you have enough money to double down to recoup the loss? Or are you going to work to pay it off? Work that out NOW!

14 The Rat

@Aolis: I beg to differ. While I certainly admire your enthusiasm and respect your position, in my view, I have made a decision that I’m comfortable with. I didn’t decide on executing this strategy just for ‘the thrill of it’.

I’m fully aware of the fact that I could have utilized the funds and invested in say GICs, or even a petty savings account. In fact, 50% of my portfolio is attributed to guaranteed investment vehicles. Been there, done that – still doing it.

I’ve done my homework on the stocks I have chosen and don’t feel as though I’m playing at a crabs or blackjack table. With that being said, I didn’t say the plan wasn’t risky and I haven’t suggested for anybody to follow suit.

I’m also prepared in the advent that I have to transfer the debt in a worst case scenario, and I touched on this in my response to Charles in Vancouver. I also have the funds to cover the losses, if any.

Out of curiosity, what would be your position in terms of borrowing against the equity of your home. Would you consider that to be irresponsible as well?

I truly appreciate your feedback; for me, it confirms the level of risk this strategy encompasses.

@Causalien: Debt is debt. Whether it’s on the equity of your home, credit card AND on margin, you’re still technically borrowing money you don’t own. I chose the route I was more comfortable with.

I agree with you in that it could result into being comparable to a margin call in 10 months, but a lot can happen in that time period :)

Cash is cash, and the $175 is something I’m going to pocket.

While I can certainly appreciate your suggestion to buy some puts to hedge some of the risk , I’m not interested in getting any options, even if the intention is to minimize my risk.

Regarding the 0% MBNA card, I’m curious if you’re in Canada. I know of a lot of great credit card deals in the U.S. by reading up on My Dollar Plan’s site and she often highlights several 0% interest cards. My promotional rates are marketed at 0.99%.

What I like about My Dollar Plan and her Credit Card Arbitrage plan, is that her strategy allows for him to earn over $12,000 in ‘free’ money. She left the workforce at age 29 and has also shared some interesting experiences.

Thanks for the comment!

15 Causalien

Some more points:

It is a Canadian credit card.

You cannot deduct credit card loan interest as investment loan.

16 Sunny

I also did something similar a couple of weeks ago, I use 5 000$ in credit card balance transfer at 4.9% for 6 months to invest in Just Energy Income Fund (JE.UN)… I understand why you are willing to use leverage. If you have the feeling you are doing the right thing for you, why not? Since you seem pretty comfortable with a good situation, I am for those kind of things. I don’t know one of the stocks you have invested in. Seem interesting but risky. Myself, I something use leverage, but only to invest in dividend payer companies, they represent less risk for me, as I am a small investor, still living in an apartment that is, btw, a one and half lol. Inspiring to read about leverage.

17 Aolis

@The Rat: I am currently leveraged with a line of credit and invested in TD Cdn Index e-Series. I invested during the recent drop. I don’t own a home.

Leveraged investing obviously depends on the individual situation and a person’s temperament. I can safely say that my investment is statistically likely to grow more than my interest costs over the next twenty years.

You can not say the same for yours in the next ten months. Your stocks could drop 30%, just as they did two years ago, and have nothing to do with your knowledge of mining.

As you said, debt is debt. A secured loan is two or three percent less than a unsecured loan. You might feel more comfortable with the unsecured loan but you will pay for that comfort. Your partner’s input and feelings will also have an impact on the decision.

The credit card arbitrage is interesting, just not the short term stock investing. It will be an interesting conversation with Canada Revenue if it comes to that. Make sure to not buy anything else with the credit card.

18 Squawkfox

This post missed the April 1st “Fools” deadline by a week. But don’t fret, your leveraged results could make the 2011 deadline. :)

19 James

I too hope that things work out for you. You worked in the mining field and hopefully your insight in that field pays off!

If you’re confident with your stocks, I don’t see anything bad about his plan. It’s not time-locked as many of you think, because after 10 months, he can for example, find another loan with a low interest rate to pay off the credit card. At the worst, he could just use the HELOC he’s currently adverse to doing, at after 10 months it would slightly ahead of actually using the HELOC in the first place.

20 The Rat

@Causalien: Interesting. I had never come across such a promotion and will look around. Even if I found the 0%, I don’t think I would avail of it for this time around because I’m guessing the 1% transfer fee would still be applicable. Getting rid of it would not be practical taking this into account. Nevertheless, I’ll be sure to keep an eye out – thanks!

By the way, when I mentioned, “Despite the fact that the interest on the investment loan is tax deductible come tax season, I just wasnt interested in securing any assets or diving in with a higher interest rate situation”, I’m actually referring to the CIBC personal line of credit and not the MBNA cards.

In fact, I could care less if the interest is deductible with the use of the credit cards. Regardless, I will check with my accountant; besides, that’s what I pay him for!

@Sunny: Interesting. Did you go with MBNA or a different card? I’ve never heard of JV.UN, but after checking out the stock information, with a yield of just over 10% along with a monthly distribution, it seems to cover your investment. Best of luck with your leverage plan!

@Aolis: I recently published a thread on index funds and touched on the TD e-series funds. Did you manage to get favorable borrowing terms on your line of credit?

You’re absolutely right in that everybody’s approach to investing is not always the same and it often depends on the individual. People have different levels of risk tolerance as it relates to investing in general- imagine the varying opinions that exist in terms of leveraging!

Despite the fact that it’s the main goal, whether I’m going to outright sell all the stocks I’ve purchased at the precise moment the 10 months are up, well that is ‘to be determined’. One thing’s for sure, I will either be selling all the positions, transferring the amount to a different promotional offer or line of credit, or paying the balance outright.

The intent of my thread is not to instill rigid guidelines with the thought process “no matter what, I just gotta sell all of these shares in 10 months time” kind of thing. Despite the ‘expiry date’ in relation to the promotional offer, I still have some flexibility in terms of how I’m going to tackle things come early 2011.

As we know, markets are always in a state of change, and you have to be willing to be receptive to adjusting your plan as things happen. My goal is to witness some serious capital gains over the next 10 month period and sell out; whether that becomes a reality on the day the promotional offer expires, well, we’ll see! My hands aren’t cuffed.

The selection of stocks I picked is not an attempt to just dab around and play with penny stocks. Depending on how they perform, they could be long-term positions. NML for example, holds the world’s largest undeveloped iron ore deposits. If I want, I can pay the debt in cash when the time comes. Essentially, my plan is in place, and I’ll see where it takes me.

As I replied to Causalien, I’ll be sure to verify with my accountant before contemplating the possibility of claiming the interest. The cards aren’t used for purchases.

Thanks for sharing your thoughts; greatly appreciated.

21 The Rat

@Squawkfox: My bad, maybe I’ll write about herbal tea in my next thread in order to sooth my foolish mind :)

@Thanks for the comment James. You’re right, I have a few backup plans depending on how things transpire in 10 months time. As I alluded in my previous response, there are options when the promotional rates expire. I have a feeling that there’s a bunch of us that are curious as to how things are going to pan out in early 2011! :)

22 Potato

@Mike, others: yes, my “you’re nuts!” comment was meant to refer to the timeline moreso than the source of funds, though even there I was shaking my head a bit…

@The Rat: I’m just having trouble figuring out your headspace. You seem comfortable with the risk of leveraged investing in penny stocks (and further of doing so with a time-limit), yet aren’t comfortable with the fact that a HELOC is callable, or that if you default the bank could foreclose on your home (though the odds of either happening are hugely remote for modest borrowing — especially since it’s hard to default on a loan that you can roll), or whatever else it is that makes you not comfortable with borrowing against your home. A HELOC (or broker margin) gives you a low interest rate because it’s secured — a credit card company does it because they hope you slip up and then they can screw you later. Now if you’re careful, and I’m sure you will be, it’ll all be fine, but for all the effort of applying and then reading all the fine print, and staying on top of the situation along the way, and then raising money to pay it all off in a lump sum at the end of the 10 months just doesn’t seem worth it to me. Plus, if you have a lien on your home (such as with a HELOC), I’ve heard it can help make it harder for title fraud to work against you, so there are some benefits there as well. Especially if you already have a personal LOC — might as well get the better rate on the HELOC (which is what, 2.75% these days?).

Then finding out that 50% of your holdings are in guaranteed assets either helps the whole thing make sense (e.g., if you have a $25k GIC maturing in 10 months that yields >3%, so the leverage is for liquidity purposes/arbitrage), or makes it stranger yet (if you’re borrowing at or above the return of your cash, rather than just utilizing the cash directly).

23 The Rat

@Potato: No matter what way we look at it, at the end of the day, I’m paying between $40-$50 a month to borrow $25,000 for a 10 month period – it’s that simple.

Some of the commentators are borrowing funds from a PLC, others are either borrowing or suggesting to borrow against the equity of their home in the form of a HELOC, while I’ve taken the MBNA route.

In the advent of something utterly stupid happening, I have backup options that range from my PLC, other promotional cards, margin account, and yes, cash. I just woke a few minutes ago, and I slept like a baby last night.

Let’s be realistic – do you really think I wouldn’t roll the debt over if something went wrong? Equally importantly, I may even roll it over if I’m extremely happy with the performance of my positions in 10 months time. I’m not going to dwell on whether this strategy is bogus because it may take a bit of time to read up on the fine print. If you borrow against your home, I’m sure you’d take the necessary time to examine all the pertinent details before going ahead with the plan.

Whether the angle I’m using is perceived as a unique yet mundane attempt to attract attention, well, that wasn’t my intent. I’m simply using a strategy that I’m comfortable with; besides, I’ve been able to demonstrate that I can get a rate that’s virtually the same as getting a secured loan with a HELOC without having to borrow against my home.

I can agree to disagree on strategy, but at the end of the day, each method involves taking on debt and there’s no way around that.

Thanks for sharing your thoughts. :)

24 Writer's Coin

Did you ever consider using options with this money instead of dipping into penny stocks?

25 DividendMan

The fact that you referred to “crabs” instead of “craps” for the casino game with dice makes me believe you are not a gambler at heart. :)

I think people are just shocked that you’re doing it on such a short timeline with “penny” stocks. The fact is that you’re in a much better fiscal position than most people your age so you can take risks like this.

If you’ve done your research and can roll the debt into slightly higher interest payments later (if things go south and you want to hold on), I think it’s unlikely you will lose all the money.

26 The Rat

@DividentMan: LOL :) You’re right, I’m the furthest thing from being a gambler in that regard!

You’re right in that I can take some extra risk given my fiscal position; in fact, I probably wouldn’t even be considering such a strategy otherwise.

Technically, they’re not all penny stocks. A couple of them have already surpassed the $5.00 per share mark.

@Writer’s Coin: For the time being, buying options does not interest me.

Thanks for the comments!

27 Aolis

@The Rat: If you sell the investment, you are going to pay tax on the capital gains immediately. So the question is, what are you going to do with the money?

If you spend it right away, then fine. If you turn around and reinvest it, then you have wasted money on taxes. You should have just invested in a long term stock, kept it there and pay the taxes in twenty years. If you are only going to spend a small portion, then you should invest in tax advantaged dividend stocks that will give you a small amount to spend each year.

If you are going to keep the stocks in ten months, then why the short time frame? Would you sell them if they were doing poorly? It seems like you are limiting your investment term because of the credit card term. That doesn’t make sense.

Try to separate the investing part from the borrowing part. Choose investments based on the time frame for when you will need the money, taking into account the taxes that you will pay. Then find a source for the loan. Many people who do credit card arbitrage switch from card to card for years. This doesn’t work so well in Canada.

28 Michael

Nice pop in NML today. Already an unrealized gain of about 2200$ or 9% on the total portfolio. Pretty good for a weeks work.

29 Sunny

Hi again The Rat! Not the same credit card company. I had several Visa credit cards and all year long I benefit from different offer for credit card transfer balance. I borrow cash that way on a regular basis. I recently use a credit card balance, an offer from TD Visa at 4.9%. Lucky you are to benefit of so low interest rate for a full year! My lowest interest rate ever so far had been of 3.9% with CIBC Visa. What I actually dislike about borrowing on credit card balance transfer is that those offer are only for 6 months or so. I had one of those who expired in May, I don’t want to sell my stocks… I could sell with a small profit, but than will lost all future dividend income. Difficult situation to deal with. But credit card balance transfer is a nice way to borrow money when the little trick is being understood lol.

30 Investor Junkie

The Rat: I suggest you read this long thread on Bogleheads forum:

http://www.bogleheads.org/forum/viewtopic.php?t=5934&postdays=0&postorder=asc&highlight=gold&start=0&sid=f6d70cd5ca32e3068b26d321f6294d09

Let me know if you work out any differently.

Why is it every 21 year old thinks they have a new scheme to make a killing in the market?

31 Financial Cents

@The Rat – gutsy! I think your plan is good, but a good plan can only be executed if you have the emotional and mental capacities to execute it…and I certainly think you do. I like that your plan has an expiry date – VERY important. Personally, I don’t know if I would be comfortable in doing this; that said, I think I could; but I would not embark on this journey at this point in my life because of my comfort level in that process….

To date, I have not borrowed any money to invest. The way I see it, I got about $200,000 left on our mortgage, and that’s enough debt and borrowing for me. I like to keep it simple :) This is not to say that when our mortgage is finally paid off, years from now, I might consider a similar move.

In closing, I like other faithful followers, are quite interested in learning how this turns out!!

32 The Rat

@Aolis: First off, I don’t want to jinx myself but at a bare minimum, I want this strategy to cover at least all my interest expenses and time committed to executing the plan. Everything else is bonus.

With that being mentioned, of course, I would like to witness some serious share price appreciation with the overall selection of stocks and possibly take advantage of the capital gains.

As I alluded to in a previous reply, there are a lot of variables involved and trying to ‘analyze to death’ exactly what I will do when the ten months are up is difficult to spell out from A to Z. For example, if I’m pleased with some of the companies’ future news releases and how projects are developing, I may want to hold some or all of the positions for a longer period.

I fully realize the tax implications involved with capital gains. If the gains are significantly high, then to me, it’s still worth taking the gains despite the tax I’ll have to pay. One option I’m considering if I’m pleased with the results, is to invest some of it in RRSPs with unused contribution room I have built up, and then take the refund and put them in TFSAs. We’ll see what materializes.

Telling me I ‘should have’ done this or that is subjective yet I can nevertheless respect your position on the matter. Remember when I mentioned that 50% of my portfolio is allocated to guaranteed interest vehicles? Well, the other 50% is with equities, and within a sizable chuck of my equity positions, are Canadian blue chip stocks that have a strong history of increasing dividend payments. These stocks will receive the favorable tax treatment you mention, and these are positions that I’m in for the long-haul. It’s been taken into account.

@Michael: Thanks. I’m going to do my best to avoid looking how the stocks are performing because of the minimum time frame I’ve allotted. Crossin’ my fingers :)

@Investor Junkie: That is a tragic account indeed. With that being mentioned, you may have noticed my plan is not one that entails borrowing $210,000+ of borrowed funds. We’re talking about an amount not far from 10 times less! I think it’s also likely that the funds from the individual who borrowed that much money resulted from borrowing against the equity of his home.

Based on your own site, you’ve likely leveraged yourself significantly more by buying your investment property (if funds were borrowed). There are risks associated with that type of investment as there are with investments in general. I’m not trying to suggest my strategy isn’t risky, and I’ve never shied away of that fact since the beginning. I’m just stating a point that I’m not leveraging the whole farm here.

FYI – I’m in my early 30′s, and this plan is not one that intends to ‘conquer the world’ – I suggest you get over it.

@Financial Cents: It’s definitely something you would have to be comfortable with; that’s for sure. Justifying the decision to embark on this journey has been easier for me given the fact that my ‘core’ portfolio is sustainable from an income stream level and that I have a couple of back up plans given a potential cataclysmic event in the markets or even with the selection of stocks I’ve chosen.

I’m also interested in seeing how things shape up in 10 months time. Stay tuned!

@Four Pillars: Mike, thanks for the opportunity in doing a guest post on such a great site. Much appreciated.

@Everyone: I genuinely appreciate sharing all of your comments, thoughts, and feedback. Even though there can be conflicting viewpoints throughout our exchanges, I appreciate everyone’s thoughts and varying perspectives.

33 The Rat

@Sunny: I suspected that it could have been that card since I was recently offered the CIBC promotional offer it is you mention. That’s also one of my backup options if I want to roll out the debt to a lower card.

Thanks for the comment; best of luck with your leveraging endeavors! :)

34 The Rat

@Investor Junkie: If you’re referring to the other example in the article, which involves ‘market timer’ and the example of a guy having only $20,000 net worth and wanting to invest $100,000 in options, well that’s a totally different beast all together.

Suggesting that this example is somehow comparable in terms of risk to my strategy is completely unfounded, in my view. My strategy does not encompass a scenario where I would be borrowing 5 times my net worth, nor does it involve investing in options. There are some stark differences here.

35 Investor Junkie

@The Rat:

“Were talking about an amount not far from 10 times less” You are missing the point that other’s have mentioned. It’s not the amount, it’s the method and time frame. As mentioned previously you have a 10 month window before getting a guaranteed margin call. 10 months time frame is not investing, it’s gambling (or er sorry “trading” as some like to call it) How much of your total net worth is the $25k? I haven’t checked your web site, but I assume it’s in the 20-30% range. Way too much for speculative investments. Can you afford to lose it all? If not it’s too much.

Also being able to roll into low/0% rate credit cards in the future is going the way of the do-do bird. We will not see these teaser rates in the near future. Especially in the USA. Even in your case it’s not true 0% rate.

http://www.nytimes.com/2010/04/11/business/economy/11rates.html

You mention nothing about your “investment” strategy, just about how to get a low cost loan. This is another sign it’s purely speculative.

What you are doing is basically putting money in some lotto tickets. The primary method you are hoping to win is via luck, not skill. I wish you luck, but as history has shown the typical outcome. If you do come out ahead, it will be because of luck, not skill.

Have I used leverage before with investments? Yes, but they are fixed rate for long terms (5 years+). Not 10 months. Debt is an important tool in investing in anything, but not on the terms you state. This is one of the reasons I don’t pre-pay our after tax 3.75% rate mortgage. I can get better returns in the market, but it’s a fixed 30 year loan!

36 Mike

Investor Junkie,if you are going to criticize you shouldn’t make silly assumptions to support your opinion.

You think Rat’s net worth is only $75k? He’s retired – I wouldn’t be surprised if his net worth is ten times that much.

37 Investor Junkie

@Mike Then why do this loan for 10 months anyways? Unless the money is tied up for 10 months. This is my point exactly, if he has the NW then it should come from his cash.

38 The Rat

@Investor Junkie: You’re overly fixated on the 10 month term; as I’ve stated before, there will have to be something done when the expiry date on the promotional offer ends, but that doesn’t mean I’m necessarily going to sell all of the stocks.

If you’ve read the other comments, you would have likely noticed that I already mentioned that I can pay the amount off in cash, if necessary. My backup plans aren’t just low interest, promotional credit card offers or lines of credit.

In my view, by suggesting that it’s similar to buying lottery tickets really highlights how you’re zoned in exclusively on the time horizon and not the fact that I have taken the time to research my selection of stocks. Yeah, it’s speculative but I don’t think it’s gambling . If you think that luck is the only way that I’m going to be able to earn a capital gain in this case, than I think you’re being a bit naive.

I won’t ask you if your investment property is in the same location as your home, but if that’s the case and you have leveraged both properties, than this can easily be viewed by some as being riskier than my plan. This is why the ‘amount’ has a lot to do with it.

In the case of having an investment property in the same general location as your home, you could be overexposing yourself either in terms of borrowing a high amount of funds while at the same time placing yourself in a precarious situation should real estate market conditions change negatively in that region. Again, this is why the ‘amount’ has a lot to do with it. An individual who has both a home and an investment property could easily have $500,000 tied up in borrowed funds. Sure, it’s a ‘long-term’ purchase, but as with any investment strategy, there will be risks associated with an approach such as this as well.

And, even in this case, I would not suggest that you’d be gambling. You’ve simply chosen a strategy that you’re comfortable with despite the risks.

39 The Rat

@Investor Junkie: If I can utilize borrowed funds for the minimal amount of interest that I have to pay, coupled with the fact that I’m comfortable with the risk, then I’m going to do it. In this case, I have virtually double the amount of funds working for me in different areas. Sure, I could have paid cash for the stocks – but I didn’t want to!!!

This is where we see things differently. When you suggest, ‘should have’, you are being subjective towards what you view as being appropriate investment behavior. I can respect that and understand the angle you’re coming from.

We all know the power of borrowing and the potential that it can offer – why not use it to my advantage if I think I can? You’re likely borrowing more money than I am as we speak. As I write this comment, in terms of my overall net worth, the only real exposure I have to debt is with this leverage plan. I’m not going to wrack my brain over it.

40 Mike

Investor J – the purpose of leverage is to increase the riskiness of the portfolio and hopefully the reward as well. I’m not defending his investing plan however I think that this is play money for him, therefore the risk is pretty low.

41 Financial Cents

Wow, love the posts and dialogue! I can’t wait to see how this turns out! Thanks Mike for bringing The Rat in as a guest. May I suggest The Rat contributes monthly to your site, so progress is monitored actively and faithful followers to your site and his are updated accordingly?

42 The Rat

@Mike: You’re absolutely right about the fact that I’m utilizing funds that I can easily roll over or pay back entirely should the strategy enter ‘crisis management mode’.

With that being said however, I’d like to add, with the utmost respect, that I don’t view this as play money – at least not in the context to which I interpreted your statement. $25,000 is a lot of money. The fact that I’m financially independent does not translate to this being a situation where I’m just ‘tossing change’ around in a playful manner. I’m taking this plan quite seriously and my hope is that things will materialize in my favor.

I can however understand where you’re coming from in a sense that I can afford to explore such an opportunity due to my personal situation. I think you’ve nailed it on the head how it’s this fact that perhaps provides clarity to explaining some of the perplexities from some of the commentators regarding the plan.

43 The Rat

@Sunny: Just got a 2.99% promotional offer for 6 months from CIBC in the mail today. Keep an eye out, you may find something that offers you a lower rate.

44 Sunny

The Rat, you are so lucky! I had received today my CIBC Visa statement but I didn’t received that kind of happy surprise. I think they really target their customers. Myself, I already had 2 tranfers on my CIBC Visa. Correct interest rate being 3.5% actually. For me, one of those amounts transfer offer is ending on May, the other in September. The one in May is giving me a headache, just like for my Web site, which disable for now because I forget to renew my domain address… lol One problem never come alone isn’t? But good news, I have a 4.9% offer at TD. I just need to get the limit increase being approve. I will know by Friday. Than, the amount at CIBC expiring in May will be transfer at TD before the end of May. I do not own a house or condo, so as borrower, I don’t worth that much… Will my plan work? Yes, but only if TD increase my Visa limit, I am already at 5 000$ at 4.9% until September or so. And as for my Web site, it will be back within a day or 2, I just pay for the renewal of the domain… lol…. The Rat you rock with your credit card balance transfer. Nice to see someone as sophisticated as yourself playing with credit card balance… like I am not alone…… :) Do you have any sort of problems of what so ever or are you just always so perfect. And do rich? I need to know.

45 Michael Carriere

Interestingly enough, I stumbled on a tracking portfolio that I created to monitor the success of this plan. Here is what came out of it as of close 3/16/11

ARZ – 43.83% Gain – $2206.68
BIM – 106.94% Gain – $2673.44
CLM – 72.50% Gain – $1720.80
GBK – 41.94% LOSS – $1950.00
LIM – 90.19% Gain – $4632.00
NML – 213.27% Gain – $10845.00

For a total market value of $44,907.32 or 81.23% Gain. I hope you stuck this out to the end. Very nice work!!!!!!

M.

46 Mike Holman

@Michael – Holy cow! And I thought he was just talking crazy. ;)

47 Gabe

@The Rat,
Just curious how far you went and what the outcomes were?

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