If the stock market crashes, should I borrow money to buy low?

Anyone brave enough to pump money into stocks late last year was well rewarded at the start of 2019.

Lesson for investors: market declines are shocking and stressful, but they are also excellent buying opportunities. A thirty-year-old reader seems to have assimilated this lesson well. He is seeking input on a plan to borrow money during the next market downturn.

“Once stocks fall 25%, I will borrow $30,000 from my home equity line of credit to invest in a portfolio of ETFs in my TFSA,” he wrote. “If the market continues to fall 35% from the peak, I will borrow another $30,000 to put into my TFSA. If the market fell 45% off peak, I would withdraw enough money to maximize my TFSA and then put $10,000 into my RRSP. This reader is single, debt free, mortgage free and has not yet opened a TFSA. He thinks sticking to his plan won’t be a problem and he understands that it could take years to bear fruit.

One concern is that this investor’s market timing is backfiring. For example, he could wait on the sidelines while the markets show decent gains, then lose heart after a big crash and sit on the sidelines until much of the recovery has already happened. It might be better to just invest on a monthly basis.

But I’ve seen a borrowing to invest strategy like the one he talks about pay off. In a column written two years ago, I documented how an investment adviser borrowed $250,000 during the worst of the financial crisis and turned it into gains that he described in the spring of 2017 as being “between the double and triple. His investment actually fell about 10% before starting a long climb. Being comfortable as a long-term investor, he never thought of selling.

Investing money in stocks after a market drop is one of the best long-term investment strategies. But it’s also one of the most difficult because you have to ignore the panicky emotions of most other investors. Consider doubling your stress level if you borrow to invest at a market low instead of using cash on hand. You may well find yourself in the position of making payments on the debt incurred to buy stocks that are falling sharply in value and worth less than what you paid for. Some investors can handle this, but many cannot. We’ll leave it up to that reader to decide if he’s up for the roller coaster to come.

A few additional notes: This reader would be borrowing to invest in registered accounts, so the interest he pays would not be tax deductible. Using your line of credit and not a margin loan from a broker means there’s no worry about a margin call (where you have to repay a loan taken out to buy securities that have fallen in price). He only has to pay the interest on his outstanding balance each month.

Comments are closed.