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My plan to lever into the market
Old 10-17-2008, 12:35 PM   #1
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My plan to lever into the market

I have decided to lever into this market to take advantage of a once in a lifetime event. I have good positive cash flow, A guaranteed government job, and receive a military pension. I have no debt except for my mortgage, which is less than rent where I live.

I am starting with 25,000 from my line of credit as I see plenty of opportunity in the market and will lever up from there based on my assessment of recovery.

I am allocating 1000 a month from my cash flow to this project.

Currently my line of available credit is in excess of $300,000 but I won't go past $100,000 if that.

Current int rate on my line of credit is 4.25%

Borrowed money for investments is tax deductable at 32% based on my income

Carrying cost for $25,000 is 106.00 month

Here is the plan

Investment % and dividend payout rates for the initial $25,000:

60% I Shares dividend (XDV) with 4.633% current payout

15% Bank of Montreal (BMO) with 6.443% current payout

10% Husky Energy (HSE) with 6.177% current payout

15% I Shares Canadian Trusts (XTR) with 15% current payout

Averaged payout for the portfolio is 6.6%


The dividend payments will pay for the interest costs on the line of credit. Once I see signs the market is stabilizing I plan to lever up a further 25,000 into I Shares Dividend (XDV).

I am also planning a large pirchase of Horizons Beta Pro Energy Bull Plus ETF (a 2X levered investment) when I feel the market has stopped discounting energy stocks. Some of the stocks in the ETF are trading at 1X earnings others 3X earnings....all are in production and have positive cash flow.

I see the potential down side as no more than 20% near term for the initial $25,000

Upside 50% over 5 years.


Appreciate comments on the plan.
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Old 10-17-2008, 01:19 PM   #2
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Don't know man. By the time you make up your mind, the market already changes. BMO already up 6%. Better revise your numbers above.

In this market, it looks like you got to go with your gut instincts, and your guts. It moves so much and so fast, it tends to make day traders out of us. I have proven to myself that I cannot daytrade, and the macroeconomic picture is so hazy I don't know what to think. If you think you can handle some loss, hold your nose and buy.

About your government job, if it is secure, in addition to your pension, you can take on higher risks. A guy I have read said if your job is like a bond, then your portfolio should have more stocks. And vice versa.

A lot of high-tech workers do not realize their job is as volatile as stocks, hence they should have more bonds. You've got to figure out for yourself.
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Old 10-17-2008, 01:37 PM   #3
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How do you get a line of credit at 4.25%?
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Old 10-17-2008, 01:57 PM   #4
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Quote:
Originally Posted by utrecht View Post
How do you get a line of credit at 4.25%?

I have a prime rate and secured the line of credit with my house. I have a Visa at prime also, although it is not secured (used to be but when I moved and picked up another mortgage the bank never bothered to secure the Visa account.
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Old 10-17-2008, 03:34 PM   #5
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Hey, why stop there? Use funds from your line of credit to buy on margin in your brokerage account. That way you can get some serious leverage, and you can always fall back on your unused lines of credit to meet margin calls.
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Old 10-17-2008, 04:48 PM   #6
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Seems to me the very lesson of this credit and market mess is that leverage is a ticking time bomb.
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Old 10-17-2008, 05:06 PM   #7
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BMO makes up about 6% of XDV, so you will be closing in on 19% BMO in your AA. Is that your intent?
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Old 10-17-2008, 05:10 PM   #8
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You're not talking about a lot of leverage, you're starting small, that should be OK if you can stick with the plan through more dips and spikes.

I can't say anything about the planned investments. They seem a little conservative for my taste, but if the dividends hold up it looks interesting.

I've done this before, with conservative (but not dividend oriented) funds that ended up not going up much, and finally gave up when I broke even and the LOC rate was up at around 7%. That variable interest rate can be a problem when things start picking up. I'm OK with this at 4%, but 7% doesn't leave much margin.
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Old 10-17-2008, 08:44 PM   #9
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I think you want to be careful at any time when you use leverage, but in a down market its not a bad idea.

Generally valuations are more attractive, dividend yields are higher and investors are more cautious of the extent of leverage that they use vs. what exists during the high periods of a bull market cycle.

Your choice of investments is good, but just be careful not to target only highyielding stocks. Choose a mix of high yields & low yields (that grow their dividends at a high compound rate).
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Old 10-18-2008, 02:55 AM   #10
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What happens if you become ill or disabled over the next few years or some other unexpected catastrophe? Your risk is not just market risk which you are thinking will be mitigated by waiting 5 or 7 years.
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Old 10-18-2008, 10:39 AM   #11
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I did not follow financial stocks. Just started recently to satisfy my morbid curiosity. Thought of bottom fishing until I read an article in the current BusinessWeek, warning of the impending credit card default crunch. No matter that P has gone down significantly, will E come down even harder? This article shows a few American banks with various levels of exposure to the credit card business.

Never look at BMO before, until this thread brought it up. I hope the Canadian spending habit is much self-restraint than our American free-spending style. If so, I may be interested in BMO myself.
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Old 10-18-2008, 10:46 AM   #12
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I think about trying your plan periodically, but I don't have the stomach to invest with borrowed money.

Now is probably the best time I've ever seen to try it, though.

My only concern is that the investments you've chosen are not very diversified. If energy prices go south for an extended period of time, it could hurt you're chances.

I would add some other stocks that aren't tied to energy or banks. Maybe MO, MCD, KO. They don't yield as much, but I think they are pretty close to no-lose long term. I guess its just a question of trading lower downside for potential upside.
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