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QCash on: Borrowing to Invest: My Exit Strategy?

QCash, the 37 year old retired millionaire, writes about his adventure in leveraged investing.

I have never been a big fan of leveraged investing.   Especially when I took early retirement and I don’t want to expose myself to any large risks that could thwart my plans.

However, I have found myself embracing the concept of borrowing to invest this past year as I have been trying to convert my growth funds and stocks to income funds and dividend paying stocks through my first year of early retirement.

First, I decided that I should maximize my HELOC in my house while I was still gainfully employed (or I could at least produce a decent tax return ;-) ).

I was pleasantly surprised to find out that the $250K house we purchased in 2000 was appraised at $480,000 allowing us to establish a $384,000 line of credit at prime.

So why borrow to invest.

Reason 1 – Capital Gains Exposure

I currently have in excess of $200,000 in unrealized capital gains.    If I sell everything right now to buy the investments I want, I would be hit with close to $40,000 in capital gains taxes this year.

Reason 2 – Market Timing

I am not, nor have I ever been, good a timing the market.   Quite frankly, I suck at it.   I mean really, really, really suck at it.   However, I do know that there are times when the market undergoes some pretty strong corrections (this summer, this November) and those are great buying opportunities.   However, I don’t keep a great deal of cash around.   Also, I don’t want to sell my growth stocks when the market is on a low swing.   Why not try to squeeze a few more dollars out on the upswing.

So this brings me to my “exit strategy” that is now in place.    This exit strategy is how I managed to get the income portfolio I wanted while transitioning my growth portfolio and minimizing my taxes.

I have essentially, borrowed to buy my ideal income portfolio and now, over the next couple of year, I can sell off my growth stocks and I can offset my carrying costs with my new capital gains.    This doesn’t affect my overall net worth, but it does require a great deal of discipline.

I expect to have the loan paid off in four or five years and minimize the impact of my capital gains tax by spreading it out over a couple of years.

This is something early and regular retirees should consider as they begin to transition from growth to income.    Especially if you need to have an income generating portfolio the day after you quit working, but to do it, you need sell a lot of your investments.

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5 Comments

  1. Gates VP on December 29, 2007 at 3:01 am

    Man QCash, maybe it’s b/c I’m not “saddled” with the problem of “too much money” ;), but that’s a neat idea! My mother going into partial retirement right now and this is not an angle that I’ve ever considered.

    Definitely food for thought.

  2. Coppertree on January 21, 2008 at 7:21 pm

    Interesting idea.
    What would be your ideal income portfolio?

    thanks

  3. HG on December 12, 2009 at 6:19 pm

    I still don’t get it. (sorry) How would you escape your tax on capital gains on an investment depending on the type of funds you used to buy that investment (leveraged vs. non leveraged)?

  4. eugene on December 13, 2009 at 3:02 pm

    A few question about your strategy QCash:

    1) As you’re transitioning between your growth portfolio and borrowed funds to acquire income your portfolio wouldn’t you still have to be reporting the income generated from your new portfolio and thus pretty much cancels out your carry costs for it right?

    eugene

  5. RICHARD on November 4, 2011 at 7:26 pm

    If you have un-realized equity, paid off house, it might be worth while to consider getting a HELOC and invest it. Depending on your situation you should be able to swing a HELOC for 4% or less. Invested in high dividend “blue” chip stocks like BCE (paying 5.25% at todays value) you could actually pay off the loan with the interest as it presently stands.
    Remember that stock values vary as well as interest rates so you need to keep an eye out for when to bail out, preferably after a gain.
    Also don’t play with money you can not afford to diminish in value over the short term. If you are not comfortable sitting tight on your “bets” then don’t bet.
    I have seem my portfolio drop by-$3,000 but still have more money in the account, due to dividends, than when I started out. The “big” picture is what counts. Hopefully your stocks will recoup and then if you are not at ease with it – bail out.

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