invest could lose

WITH TODAY'S relatively tow
inierest rates, you might be tempted
to borrow money to invest.

Leveraging. as it’s called. can

_indeed be a great way to make
money,

But, warned a Certified General
Accountant (CGA), you can also
lose money just as casily: The CGA
gave this example: ;

Let's say you have $1,000 and
“borrow $9,000 to make a $10,000
investment that grows’ in a ycar to
~ $41,000.
~~ Sell, repay the loan and you will
have made a profit of (not counting
“loan interest) $1,000 —. in effect,
donbling your money even. though
the investment went up only 10%.

oi On the other hand, if. your
investment drops’ 10% to $9,000

“and again you sell, you will just as

_ magically have lost ali of your orig-
inal $1,000...

‘ So the 10% investment decline
tums into a 100% loss for you. .
vs “Borrowing to invest also

:. appears attractive because you may

“often deduct the interest,” said the

CGA, whose. public. practice
includes analyzing and making pro-
jections of various investment
strategies..° 5. -

“But'if ‘your: investment expens-

‘ es exceed ‘your investment income,.

you: could find you.are unable to

“use some.or, all of the capital gains

xemption | even if your profit quali-

+ fies for this tax break. ;

Here are three. people who bor-

‘owed to invest, Their stories illus-
rate three typical situations.

“WYOUNG AND.ADVENTUR- .

“OUS. ‘Although the wife wasn’t

quite as adventurous in her invest- -

- couple wanted fast profits and were

“oprepared | to risk.ending up’with .
equally quick losses. They under-.

stood both the: risks-and tax rules,
‘and reviewed the situation almost
daily, ready to sell investments to

ccause they both worked outside
he ‘hore, they: felt they could sur

debt limit within which bath felt
comfortable,”

® OLDER AND SECURE. This
man hoped to make enough money
!o enable him to retire in two years.
“| bad never borrowed to invest
before.” he said. “Eut for me the
risk is worth Ihe potential reward of
retiring at 60 instead of 65. And itt
lose, | will simply work until 65, “

He had mortgaged his house as .

well as taking out additional loans.
The CGA suggested he might
liquidate enough investments to
pay off the mortgage so at Icast his
home would not be at risk.
B® OLDER BUT WORRIED. The
husband had already retired and
now was working at a temporary

_job. The wife hadn’t been sleeping

well because the couple's invest-
ment portfolio had dropped to

. $32,000 from $40,000 and they still,
_ owed the $40,000.

| “In this case.” said the CGA, “I
suggested they should consider
repaying the debt by cashing the
investments and some other savings

‘they had, and Jook at a sfower but

steadier investment approach. ™
The CGA warned that whenever
you are tempted to borrow to
invest, don’t be swayed by all the
profits the salesperson is touting.
“If all goes well, of course
you'll have no problems.” the CGA
said. “For balance, always. write

down how you will. manage in the -

worst-of all possible worlds: rising
interest rates boost. your loan costs,
your investment, drops in value and

~ the tax benefits disappear.

“Used carefully, leveraging can

‘still help you get ahead financially.

For example; you don’t have to,
borrow 100% of an investment. if.
you put up half, for example, and
borrow half, the potential return on

-your money might not be as great.

But at least your loss exposure will
also be less.”
If, in the earlier exampie, you

‘borrowed only half of the $10,000

and it grew to $11,000 in one year,
the return on your $5,000 would be
20% —— instead of 100%. But if the

. investment dropped to $9,000, then

your loss. would also be only 20%:

; instead of 100%. ©

Sunday, February 20, 1994 - North Shore News - 25

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-or-

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-or-

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5

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March 31, 1994.]

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