Personal Finance

I *will* be a multi-millionare! @@@ Next Plan Details : May 15 @@@

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  • Jul 31st, 2009 8:45 am
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Deal Addict
Apr 1, 2004
1582 posts
34 upvotes
PrinceMS wrote:
May 15th, 2009 1:16 pm
so I came across another financial planner. He note down my information and will get back to me - after doing some research for my long-term retirement planning.

He proposed that I should start this specific plan right away. It is similar to the one I listed above but some more benefits:

- Start with $50,000 investment loan
- Invest in a specific mutual fund which gives out 6.1c/unit
- Hence as of right now - it will pay $408 / monthly
- The payment is $350 / month for the loan
- Essentially this will pay itself off in 10-12 years
- Now market condition will dictate the value of $50,000 invested, it can go up or down - BUT whatever it may be , its free money!
- The rate was recently adjusted (jan 2000) after 50% market drop, so unlikely it will drop again (because if the market drops another 50% from where it is now - we will have bigger problems than just this loan?)
- This also helps in tax deductions

This guy was amazing took 2 hours to explain everything to me , exact rates, his commission structure etc.

He asked me to think - why I shouldn't do this, and i can't think of any reason right now?
You shouldn't do this for the exact same reasons as before.
Deal Addict
Feb 9, 2005
4169 posts
16 upvotes
PrinceMS wrote:
May 15th, 2009 1:16 pm
so I came across another financial planner. He note down my information and will get back to me - after doing some research for my long-term retirement planning.

He proposed that I should start this specific plan right away. It is similar to the one I listed above but some more benefits:

- Start with $50,000 investment loan
- Invest in a specific mutual fund which gives out 6.1c/unit
- Hence as of right now - it will pay $408 / monthly
- The payment is $350 / month for the loan
- Essentially this will pay itself off in 10-12 years
- Now market condition will dictate the value of $50,000 invested, it can go up or down - BUT whatever it may be , its free money!
- The rate was recently adjusted (jan 2000) after 50% market drop, so unlikely it will drop again (because if the market drops another 50% from where it is now - we will have bigger problems than just this loan?)
- This also helps in tax deductions

This guy was amazing took 2 hours to explain everything to me , exact rates, his commission structure etc.

He asked me to think - why I shouldn't do this, and i can't think of any reason right now?
You really haven't come back with anything new, this is just the same idea over again from a different advisor.

The mutual fund isn't some magical fund, it just pays a large dividend at the expense of long term growth, plus it probably pays some nice trailer fees to the advisor that sells it to you.

In fact, no advisor or fund has any secret sauce that will change the game.

If you're so determined to make a leveraged investment, at the very least educate yourself enough that you can do it yourself with low cost funds rather than taking on just as much risk while reducing your retruns by lining other people's pockets. Sure, you won't have an advisor to blame if it blows up, but you'll have more left in your pockets if it works out.
Deal Guru
User avatar
Nov 19, 2002
11980 posts
282 upvotes
I think with your level of knowledge (which is somewhere nearly as low as mine) the only thing you should definitely do is remove step 1 from your investment strategies....

Forget about borrowing money to invest. You cannot reasonably expect to have any sort of "free money" based on interest rate differentials.
[OP]
Deal Fanatic
Jul 30, 2003
5460 posts
372 upvotes
Toronto
This strategy is similar - but end goal (and consequence) are different.
We are not timming the market, also last two year financial meltdown reduced the mutual fund payout by 2c/unit, so if market goes down and this gets reduce 2c more - it still in manageable limits.

I am sorry for asking stupid questions (maybe repetitive) - but if we are not timming the market , then where / what is the risk?
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Mar 6, 2007
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PrinceMS wrote:
May 15th, 2009 1:16 pm
so I came across another financial planner. He note down my information and will get back to me - after doing some research for my long-term retirement planning.

He proposed that I should start this specific plan right away. It is similar to the one I listed above but some more benefits:

- Start with $50,000 investment loan
- Invest in a specific mutual fund which gives out 6.1c/unit
- Hence as of right now - it will pay $408 / monthly
- The payment is $350 / month for the loan
- Essentially this will pay itself off in 10-12 years
- Now market condition will dictate the value of $50,000 invested, it can go up or down - BUT whatever it may be , its free money!

- The rate was recently adjusted (jan 2000) after 50% market drop, so unlikely it will drop again (because if the market drops another 50% from where it is now - we will have bigger problems than just this loan?)
- This also helps in tax deductions

This guy was amazing took 2 hours to explain everything to me , exact rates, his commission structure etc.

He asked me to think - why I shouldn't do this, and i can't think of any reason right now?
Why start with 50k, why not 50million, beacuse this "will pay itself off in 10-12 years" and its "free money"
[OP]
Deal Fanatic
Jul 30, 2003
5460 posts
372 upvotes
Toronto
^ I was thinking the same thing - but you can only get so much investment loan. $50g is already at limits for me, fudge the papers to get close to $100g at most , I would assume. You need so much liquid assets, steady income etc to qualify for this.

Advisor has set this up for himself and his wife - he is willing to show the papers.

Just want to clarify - that I am not keen on messing my finances up. My understanding is that, I have time and risk tolerance on my side - so I should capitalize on that?
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Deal Addict
Oct 1, 2006
1969 posts
1240 upvotes
Montreal
There is no free money. Risk and return are strongly correlated. If you own low risk investments (e.g. GIC, bonds) you returns will be low. If you want to achieve higher returns you need to take higher risks (e.g stocks).

For your strategy to be successful your returns on your investments must be greater than the interest rate on your loan and the fees for the mutual fund. (~2.5%). Therefore to be able to achieve this you need to take very high risks. There is no way around it! There is no free lunch. Your financial planner tries to give you the illusion that his approach is risk free but it is not. It is very risky.

You should stay away from leverage.
Deal Expert
Oct 20, 2001
18709 posts
1233 upvotes
Sauga
jmc0 wrote:
May 15th, 2009 3:16 pm
Why start with 50k, why not 50million, beacuse this "will pay itself off in 10-12 years" and its "free money"
And an even better question is why the FA is not doing this himself and chilling on a beach rather than working for a living? :confused:
Deal Addict
Jul 28, 2005
3237 posts
25 upvotes
PrinceMS wrote:
May 15th, 2009 1:16 pm
- Start with $50,000 investment loan
- Invest in a specific mutual fund which gives out 6.1c/unit
- Hence as of right now - it will pay $408 / monthly
- The payment is $350 / month for the loan
- Essentially this will pay itself off in 10-12 years
- Now market condition will dictate the value of $50,000 invested, it can go up or down - BUT whatever it may be , its free money!
- The rate was recently adjusted (jan 2000) after 50% market drop, so unlikely it will drop again (because if the market drops another 50% from where it is now - we will have bigger problems than just this loan?)
- This also helps in tax deductions
Before I start insulting this, I just want to make sure I understand it.
  1. Are you saying you can borrow $50,000 and then make payments of $350/month for 12 years and the loan will be gone?
  2. Or are you also taking the $408 monthly distribution and applying it to the loan in addition to $350/month from your own pocket?

If it's the first, and you didn't misunderstand the advisor, then they're lying to you.

$350/month x 12 = $4200/year
$4200/year x 12 = $50,400

So, where do you plan to get a 12 year loan for $50,000 with a 0.1% interest rate?


It's hopefully become quite clear you don't fully understand this investment. Investing is something you don't understand frequently ends very badly. You need to do some reading on the basics of personal finance, and avoid advisors who are trying to take advantage of you with get rich quick schemes.
Deal Addict
Oct 1, 2006
1969 posts
1240 upvotes
Montreal
PrinceMS wrote:
May 15th, 2009 1:16 pm

- Start with $50,000 investment loan
- Invest in a specific mutual fund which gives out 6.1c/unit
- Hence as of right now - it will pay $408 / monthly
You invest $50000 and get $4896 back per year in "dividends". This corresponds to a "dividend" yield of 10%. Sounds good but it is not. Basically what the fund probably does is paying the dividend partly from your own money. It is just returning the orignial money you invested with the fund back to you.

What is the name of the fund? Look it up and see if there is any return of capital in the distribution.
Deal Addict
Feb 9, 2005
4169 posts
16 upvotes
PrinceMS wrote:
May 15th, 2009 3:10 pm
This strategy is similar - but end goal (and consequence) are different.
We are not timming the market, also last two year financial meltdown reduced the mutual fund payout by 2c/unit, so if market goes down and this gets reduce 2c more - it still in manageable limits.

I am sorry for asking stupid questions (maybe repetitive) - but if we are not timming the market , then where / what is the risk?
What do you mean by you're not timing the market? If you're doing a lump sum investment of $50k you are essentially timing the market.

You also should keep in mind the interest rate of the loan probably isn't fixed, and interest rates are at hisorical lows right now and have no-where to go but up.

I'd suggest saving/investing as much of your money as you can every month in low cost mutual funds. You may lack the leverage meaning you have a much smaller amount invested, but you'll save about 2% drag of the fund management and around 4% on loan interest.

If you pay close attention you'll find you need the market to return 6.5% (that would be 4% return for you fund after the 2.5% management fees) just to break even. If you ditch the advisor and use a mutual fund with an MER of around .5% you'll come out ahead as long as the markets return at least 4.5%. Of course, if the interest rate on your loan goes up (you can probably count on it over the next few years) you'll still need your investment to beat the loan interest rate by at least .5% to come out ahead with your leveraged strategy. Of course, when the leveraged strategy is just breaking even, an unleveraged strategy would actually be generating a return.

As I said before, I wouldn't recommend even thinking of trying this unless you educate yourself enough to set it up all alone without the "help" of an advisor who will just diminish you chances of success. If you don't feel comfortable buying ETFs using a margin account you shouldn't feel comfortable with the avisor advising you to perform a much more expensive version of exactly the same thing.
Deal Addict
Apr 1, 2004
1582 posts
34 upvotes
Germack wrote:
May 15th, 2009 3:55 pm
There is no free money. Risk and return are strongly correlated. If you own low risk investments (e.g. GIC, bonds) you returns will be low. If you want to achieve higher returns you need to take higher risks (e.g stocks).

For your strategy to be successful your returns on your investments must be greater than the interest rate on your loan and the fees for the mutual fund. (~2.5%). Therefore to be able to achieve this you need to take very high risks. There is no way around it! There is no free lunch. Your financial planner tries to give you the illusion that his approach is risk free but it is not. It is very risky.

You should stay away from leverage.
Agree all the way up to the last last proposition.

Again, OP, you don't really seem to be hearing what people are saying on this forum. While the factors you point out may be valid (you are young and have risk tolerance on your side), you don't seem to have grasped the full extent of the risks inherent to the plan. For example, with respect to cash flow, are you in the position to pay up to 10K a year in interest costs in the event interest rates shoot to 20%? Alternatively, can this investment loan ever get called if the market drops another 50%? What happens if you lose your job? Do you have a partner who would be able to individually support the loan? What happens if everything happens together.... you lose your job, interest rates spike, and the market drops? Are you going to be bankrupt and forced to liquidate everything at the absolute worst time?

In general, the theory is incredibly simple. Stock market gains are historically higher than interest rates. Therefore, in theory, the more you leverage, the more you earn. The problem is volatility and risk though, and so while you have the upside right (albeit implemented arguably in an inefficient way), you dont' seem to have fully thought out the downside.
Deal Addict
User avatar
Apr 4, 2005
2667 posts
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Toronto
Germack wrote:
May 9th, 2009 11:41 pm
The problem is that most people invest so poorly. A recent study showed that while the S&P 500 has returned 8.35% over 20 years the average equity investor earned only 1.87%!
http://www.qaib.com/showresource.aspx?U ... e=FreeLook

The two biggest mistake people make are:
a) Paying too much in fees
b) Trying to time the market

Buy & hold of a low cost diversified portfolio is the way to go.
those number are based in the usa where MERs are higher than up here in canada. Also in canada fewer people time the market and more ppl do the buy and hold strategy
[QUOTE]there's no such thing as a stupid question unless it's a really stupid question - me[/QUOTE]
Deal Addict
Jul 28, 2005
3237 posts
25 upvotes
flito ray wrote:
May 15th, 2009 9:56 pm
those number are based in the usa where MERs are higher than up here in canada.
Completely incorrect. US mutual funds have some of the lowest MERs in the world, while Canada has some of the highest. There was just another study released on that this week.
Most investors in the United States pay below 0.75% annually for fixed-income funds and below 1% for equity funds.
...
Morningstar found that Canada and Japan were the only countries in which the median MER for equity funds generally ranged between 2% and 2.5%.
http://network.nationalpost.com/np/blog ... -fees.aspx


Also in canada fewer people time the market and more ppl do the buy and hold strategy
That would be nice if it's true. Is there any evidence that this is true?
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User avatar
Jan 19, 2005
1532 posts
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PrinceMS wrote:
May 8th, 2009 4:03 pm
- Yes Million is not what it used to be - but I don't know any millionare personally, so even though with 2.x times inflation being a millionare at that age, will most likely be good enf for me.
Also, what is the alternative? I don't know what else I can do that is going to give me a good shot at being *mere* millionare?

- I didn't say I am giving up my lifestyle for this. I mentioned SAVINGS

- He used 12% rate of growth (10% at times). Although rate of growth from 1950 is 16% on average.

- so
CONS are: I have not access to money for 4 years?

PROS are: I will have financial freedom! Retirement will be comfortable. I can do what I want to do (business / travel) etc

You got that all wrong to begin with...

You made a MASSIVE assumption that you will live to see your retirement and cash out that million bucks... if that's even worth anything at that point.

For all me and you know, you could get hit by a streetcar on your way to work tomorrow and proclaimed dead on the spot, and there goes your retirement plan down the sh1tter.

Think about it... then start living your life NOW.

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