What are the risks of borrowing to invest?
A leveraged purchase of mutual or segregated funds involves a greater degree of risk than a similar purchase using cash resources only. The reason for this is that if the value of the investment falls, the borrower suffers a loss of value beyond what they may have experienced had they invested with only their own money. For example, on a 2 For 1 Loan where investors pledge $50,000 and borrow another $100,000, if the investment drops in value by 10%, the numbers would look like this: On the investors’ portion of the investment, $50,000 less 10% = $45,000, they’ve lost (so far) $5,000. Had they ONLY invested with their own money, their loss would be fixed at $5,000. However, when you include the investment from borrowed funds, $100,000 less 10% = $90,000, an ADDITIONAL $10,000 is lost. Borrowers are also responsible for loan payments irrespective of the performance of their investments. In other words, should an investment drop in value, not only does the borrower lose on the investment,
