What is market volatility? Volatility is when prices of stocks and equity funds increasingly shift in value up or down. When a low-volatility period is followed by increases in volatility, stock markets may begin to offer lower prices, which can effectually present lower priced fund units, both offering a buying opportunity for the investor.
The stock market can both gain value in a “bull market” and can have periods of slow down referred to as a “correction” or if more prolonged, a “bear market”.
Many investors have seen their investments increase dramatically since the 2008-9 financial crisis that affected all the world’s markets. Further, since 2020 during the pandemic, the market has experienced remarkable gains as investors moved into another big opportunity after an extreme correction based on fear in mid-March ’21 occurred. Many of these investors have also witnessed a remarkable bull market taking many stocks and equity funds much higher than their previous years’ valuation. Conversely, investors who unwisely sold their holdings out of fear lost money.
The ideal strategy exercised by most successful contrarian investors like Warren Buffet is to buy investments when others are fearful, and they are selling their holdings at lowering prices.
When buying opportunities abound The market can experience increased volatility due to fears such as various wars, debt crises of countries, economic slow-downs, or the potential of rising interest rates.
Nevertheless, during periods of higher volatility, wise investors think positively, relying on the professionals managing their investment portfolios.
Predesigned investment plans are important Though periods of volatility occur, it is important to exercise patience while maintaining a balanced and well-diversified portfolio according to a prescribed investment plan.
Plan with your advisor to establish a buying plan when others may be fearful. Market cycles of volatility are normal and expected.
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Risk of Borrowing to Invest
Here are some risks and factors that you should consider before borrowing to invest:
Is it Right for You?
Borrowing money to invest is risky. You should only consider borrowing to invest if:
You are comfortable with taking high risk.
You are comfortable taking on debt to buy investments that may go up or down in value.
You are investing for the long-term.
You have a stable income.
You should not borrow to invest if:
You have a low tolerance for risk
You are investing for a short period of time.
You intend to rely on fund distributions / income from the investments
to pay living expenses.
You intend to rely on fund distributions / income from the investments to
repay the loan. If this income stops or decreases you may not be able to
pay back the loan.
You Can End Up Losing Money
If the investments go down in value and you have borrowed money, your
losses would be larger than had you invested using your own money.
Whether your investments make money or not you will still have to pay back
the loan plus interest. You may have to sell other assets or use money you
had set aside for other purposes to pay back the loan.
If you used your home as security for the loan, you may lose your home.
If the investments go up in value, you may still not make enough money to
cover the costs of borrowing.
Tax Considerations
You should not borrow to invest just to receive a tax deduction.
Interest costs are not always tax deductible. You may not be entitled to a
tax deduction and may be reassessed for past deductions. You may want to
consult a tax professional to determine whether your interest costs will be
deductible before borrowing to invest. Your advisor should discuss with you
the risks of borrowing to invest.
