In late 2006, Mary (not her real name), a 75-year-old widow, accepted the advice of her Investors Group advisor to borrow $50,000 to invest in mutual funds. She has maintained this loan for over 6 years now. Mary is an intelligent woman, but not an experienced investor. It’s easy to see how this move was good for Investors Group, but very hard to see how it was good for Mary.
Mary’s recollection is that this strategy was somehow going to save her heirs money on taxes. The only connection to taxes that I can see is that she can write off the loan interest each year. But this just saves her a fraction of the interest; she still has had to pay the rest.
The main thing this leverage did was add another $50,000 to Investors Group’s assets under management. As of the end of 2012, this figure has shrunk a little to about $49,800. The hidden management expense ratio (MER) cost on these assets is $1211 per year.
After accounting for the tax write-off for interest, Mary has lost $9170 over 6 years. Her average compound return is a loss of 3.0% per year. Over this same period, Canadian bonds rose by an average of 5.9% per year, the TSX rose 2.3% per year, and the S&P 500 lost 0.4% per year. The main reason for Mary’s poor results is the sky-high MERs on Investors Group mutual funds. Mary has paid roughly $7300 in hidden MERs over 6 years. She also has a RRIF with Investors Group where she has paid even more in MERs.
However, focusing on Mary’s dismal investment results is a distraction from the more important question of why she was talked into leveraged investing in the first place. In my opinion, leverage is completely inappropriate for her situation. She is now 81 years old and could use the $9170 she has lost. Fortunately for Mary, it will only cost her about another $200 to collapse the loan and investments. If she had collapsed them back in 2008 or 2009, her losses would have been far greater.