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I want to take advantage of today's bargain-basement stock prices. Should I borrow to invest?

In one word: No!

Because of market volatility, yes, stock prices have dropped, but borrowing to invest is fraught with risk. Unless you're able - or willing - to lose your money, it's unwise to borrow to purchase stocks. In a previous article this year, we discussed the mechanics of borrowing on margin. The results of investing on borrowed money can be devastating in a down market, so we'll re-emphasize the dangers.

Risks of leveraging to purchase stocks:

Upswing: Let's say you borrow $10,000 to purchase a stock that rises 10 per cent. Your gain is $1,000 before interest costs. Down-tick: If the market experiences a 10 per cent nose-dive - not unusual in today's market - that same $10,000 loan translates into a $1,000 loss. Add the cost of a loan at 8 per cent interest, then commission charges, and your losses are even greater.

Risks of margin accounts:

A margin account is another form of leveraging. A brokerage firm will lend you money for investments in a separate margin account. Most brokerage firms offer 50% margin or more on most stocks (there are some stocks that brokers will not lend money on!). For example, if you buy 100 shares of ABC.com stock at $50, you would invest $2,500 of your own money and the brokerage house would put up $2,500 in the form of a margin loan. You are only allowed to borrow 50 per cent of the market value of the stock. Herein lies the danger: If the stock price drops, you have to add more money to your margin account to cover that loss so you don't exceed that 50 per cent loan. If you don't have discretionary investment money to add to your account, you may be forced to sell other securities to make up the difference. And you may be forced to sell those other securities at a loss during a volatile market.

Other options:

While borrowing to invest is a high-risk gamble, there is no better time than now to take advantage of lower stock prices through time-proven investment strategies.

Three successful investment strategies:

The Power of PAC

A PAC is an acronym in the financial industry for pre-authorized chequing - putting a consistent amount of money every month into an investment account. Establishing a PAC for a registered retirement savings plan is one of the most effective investment strategies. You are not only saving money in a tax-sheltered account, but you are also gaining money through a tax refund. A PAC is an effective strategy for riding the waves of market volatility. By buying on a monthly basis, you get the advantage of dollar-cost averaging. When the market is down, you actually end up buying more units of stocks or mutual funds - a long-term advantage if you believe in the long-term prospects of equity securities.

Maximize your RRSP

While investing in a RRSP is one of the most effective tax-saving strategies, less than 50 per cent of Canadians contribute to an RRSP. On top of that, only about one third of Canadians take advantage of unused RRSP contribution room. For instance, in 1999, the average RRSP contribution was only $4,477, well below the maximum of 18% of income or $13,500.

Spread your Risks:

Diversifying among different types of investments creates a well-rounded, risk-averse portfolio. Spreading your investments among cash, stocks and bonds, balances an account during market volatility. The percentage of your portfolio you spread among these three investment areas depends on your age, risk tolerance and time frame. Further diversifying your portfolio among different industry sectors and international markets also reduces risks. If one industry sector experiences a down cycle, another sector often experiences a cyclical upswing.

The bottom line on borrowing to invest:

When it comes to borrowing money, many financial advisors agree that borrowing to buy securities only makes sense for an RRSP. They then recommend that when you receive a tax credit back in the spring, you use that credit to pay off the loan, or at least a portion of the loan.