Contact: Judy Culford

August, 1996

Phone: (519) 663-2252

Leverage Risk Lower Than You Think

NEW RESEARCH shows that the breakeven point for leverage - borrowing to invest - is significantly lower than most people think.

"Most people - including those in the financial industry - reasonably think that their investment returns must exceed their cost of borrowing for leverage to be profitable. But this is not true for several reasons," explains Talbot Stevens, speaker and author of Financial Freedom Without Sacrifice.

It is important to understand the real breakeven point because, mathematically, the breakeven point of any investment strategy defines the risk of that strategy.

First of all, the leverage breakeven point is reduced because of tax benefits. Generally, when you borrow to invest, the interest expense is tax deductible. Additionally, capital gain investments, like equity mutual funds, compound tax-deferred much like RRSPs, and when they are sold, you only pay tax on three-quarters of your gains.

The more significant factor is due to the difference between debt interest and investment interest. Investments compound, with interest on interest, while debt interest that is paid as you go, does not. This subtle distinction - that debt interest is simple interest while investments grow with compound interest - means that the leverage breakeven point is lower than the cost of borrowing, and that it decreases over time.

The following table summarizes the gross, before-tax breakeven returns over time, assuming a 10% cost of borrowing, 50% tax bracket, tax-deferred capital gain investment growth, and a 3% inflation rate.

Leverage Breakeven Point
Decreases Over Time
Investment Period (Yrs) Excluding Tax Benefits Including Tax Benefits
1 10.0% 8.0%
5 8.9% 7.3%
10 7.9% 6.7%
20 6.7% 5.9%
30 6.0% 5.4%
40 5.5% 5.0%

The middle column shows how the break­even point decreases over time purely based on the distinction that debt interest is simple interest while investment growth compounds.

For example, even ignoring the tax benefits of interest deductions and capital gains being taxed less, someone leveraging over a 20 year period with a 10% cost of borrowing would only need to achieve a before-tax capital gain return of 6.7% to break even - far less than the 10% that most people expect.

When you include the tax benefits, the break­even point is only 5.9% for someone in the 50% bracket, and 6.2% for a 40% bracket. If your cost of borrowing is less than 10%, the break­­even point is even lower.

If you're wondering if borrowing to invest in markets near all-time highs is a wise move, Stevens cautions that he only advocates leverage done conservatively over the long-term with a trusted advisor. And by investing in international mutual funds, the fund manager automatically adjusts if a market is overvalued

Talbot Stevens is a speaker and author of the bestseller Financial Freedom Without Sacrifice, and the president of a London-based financial education firm providing employer-sponsored and public workshops. He has started a PETITION to make basic financial education a mandatory part of the school system. Anyone wishing to support this petition is urged to write their MPP and call Mr. Stevens at (519) 663-2252.

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Talbot Stevens is a financial educator, industry consultant, and author of "Financial Freedom Without Sacrifice" and "Dispelling the Myths of Borrowing to Invest". For other story ideas, visit the Free Resources menu of For more information, contact Judy Culford, Communications Director for Talbot Stevens, by calling (519) 663-2252, or emailing