Episode 219: What If My Leveraged Investment Tanks? How to Build a Wealth Reservoir That Survives Volatility

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What happens when an investment made with leverage—whether through OPM, a HELOC, or a whole life policy—suddenly goes bad?

Canadian business owners and families often worry about using leverage to build wealth, especially when markets turn or a deal underperforms. It’s easy to feel uneasy when the value of an investment dips, your home equity stalls, or you’re unsure how a leveraged move might affect your long-term financial security. This episode unpacks the emotional and financial realities behind these decisions, showing how to think clearly about risk, liquidity, and diversification—without letting fear shut down your wealth-building strategy.

In this episode, you’ll discover:

• Why the type of asset you leverage matters—and how different reservoirs (cash, home equity, whole life policies) behave when markets fall.

• How to structure your wealth reservoir so a single failed investment can’t collapse your system.
  
• The mindset and mechanics behind maintaining liquidity, staying diversified, and making confident investment decisions even in volatile times.
  

Press play to learn how to build a resilient wealth reservoir that keeps your financial system secure—no matter what your next investment does.

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX. 
  

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

Building long-term wealth in Canada starts with a clear Canadian wealth plan anchored in a strong wealth reservoir and smart investment strategies that balance growth with solid risk management. By integrating tools like a whole life policy, RRSP optimization, and tax-efficient investing, Canadian business owners can create an opportunity fund that supports financial diversification, reduces emotional investing, and powers a path toward financial freedom Canada and even an early retirement strategy. Inside Canadian Wealth Secrets, we explore how modest lifestyle wealth, real estate investing Canada, salary vs. dividends planning, and personal vs. corporate tax planning shape a resilient financial system. Through thoughtful financial planning, corporate wealth planning, and financial literacy, entrepreneurs can leverage financial buckets, corporation investment strategies, and capital gains strategies to build financial independence Canada and strengthen their estate planning Canada. Whether you’re optimizing RRSP room, choosing between real estate vs. renting, or refining your financial vision setting, the right investment bucket strategy—rooted in sound Canadian tax strategies and business owner tax savings—sets the foundation for building long-term wealth Canada through effective financial diversification Canada and strategic corporate structure optimization.

Transcript:

Okay, let’s talk about a common question we get from our clients, but also, know, any Canadian business owners that we are talking to or Canadian families, that question often is around the concept of our wealth reservoir. We talk about here often on the podcast, which is one of the pillars, phases of a healthy financial wealth system, whether it’s my personal wealth system or inside my corporation wealth system.

in the wealth reservoir itself is your, you know, the opportunity fund, your emergency fund, your liquidity ⁓ access to making good, smart decisions financially for investments or for building your retirement or, you know, taking that next step or thinking about, you know, being, you know, having passive income. Like it’s basically the foundation for a wealth system.

The question that often comes up is, so let’s say I use, which we’ve talked about here on the podcast before, the foundational tool at tier three of my emergency fund, which is my wealth reservoir, is using a whole life policy, a dividend paying whole life policy that’s gonna grow in value, it’s a great asset, and then I can leverage against that for investment purposes.

allows me to stay liquidity, you know, or a capital liquidity, but it also allows me to to move when I need to move, but also makes two uses for the same dollar. We’ve got growing a growing asset, and then we can use the cash value of that to buy real estate or invest or, you know, maybe all of a sudden I’m I’m going with a an alternative type investment private equity like.

I’m trying to grow my wealth. I’m using a wealth reservoir tool like a whole life policy to do that. But what happens? Here’s the question, right? What happens when I do that and my investment, you know, takes a turn, you know, all of a sudden now I’ve used leverage to invest and now I feel like I’m underwater, you know, like this is the common, like maybe I shouldn’t, I shouldn’t like do this. Like I shouldn’t.

Right. buse that tool as my wealth reservoir. Maybe this cash is my wealth reservoir. Like maybe I should just do what everyone else does is like build up an opportunity fund in cash, but I don’t use say a policy to do it.

Right, right. Yeah, absolutely. And I think one thing that’s really easy for us to always be talking about, especially on a show like this, right? Where we’re talking about Canadian wealth secrets and we’re talking about investing and we’re talking about growing our wealth and you know, making sure that we minimize taxes and we leave a legacy. Like we really want to have our cake and eat it too. We want to do all of these things. And most often people that are listening to the show are much like us, they’re optimizers. So we’re constantly looking at

how do we like squeeze extra opportunity out of all the dollars that comprise of our net worth? And while that’s, I think an important exercise for us to be doing and we wanna explore that and we wanna research that, it’s really easy for us to forget that sometimes investments don’t always work out the way we thought, right? So we have to be very, very aware and we have to be reminding ourselves that sometimes,

When we optimize to the nth degree, when we try to get every dollar working at its best use, what we’re doing is we’re usually introducing additional risk. Now, how much risk of course is of, you know, totally up to the end user. It’s totally up to the investor, but it’s really important for us to recognize it because, know, John, you’re saying, hey, what, like, what happens if we borrow against say a whole life policy and make an investment and maybe the investment doesn’t go well?

I think we should start at first principles here and go, well, what would happen if you had cash? If we saved up all this cash and we made that investment, or we use the Smith maneuver against our primary residents. We have so many people that are so interested in the Smith maneuver. And I think it’s such a great tool. It’s such a fascinating tool. But it’s always based on average rates of return that are always positive and always relatively high and worthwhile.

but it’s very easy to sort of miss those opportunities that sometimes go south or go sour depending on the investment that we’ve actually made. So I think we have to be really aware and really thinking about what kind of investments are we making and then what are the real risks associated with those investments? And then finally,

How diversified am I? Am I OK to take on additional risk with a certain investment or investment class? And how much of my net worth does it actually tie up? And therefore, if something did go south or did go bad, that we would actually be able to pivot from there, and it wouldn’t actually set me way, way back or way far behind.

Yeah. So as we explore this, when we talk about an opportunity fund, it usually starts in phases, like you had said. A lot of times it starts as cash, and then we encourage people to start utilizing a home equity line of credit if they do own their own home or if they have rental properties. And then finally, if and only if it makes sense that they’ve built up their assets to a point and they built up their opportunity fund, this opportunity bucket or ⁓ wealth,

reservoir as we like to call it, we built it up to a level where it now makes sense to start leaning into permanent insurance so that we can utilize that as a tool. We then have a lot of optionality that has opened itself up to us to make different types of investments. So I want to go all the way back to like, well, what would happen if we took cash and we made an investment and that investment actually went bad.

Now, first and foremost, we have to talk about what investments could go bad. Here’s some examples. One is you picked an individual stock. You picked a single company, you invested in it, and it went to zero. Maybe you put it all into Bitcoin and you’re like, Bitcoin cannot go to zero. It’s like, we actually don’t know that. We don’t know that. I don’t believe it will ever go to zero, but we don’t know that and I don’t have 100 % of my net worth in Bitcoin.

The same is true even with different types of alternative investments where you might put a certain amount of money into an alternative investment. On paper, everything looks good. Historically, everything looks good, but maybe that thing goes to zero, right? Or that specific project or company goes to zero. So we really have to look at like, when could this possibly happen? And is it something that you can actually recover from? Like a stock going to zero?

a company, a private company going to zero or any type of other alternative investment could potentially go to zero. And that’s gonna put you in a very different place than if let’s say you’re implementing the Smith maneuver and you’re putting it into say index funds, right? Where you’re going, listen, over the long run, the S &P 500 is not going to zero. If it does go to zero, we’ve got.

bigger fish to fry than worrying about our net worth. We’re probably at like complete, you know, worldwide meltdown, which obviously is a very, very low chance of taking place.

Right. Right. And so I think what you’re saying is like, if it was just cash and my investment decreases, now all of a sudden my, you know, when I think about my portfolio, my portfolio is decreasing and then it’s now, now I have to like recover that portion of the portfolio. So we’ve talked about this before, like if you, all of a sudden, if you’re, you know, all of sudden it takes a 50 % decline and say that

that asset or say the deal goes 50 % down. Now you got to, you know, now you got to recover a hundred percent, just to get back to break even. And that’s the true, that’s true. When you think about with cash, right? It’s like, bought that or I invested specifically with cash. It was down. This is the scenario. Um, I think we get, we get weirded out. We get worried when we have leverage on the table. So now let’s compare, like, let’s go to the case where I used the Smith maneuver, you know, uh, and I, and I took that.

And I’m starting invest in say these index funds and all of a sudden it took that 50 % decline. Yes, in that investment, I still have to get a hundred percent increase to get back to break even. But here’s the kicker with that asset, right? Is that over on the other side, the underlying asset you used for the leverage could be going up still, right? Like you could be having like, Hey, the real estate is still.

Right. increasing year over year and that assets increasing. Therefore, it’s like almost like the debt, you know, my, my, my net, you know, my, my HELOC is like, getting more access to capital because that assets gone up and it kind of offsets a little bit of that 50 % decline in a way, you know, I still want you to think about that. This is still one giant pot of capital you have. And the pot went down. Like you, still have to think about that, right? They still have to do what you just said. You still have to think about diversity.

Right. diversification and making sure that you’re making good decisions there. You got to think about liquidity and making sure that you’ve got that buffer. You’ve got that safety net to make sure that you can make ends meet when these types of things happen. You have to think about this as a whole, regardless of what other asset class you’re using for leverage. There is no, hey, this thing worked. This tool is supposed to help me work, but it’s like you still have to make good financial decisions with your investments. But when you think about

that in that case, your using the Smith maneuver to that, that but that the house value could go up, but the house value could also go down. Right. So that’s what everyone gets worried about. Right. It’s like this this leverage. It’s like, my my my deal went bad. I still I’m now I’m on the hook to like cover the deals value because I I’m I’m it’s going to take forever for this to come up or I lose it all. And now I have leverage to pay back as well as

You know, maybe the house also went down and that’s or or this loan. got this interest to pay, right? Like that’s the other part is now how do I pay the interest when the asset or the the underlying investment can’t give me the cash flow to pay that up. But now flip it over to using your whole life policy. If that that’s the case, it’s like your policy is acts like a HELOC in the same sense. However, let’s say the deal goes bad. Your policy is not going to go down.

Like your policy is going to go up contractually every single day. Like it can’t go down and therefore that underlying asset is still going to inflate that it’s going to increase against whether this leverage is there. it’s still gonna be there for you. So if you compare it to like using leverage anywhere else, then this leverage goes up every time. Yes, no matter where you gain the leverage, you’re gonna have an interest.

Attachment to there. You can’t borrow money for free. So so the idea is like that asset Actually is better to like to leverage against then say your primary residence and then a cash like you know Yes, you have the interest to pay but it’s like the cash is like it’s gone, you know There’s no underlying asset anymore that could continually give you more to your net your bottom line and your net worth Versus, know using this asset and this is why banks

It’s like it’s an A class asset, you know, that they want to make sure that it’s like, we’ll leverage again, like we’ll give you loans against that because it’s a great asset class for us to give you a loan against. So when you think about it, the question here isn’t like, obviously the question isn’t like, what if my deal goes bad? Because this is what people wonder. It’s not, and therefore it’s not, it shouldn’t be, if the deal goes bad then therefore I should not use this asset class. The question is that, like you should still ask, what if the deal goes bad and have a plan for that?

Right. but you shouldn’t be ruling out this asset class as a leveraged tool just because if the deal goes bad, then I’m screwed and I can’t recover. That could be true regardless, but don’t rule this asset class out for that reason. It’s better than the other ones.

Yeah, for sure. And I think it’s, you know, if we go all the way back to what asset you are investing in. So if we’re looking to invest in a certain asset, we really need to be cautious and cognizant of can this thing go to zero? And if it does go to zero, am I okay with that? Now, the hard part though is the answer to that question, I feel is oftentimes different when you’re going into a deal than when you’re coming out of a bad deal.

Right? So when people go into a deal, like it’s like you convince yourself, like I’m okay with that. Like I can handle that. This is where I think being very cautious and cognizant about your diversification strategy is so key. Like you don’t want to be going into anything that can go to zero. If it’s going to materially affect your net worth to a point where it’s going to like hinder your next step, right? Like if it’s going to like wipe you out, that’s not

the type of investment that you should be in, right? So that’s a single stock. That could even be a couple single stocks, right? So for those people who have 20 % of their portfolio in one stock, that’s like, that’s too much. Like that is too much. Now, if you had 20 % in an index, like a specific index, I’m okay with that, right? It could even be higher for some people that are like bullish US equities, for example, because you’re not gonna see that thing go to zero. So right away at the very beginning, you have to be cautious. If a deal goes bad,

Usually that means we mean it’s like you’re losing significantly and probably not getting that money back. So just be aware if you’re going into a deal like that is that are you okay with that? You have to be cautious. When I got into my investment journey, the easiest asset class for me was real estate because in my mind I was like, I want to know physically that there’s a thing I own. I own this plot of land with this building on it. And that even if the market got hammered,

I could rent it to someone so that I can keep this property and I could wait it out. That was why I went in real estate. For some people, that’s why they go into ETFs and they pick indexes and that’s a fantastic strategy as well. So when we look at our three different sort of opportunity buckets, you have to start looking at the different bucket and the type of risk you’re okay taking on with that specific bucket. with cash,

you might be okay to put it into a riskier asset, because you’re like, listen, if I don’t get the cash back, I don’t get the cash back. If we do it with the Smith maneuver, and it’s against our primary residence, something that we wanna be extra cautious about is the fact that, as you said, you already articulated, your home value doesn’t always go up each and every year consistently. There are lulls along the way, and we’re not used to that here in Canada, because we had such a long run.

since the housing market sort of stalled and we’re in one right now. So a lot of people are probably seeing that and you can only imagine how that could hurt your mindset. If you had borrowed money against your primary home, put it into a riskier asset or an asset that could potentially go to zero and you had too much money put into that deal and that deal does go to zero. Well, now you’ve got kind of like two assets working against you.

Right? you owe money on a home. And if you were over leveraged on the home, you’ll notice here on the show, like we’ve never once said, listen, it like squeeze all of the equity out of your home. We’re saying, listen, don’t let too much debt equity sit in the home. Right? And we’re not even going to give you like a guideline for that because for everyone, it’s different. And for some people, it’s literally zero. Like people are just like not willing to leverage their primary home completely. Get it. When it comes to a permanent insurance policy,

To me, the risk is essentially the same as making the investment with cash because the policy itself is going to grow each and every year as you’ve mentioned earlier. And worst case scenario, if Armageddon happens is what I say with all of our clients. I say, listen, if Armageddon happens, here’s what happens. You basically walk away from the policy and you get the cash value. If that happens in the first two to three years, there’s a small loss there.

Right? Like that’s by design. The insurance company is going to keep a little bit of that premium that you put in there because essentially you cost time and you wasted their time. Right? So that’s essentially what that is. It’s a long-term asset. But if this policy is here and we continue to fund this policy over time and we use leverage to make an out, like I say, asset purchases that make sense for you. So you’ve got to define what that is for you.

So if it is something that can go to zero, it shouldn’t be the entire availability of your wealth reservoir. That’s not a good move for you, but it could be a portion, right? Maybe it’s five or 10 % of your available funds, right? But you don’t wanna be putting too much all into any one deal just because the returns look really good on paper. And for those people who are saying, listen, don’t know, I don’t like volatility or I don’t like risk.

Right. Yeah. then that’s where you have to start thinking about the strategies that are going to work for you. And just keep in mind that a policy itself is a great fixed income asset replacement. When we design it to have high early cash value, it’s going to perform much like a GIC, but tax free. That’s on the cash value alone. So in the worst case scenario, let’s say you do make an investment. It does go bad. And that means you’ve lost some money because you’re not ever going to see the dollars that you put into that investment.

keep in mind that if it was cash, you just have less cash. If it’s a policy, you not only have the remaining cash value that you have, because you haven’t fully leveraged every dollar into that investment, but you also have insurance in the background. Like that’s an extra bonus that you get when you make an investment leveraged against a policy than say just using cash. So I would argue that that’s likely gonna be our best wealth reservoir over time.

Maybe not initially as you just start getting going, but that’s gonna be your greatest wealth reservoir. It’s your greatest opportunity bucket that gives you the least amount of risk when using leverage because the Smith maneuver, even though we like it and we promote it and we utilize it to a degree in our own portfolios, we will not over leverage on our home specifically to go into any asset classes that are going to go to zero.

And I’ll be honest and say, every time I use Smith maneuver and I put it into the index funds that are out there, I still get this upset feeling in my stomach when I see the market start dipping and when it starts dipping aggressively, even though I know rationally that it’s not going to go to zero and that rationally, if I hold on long enough, it’s all going to be okay because it’s connected to my primary residence. There is a different emotional trigger that I experienced and maybe you’re you don’t, you know, some of the listeners, maybe you’re over that and

I’m amazing, know, teach me how, but for a guy like me, that’s something that makes me feel a little bit uneasy even though I understand the math. Whereas with my policy, that policy was just a bucket of cash and that bucket of cash was gonna get invested into that asset anyway, or those assets anyway. And therefore that risk feels a whole lot lower, even though there’s leverage here, but it’s against a paper asset that is secure.

Yeah. and will not be volatile like the actual investment that we may have made utilizing the cash value.

Right. This is interesting because you’re seeing each bucket, you know, each underlying asset, whether it’s your primary home or the cash or, or the policy is separate in a way and saying like, I’m making good decisions around that portion of money. And then this portion of money, I’m making sure like, it’s a different mentality for you. Whereas I think the way I think about it is I have like this system.

uses all of this capital. And then instead of compartmentalizing it, I compartmentalize it in a different way. So it’s like I make choices based off how much liquid capital I have available. And then it doesn’t matter whether that investment is attached to my home or in the policy because I’ve allocated or diversified and made sure that

You know, I have I have dry powder when dry powder is needed and it’s all one big pot and it’s all one system. And then therefore I have the different pieces of the system that operate. But it’s like, it doesn’t matter to me where that is, because this like, for example, if like you’re saying it’s like when the market dips and that money’s touched your home, you get a little tweak, a little something in your stomach that says, don’t, ooh, I don’t like that. but I mean, partly it’s like if if you

Yeah. Yep. over if you over stretched that portion of your portfolio, but under stretched on purpose, the leverage part on this side over here, because it’s a policy, it’s all comes in the wash because now all of a sudden like that part over there could cover, hey, could pay off my, I could shift money this way and that way to make myself feel better, but it’s all one big pot to me.

A hundred %. And, and to be honest, it’s so it’s so interesting, because like, from a rational perspective, 100%, that makes sense, you know, but there’s still like this little emotional, you know, tinge that I get. And this is humans. And I’m definitely an emotional, you know, sort of being and that that’s something that you know, I continue to try to work through because the reality is, for example, while I haven’t completely levered my primary resonance,

Right. This is the world. This is us. This is humans.

I’ve done the math and I look at it and I say, you know, what would make a ton of sense is that I leverage as much on my home as possible and then keep at least enough cash value to cover that in a policy. Cause the policy is growing cat like tax free. That’s fantastic. It’s also inside of my incorporate incorporated business, right? So it’s in my holding company. So that policy being in there down the road is going to be very, very beneficial for my estate because it’s going to allow me to get

more than the retained earnings that are already trapped in that corporation to flow out through the CDA. And it also gives me the liquidity that if I ever did run into a legitimate bump, so let’s pretend we’re just putting it into the S &P 500 ETF, whether it’s VU or whether it’s SPY or whatever it is that you’re utilizing, and let’s say I had all of that equity in my home put in there, I could write off the interest on that leverage, which is fantastic, write it off against my personal income.

but knowing that essentially I have all of the backup funds in that policy sitting inside the corporation that I could easily access if anything ever went wrong. And guess what? Here I am not doing that, right? And this is one of the important aspects that I hope listeners of the podcast recognize is that when you go through the rational side of things and you start calculating things out and you start optimizing everything out,

What you also have to be okay with, and I think respect, is the fact that knowing what will help you optimize versus actually doing every little move to optimize to the nth degree may not be right for you. And that’s okay. But as long as you understand the impact, you can take small moves in order to get there. So for me, it’s just a slow process of…

every month taking a little bit extra against that home equity line of credit and putting it into the trading account and layering it in. There’s data that suggests I’d be way better to like pull an extra hundred grand today and lump sum it into the market. Over time, that’s a better move than DCA. But that’s okay. I’m okay with that because emotionally it makes me feel a little bit better. It makes it seem slower, doesn’t seem as dramatic.

So ultimately at the end of this, think from today’s episode, what we’re hoping people start to recognize is first off, when we are looking at different investments and looking at whether you wanna diversify or not, keeping diversification is key and recognizing that you don’t wanna have too much going into any one asset that could go to zero, okay? So that’s gonna protect you, number one. The second one is looking at the different buckets that you have available.

that comprise of your wealth reservoir. For you and I, John, we’ve got a cash bucket, we’ve got our home equity line of credit, and we’ve also got large policies inside of our holding companies. We have a large and vast wealth reservoir. And let’s also not forget, I wanna be explicit about this, never are we in a position where we have no dry powder. We always have a significant amount of dry powder.

And some of that’s in our home equity line of credit. Some of it’s in cash. And of course, much of it is in policies that are inside our company. We slowly and strategically are putting money into different asset classes, but we’re not trying to get every dollar making 10 plus percent at every or any given time. Because the reality is, is that we know that with volatile assets comes ups and downs.

And we want to make sure that we’re in a position where we can layer in when opportunities arise. And let’s be honest, when the pile gets large enough, where the pile can substantiate the lifestyle that you want beyond, you know, your working years, you don’t have to be as risk on. And you also don’t have to optimize to try to get the greatest rates of return. Where we want to be more strategic is where are we pulling funds from? Where can we reduce taxes?

and how can we position ourselves so that we have the greatest optionality for ourselves during our lifetime, while also leaving a ton of optionality for our estate and our legacy way down the

Yeah. Exactly. Great, great summary there. Cause like, here’s the bottom line, right? Like deal is going to go bad. It’s possible. Like it’s, gotta, you gotta be planning for that. And that doesn’t change, you know, invest like that’s part of investing, but the secret here, like the secret, the Canadian wealth secret is to never let one deal collapse your system. And that, and that is why like we build reservoirs, not pipelines. Like we build reservoirs to act as a system.

so that we can make good decisions and use our capital the way that we want to, and also cover our basis in different ways. So if you’re a Canadian corporate business owner, you want to learn more about understanding exactly how to structure your wealth reservoir, either inside of your business or on your personal side, so that even a failed investment can’t.

Derail your future. We’d love to help. is what we do every day. We talk with business owners We talk with high net worth individuals and help them develop their healthy financial wealth system Using a wealth reservoir as the foundation You can learn more but you can talk to us book a call over at Canadian Wall secrets comm forward slash discovery

And my friends, if you are interested in understanding where you have your wealth health plan on the right track or where you can make improvements, head on over to Canadian wealth secrets dot com forward slash pathways.

here’s a reminder. The content you heard here today is for informational purposes only. Should not construe any of the information you heard here today as legal tax investment or financial advice. One more reminder, Kyle Pierce is a licensed life and accident and sickness insurance agent and the president of corporate wealth at Canadian Wealth Secrets.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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