Episode 266: How Risky Is Leveraged Investing? Have Canadian Investors Been Thinking About Risk All Wrong?

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Is leverage really the risky part of wealth building — or is the bigger risk misunderstanding how, when, and why to use it?

Many Canadian business owners and investors already use leverage every day through mortgages, vehicle financing, business debt, or lines of credit — yet borrowing to invest often feels like a completely different level of risk. In this episode, Kyle and Jon unpack why some forms of debt feel “normal” while others feel dangerous, and how education, experience, asset choice, and the right support can dramatically change how risk is perceived. If you’ve ever wondered whether leveraged investing is smart strategy or unnecessary danger, this conversation will help you think more clearly about the difference.

You’ll walk away with:

• A clearer way to compare “acceptable” debt, like mortgages, with investment leverage that may create income or tax advantages.
• A practical lens for understanding objective risk versus perceived risk — and why your experience with an asset class matters.
• A better sense of when leverage may be an opportunity, when it may be a red flag, and why guidance or deeper education can help reduce costly mistakes.

Press play now to rethink leverage, risk, and opportunity through a more strategic wealth-building lens.

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.

For Canadian entrepreneurs and investors, building long-term wealth Canada starts with a clear Canadian wealth plan that connects leverage, risk management, investment strategies, financial education, and tax optimization into one intentional system. Whether you are comparing real estate investing Canada with real estate vs renting, exploring passive income planning, optimizing RRSP room, or weighing salary vs dividends Canada, the goal is to use smart financial planning, personal vs corporate tax planning, and corporation investment strategies to reduce investment risk while creating more financial freedom Canada. A strong plan may include RRSP optimization, tax-efficient investing, Canadian tax strategies, capital gains strategy, corporate wealth planning, business owner tax savings, corporate structure optimization, and financial systems for entrepreneurs, all supported by retirement planning tools, financial buckets, an investment bucket strategy, and financial vision setting. By focusing on financial diversification Canada, modest lifestyle wealth, early retirement strategy, passive income, estate planning Canada, legacy planning Canada, and financial independence Canada, Canadians can create wealth building strategies Canada that balance real estate, corporate assets, tax planning, and long-term investment risk management.

Transcript:

Kyle Pearce: Welcome back to another episode of the Canadian Wealth Secrets podcast. We are going to be digging in today into a topic that I think creates a lot of emotional reactions for people, especially Canadian business owners and investors. Today we’re going to be talking all about leverage and more specifically, is leverage actually risky or have we been thinking about risk completely wrong this whole time.

Jon Orr: Yeah. And I think what makes this conversation, I think for me, especially interesting is, that almost everyone listening right now already uses some form of leverage. They just don’t maybe think of it and think of it themselves in this way. And really what we want to kind of unpack here is, is thinking about the riskiness factor of leverage and specifically thinking about the forms of leverage and what that makes it risky. And so that’s what we really want to unpack here for you is to walk away going — what forms of leverage should I think about and how do I think about them to make it actually feel less risky to me?

Kyle Pearce: Right, right. And I actually, you know, what sparked this conversation was a conversation I had with one of our listeners out there who reached out and wanted to chat all about the Smith maneuver. You know, lots of folks in our audience are big fans of learning all about it, trying to find ways that potentially they can create some tax deductible interest. And the one nuance though is once you dig in, a lot of times people will come back and they’ll either say themselves or maybe hear from someone else — like maybe their financial advisor or someone else, maybe it’s their accountant — that borrowing to invest is maybe risky or dangerous. But then like, I want to start this conversation off and sort of compare where other forms of leverage already exist in our lives and really to kind of zoom out and try to determine whether, you know, this risk we’re talking about is reasonable or not.

Kyle Pearce: Because, John, you had mentioned it already, you know — a lot of us as Canadians, a lot of people listening on this show tend to either want or already have a primary home and the vast majority of people do not start by writing a check and buying that home, right? We finance vehicles. We use lines of credit sometimes to sort of, you know, make ends meet from month to month. Again, we’re not advocating that at all, but people out there do. And of course, many of our incorporated business owners use leverage to help fund their business, but yet we don’t really blink at any forms of that type of leverage. So today we’re going to unpack like why does some debt feel safe or okay or maybe just acceptable? Why do other forms of debt maybe feel dangerous or risky or things that, you know, kind of scare people and we sort of push away from? And whether that perception of risk actually lines up with reality.

Jon Orr: So what you’re saying is like, I think what you’re getting at here is like, some people are saying, you don’t blink when you borrow to buy your home, buy a car, go pay for your tuition. But if I wanted to borrow money to invest in real estate, to invest in dividend paying equities, invest in, say, other forms of the stock market — this is where we get nervous. This is where we’re like, are you sure you want to do that? And I think, here’s the question to you then — like is it, I guess, like when we borrowed for our home, we’re agreeing to pay interest and borrow that money. We’re going to pay this to the loan provider. Is it because it’s like the home is so permanent thinking, right? So, like I’m here forever. And even whether you get out of that home in three years, five years, 10 years, you have to pay the realtor fees all over again, whatever. But I mean, like, is it the permanence of that, but then it doesn’t feel like the permanence when you go to invest in the stock market? And then therefore is it less risky when you think about taking the leverage to go into some equities — that the math says if you borrowed up at 4.95% and then you invest, on average, you’re going to earn 7%? The math says you’re a winner as long as you are thinking permanent. I think maybe this is the part that we get hung up on — that’s like, that’s risky to do something like that. Why would you do that? Why would you bet against the leverage that you’re creating? What happens if you’re underwater? But you could be underwater with your home, you know?

Kyle Pearce: Right. Yeah. And I mean, in a lot of cases you are, at least for a while. And even if the market is rising, you’re underwater in a lot of ways because there’s a lot of costs that go along with buying a home. And I think, you know, the part that I’m sort of feeling in my mind is like a primary home — and this is not just in Canada, this is in the US as well — it’s sort of like this Canadian dream, so to speak, right? It’s like owning your own home. And I know a lot of people are shifting away from that. They’re starting to do the math and starting to recognize that, hey, you know, actually owning a home is like, there’s a lot of negative to it as well. Like there’s a lot of pain in the butt. For example, recently I go to turn on a tap in the spring and the tap in my house, all of a sudden, water’s pouring everywhere inside my house. I’m like, well, isn’t that great? I’ve got to go deal with that, you know? And those costs are never even factored in.

Kyle Pearce: So when we talk about leverage, it’s one of those acceptable forms of leverage. It’s probably the most acceptable form of leverage out there for Canadians, right? Borrowing to buy your home because that’s what Canadians do. And I’ll be honest and say, I still believe that. I want my own home. I’m not suggesting we sell our primary homes — there’s a benefit to it. You know, if you do sell it, the capital gain is protected. It does not go down in value when I pass away. Like those parts are all great. And I like knowing that it’s my home. And I think there’s comfort in that. But the reality is if you ask someone in the US who went through the 2007, 2008 crazy housing bubble that existed in the US and they dealt with the bubble popping, a lot of people had to walk away from their homes and they had to hand the keys in. And I’m sure a lot of those individuals probably have a different perception or perspective about how risky borrowing such a large sum of money to live in this home that — and here’s the key piece — you talked about dividend paying equities or rental properties that pay revenue or a business that generates revenue or we’re hoping will generate revenue. All of those things actually create income, whereas our primary home does not.

Kyle Pearce: And then don’t get me started on how much we borrow in order to fund the next vehicle, whether it’s through a lease or through borrowing. And we can talk all day about, if the rate’s good enough, it’s worth borrowing in order to do that and investing the difference. But the reality is that the risk associated with funding our own primary home, especially if the value of that home represents a significant portion of our quote unquote net worth — if that equity chunk that we have is representing a large portion of our net worth, that’s a massively risky proposition because you need to go earn income just to make the payments so that eventually over 25 or 30 years, or earlier if you’re going to accelerate the payments, you need to do those things in order to just keep this thing, which keeps taking money from you. And then we pause and we look at the other side of the puzzle, which is leveraged investing. And it somehow has a big sort of spotlight on it and it’s like risky, it’s scary, it’s gambling even. And I would argue in some cases it could be considered gambling if you don’t actually know what you’re doing. If you’re taking all this money and putting it all into Bitcoin and you don’t know anything about Bitcoin or whatever it is. Like I totally get the extreme, but there is no good case for justifying the amount we leverage on homes, cars, and then even our education, right? When we think about how much of a bill we have at the end and it doesn’t actually guarantee us any sort of income — it might position us to earn income, but like, we really have to zoom out, in my opinion, to decide is leverage for investing something that may make sense? And I guess in today’s episode, we sort of wanna talk a little bit about like who does it make sense for and who maybe it doesn’t make sense for.

Jon Orr: Yeah. Sure, sure. And I think when we think about leveraged investing — when we use the word risk and we say it’s risky, we have to also understand, I think, generally that risk is 100% subjective. What is risky to you might not be risky to me. And I think that is — it’s kind of like, I had this image pop in my mind, this phrase pop in my mind — something I’ve said to my kids. I don’t know where I heard it, but basically it’s saying travel is kind of an antidote to ignorance. The more you travel, the more you see different perspectives, the more people you meet. It helps you see the world so that you have more acceptance and you’re less ignorant about certain things. Now that’s about travel.

Jon Orr: But where I’m kind of going with that is that the more we think about our own education, it automatically makes certain things less risky than others. So when you think about it, when you ask the question about like, who is leverage good for? I think the better question is, well, where do I want to put the leverage? And does that make sense for me? Because, you know, like I said, if I gave you $100,000 five years ago and I said, Kyle, if I gave you $100,000, where would you put this money? Because to you, it’s the less risky move. And you would have said, I’m gonna put this in real estate. Because you felt very, very comfortable because you had your 10,000 hours of becoming excellent and expertise in that world of learning the game of real estate so that if you could put money into real estate, you will make money out of real estate. Whereas somebody else might say, if you gave me $100,000, I’m gonna go buy a car wash business, because I know how to make that business work and make money for me.

Jon Orr: So now it’s like, when you think of it that way, yes, there’s objective risk in these things, which means like there’s this truth, like this risk actually exists, but it’s less risky subjectively to each different person because of their experience, because of the, I’m gonna use air quotes, because of the travel that they’ve had in their life to get them to that space, right? So like they got here and it’s like, I have created this wealth of information that almost takes the risk out of it. Alex Hormozi would say, give me that $100,000, I’ll go invest it in this business over here, because I can make money out of that business. Grant Cardone says, give it to me, I’ll put it in real estate because I can make money out of that. Somebody else might say, give it to me, I’m gonna go put it in income generating closed end funds. And I’m gonna make money out of that. Like, I will put every dollar over there, because I watch it, I learn it, I study it, I put my 10,000 hours in. This is what eliminates in your case, risk — because what you’ve done is you’ve learned so much. Yes, there’s going to be some, but it’s like the less riskier it is, the more you’ve learned about the world or how this asset or this investment really works so that you can manipulate it, you can get your hands dirty.

Kyle Pearce: Well, you’re making me — you’re reminding me of an email I just answered the other day. I met with someone. It was a discovery call. We had a great conversation. And this is an individual — I would argue, like they’ve got quite a bit of what I would call debt equity, both in their primary home, but also in their corporation. So they’ve got a lot of retained earnings. I’m going to say it’s sort of like, you know, collecting some dusties — dealing with a lot in taxation as well. So like these are a lot of key pieces that sort of jump out at us when we start thinking about like leverage for investment purposes — if we’re able to create a tax offset, that’s one benefit that we can have. But again, where are we going to put that money?

Kyle Pearce: And in the email response that came back, he highlighted two things. He was like, well, I’m concerned about the market because we’re at all time highs. Right? So there’s sort of like this concern about the volatility, the risk associated with it. And he’d said like, yeah, I really liked the idea of real estate, but I’m nervous that, you know, the housing market has more to drop. And it’s like, when you think about that right there, I think what that says is less about what the markets are doing. Cause in two ways he’s sort of contradicting himself, right? Cause he’s going, okay, well, if it’s all about markets being at highs or lows, then real estate’s the right pick, because you’re saying maybe the real estate market might drop even more. And you’re like, so what — like we can reverse this and say, hey, the stock market — we’re in 2022 and the stock market was down 20%. We’re like, it could drop more. And it’s like, yes, or we could back up the truck if I trust the asset, the asset class, the thing that we’re going to do with this money.

Kyle Pearce: And basically what that communicated to me was that that individual had not done enough quote unquote traveling in the investment world to actually make a decision on their own in terms of what they might consider using leverage in order to invest in. So my response to that individual was, you know what, I would stay away from real estate, would continue learning about it, do everything you need to do, but you don’t wanna be the one to go buy real estate. Cause guess what happens? That’s where the risk shows up for someone like that. And they don’t realize that — it’s actually really active, and hey, if you buy the property and there’s something wrong with the price, you know, there’s all kinds of things that can go wrong there.

Kyle Pearce: So my suggestion was, if you are planning to use leverage for investment — cause we’ve already articulated for him, based on the earnings in their household and the tax rates that they’re in, both corporately and personally, that it actually makes sense from a tax optimization standpoint to consider going this route. However, on the other hand, I wouldn’t want that individual to be the one making the investment decision. So I said, for now, you probably are best to work with a wealth manager. If you have one that you know, like and trust, rock and roll. Or if you’d like to work with our team, we can definitely set up a call and make sure that this is aligned with your goals here. Because ultimately at the end of the day, we can read a book — we can read Millionaire Next Door, we can read The Psychology of Money — and we could say index investing is the way to go. But if you’re not experienced enough to actually follow through with that goal, then you may put yourself in a really tough spot, which again would align with everyone’s fear around the risk piece. Because you are doing something risky because you don’t yet have the knowledge, the experience, the confidence to be able to do that type of investing in a way that you’ll be able to stick with over the long term.

Kyle Pearce: You know, you talk about micro habits all the time. Well, this is like part of that conversation — if you’re going to flip flop because you start learning and then you decide, shoot, this isn’t gonna be the right move for me, that’s gonna be problematic. And that’s where I would argue the cost of, say, a wealth manager is so worth it for someone who’s looking to do some of these other things like tax optimization, but they’re not feeling confident in what it is they plan to invest in.

Jon Orr: Yeah. You bring up a good point because I think what I’m taking away from that point and that story and the interaction you had — basically kind of a next step — because if we believe that the antidote to less risk is more learning and more experience, then you have an option. You’re like, look, if I want to invest in this type of asset, could be maybe it’s private equity or in this business class, or this type of business — going to learn about it and putting your 10,000 hours in, that takes time. That’s exactly where I’m going — it’s like the side hustle here. But is that like the real side hustle? Is that your main hustle?

Jon Orr: Like now what you’re saying is you’re taking what’s supposed to be passive and you’re making it active. And do you want to go down that road to make it active, or should you just let your passive stay passive? So you could take the 10,000 hours if you haven’t started that already. Or I think what you’re saying is like, you might want to tap someone on the shoulder who has had the 10,000 hours and say, let’s start with you and let’s go into that world, but I need you to help me navigate because you’ve got those 10,000 hours in investing. And that’s why wealth advisors, investors, portfolio managers all come into play — we’ve got the right people to help us manage those investments because they’ve put that time in. So what you’re doing is you’re saying, let the passive be passive and let you be active in where you need to be active.

Jon Orr: But if you’re like, let’s say you’re at retirement, and you’re like, I got this chunk of money that I don’t know what to do with, I now need to leverage against it to go over into that asset, but I’ve got time — like maybe I wanna go learn about that. That might be a different story for you. But I think the big wonder there is, do I reduce the risk by tapping someone with 10,000 hours or do I make the 10,000 hours?

Kyle Pearce: Right. 100%. And, you know, for me, it all comes back as well — the more diversified we can be in strategy and asset class and approach, the better and the quote unquote safer things will be. Said another way, I wouldn’t recommend that someone use leverage in order to invest into their first investment, you know, like right away. That seems like a bad idea. You know, first of all, it’s like, why haven’t you been investing already? Right. So a lot of times, as you start to build your net worth, as you start to look around and you start to go, hmm, I’ve created a tax problem for myself — right, cause some people are trying to avoid tax at all costs and they’re wasting their time at this stage, in my opinion. They’re maybe earning less than a hundred thousand dollars and they don’t have a large net worth yet. And they’re focused on trying to save a couple thousand dollars in tax when in reality, what they need to do is they need to focus on volume. They need to earn more money so they can invest more so they can create a tax problem.

Kyle Pearce: And in these cases, what we find is that as people build their net worth and as they invest in multiple things, they actually tend to be less likely to use leverage because they actually don’t need to borrow to invest. And then it sort of gets us playing in the land of optimization where we start to recognize — eventually if we do things well, the tax problem we’ve created for ourselves becomes a non-issue for your lifestyle.

Kyle Pearce: This is another piece that we’re going to be chatting about on some future episodes — talking about optimization versus the complexity aspect here. For a lot of people, what I find is that they lean on the leveraged investing or they actually start sniffing around leverage investing when they’re looking around their world and they’re not seeing enough liquidity to start regular investing. And I would argue that’s a huge red flag — you’re doing this from more of a, we’ll call it a desperation play instead of adjusting your income and or your spending to sort of put yourself in a position where, if I am gonna start using leveraged investing, it’s because there are some bigger pieces here.

Kyle Pearce: So again, high T4 employees that are earning say $300,000, $400,000 a year — guess what? Your RRSP room, it’s gonna cap out at about $185,000, $190,000. So if you’re taking more than that, we need to start looking at other options, other opportunities. And I’m looking at it as an opportunity because, again, we’re not necessarily gonna call that risky. We’re gonna say, listen, there’s a risk associated with giving away 50% of your T4 income in taxes every year because we choose not to look at say leveraged investing as a strategy. There is learning to be done. We need to be responsible about it. We’ve got to be able to assess — am I in a position where I can put these dollars into a specific investment on my own or do I need the guidance of someone else? When I say do I need, should I consider the guidance of someone else? Maybe you don’t need it, but just having that other person there to be able to think things through with can be the unlock for you to start recognizing — you know, if I’m able to save quite a bit in tax and then use leverage in order to help me offset more tax over time and build my net worth at the exact same time, this stops looking like risk and it starts looking more like opportunity — as long as, as you said, we’re recognizing the journey we’ve been on, the traveling as you’ve articulated here that we’ve done in order to recognize, hey, what makes sense for me and who might I turn to in order to get the help I need to make sure that we’re not taking on unnecessary risk.

Kyle Pearce: Investing is risky, borrowing money is risky, just in and of itself. Those are two things that have risk associated. But like you’ve said, and I think for me, the big aha moment, my epiphany, is this perceived risk idea — if we know what we’re doing, why we’re doing it, and we understand what possibilities are out there, we can position ourselves to take this risky proposition and actually turn it into a massive opportunity.

Jon Orr: Right. Yeah. And I think my takeaway here is, because the math might look on paper like — the math says if I took a dollar here and I borrowed a dollar here and I have to pay 4.95% on it, but I put it over here and I’m going to make 7%, then why wouldn’t I do that? And I think what we need to do — mathematically that sounds correct, that sounds like free money to you. Right? But I think when you take the step back, you’re saying like, well, there is risk associated with that, but we also have to say there’s objective risk in there, but then there’s also the perceived risk. And we can reduce our perceived risk by more learning or by tapping people on the shoulder. And that might be mathematically the right move, but what happens is because of the learning, because of the people you’re tapping on the shoulder to reduce that perceived risk, you are going to be in a better position when the shit hits the fan. Because I think that’s what people get worried about. It’s like, wait, what happens if I’m underwater in that scenario? Can I manage that? That’s where the perceived risk is reduced because of the learning you’ve done in that world, or you’ve got the guidance around that in the world. It could be mathematically read on paper on average, but when the shit hits the fan, that’s where we need to deal, and that’s what everyone worries about when we talk about risk.

Jon Orr: So that’s kind of a big takeaway for me — thinking about reducing the perceived risk by education or partnerships when it perfectly looks fine on paper. But if you’ve done that, like I think this goes to what you said, when you’ve done that and you’ve layered in the education or the partnership, then it looks like opportunity, and then why not take it?

Kyle Pearce: 100%. I love that. Well, we’re going to have more to chat about in some upcoming episodes, not only about leveraged investing, different decisions that we have to make, but also just the psychology behind it all. So make sure if you haven’t yet, hit the subscribe button. If you’re watching on YouTube, definitely leave us a comment and a big thumbs up can be super helpful. Ring that bell and hopefully we’ll see some of you on a discovery call. You can reach out to us. We are an education first firm, meaning we’re here to educate you. We do it through the podcast. We do it through YouTube. We do it through our blog. And we also do it through our conversations, through our discovery call meetings. There are no costs, no fees. All the planning is completely free. If you like what we’re doing and you want to implement it, we are strategically licensed and our team is strategically licensed to be able to help you implement some or all of these strategies, including licenses in insurance in different provinces, as well as securities licensed across different provinces in Canada. So if you’re interested in reaching out to us to get that education first approach planning, reach out over at CanadianWealthSecrets.com forward slash discovery, and we will see you on a call real soon.

Jon Orr: Just a reminder, the content you heard here today is for informational purposes only. You should not construe any of this information as legal, tax, investment, or financial advice.

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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