# Leverage for Wealth Part 2



## dennisll (24 May 2006)

I'm sure there are a lot of forum members here who already use leverage _(See Part 1 of this thread here)_.  I think it would be great if we can share our strategies on how we can all use leverage to build wealth.  Here is my strategy:

A. Have a solid pool of high-LVR stocks as a base
B. Maintain the LVR
C. Use dividends to pay off the Margin Loan or buy more shares
D. Limit low to no LVR stocks to 10% or less of the portfolio
E. Have between 6 and 12 stocks in the portfolio at all times
F. Always have some cash for emergency

A. Have a solid pool of high-LVR stocks as a base
Building a portfolio around high-LVR stocks keeps my maximum allowable LVR on the high side, allowing for more funds to be invested.  These stocks vary from broker to broker but generally they are big, blue chip companies.  Comsec, for example, lends up to 75% on stocks like the big banks, BHP, RIO or WOW.  These stocks tend to be less volatile than most stocks, which keeps my LVR volatility low as well.  These stocks also usually have good yields, whose benefits I will discuss later on.  The main point here is that with higher LVR stocks, more money can be put to work.

B. Maintain the LVR range
I have a set an LVR range in mind and always maintain it.  For example my target LVR is 45% to 55%.  If the portfolio value has been steadily growing, my LVR will be dropping since the size of the loan will be getting smaller compared to the value of the portfolio.  When this occurs, further investment is made to raise the LVR back to within the range.  By doing this, I can magnify the benefits of the bull market using more borrowed money and yet still have a decent buffer to protect against a downturn.  Just as a stop is raised to protect more profit, the LVR is raised when it has fallen below the range to increase the potential profit.  Note that if I was more bearish than usual I can raise the LVR to the lower end of the range to have a bigger buffer.  On the flipside, if the market starts falling and the LVR goes above the range, usually stops are already being hit and stocks are being sold, taking the portfolio back to within the range.  If necessary, I allocate extra funds taken from the emergency cash fund (see below).

C. Use dividends to pay off the Margin Loan or buy more shares
Rather than spend dividends, I use it to pay off the margin loan or participate in dividend reinvestment plans to acquire more shares.  What this does is again lower my LVR as more funds are put to work, thereby allowing even more funds to be borrowed for further purchases.  

At this stage I am happy to pay the interest bill of the margin loan out of my own pocket as I am trying to grow the portfolio.  However, there will come a time when it will be too great, and this is when I will shift and use dividends to cover the interest payments.

D. Limit low to no LVR stocks to 10% or less of the portfolio
Speculative stocks, new issues, or smaller companies tend to have low to no lending allowed.  However it is these stocks that usually provide the most growth, %-wise.  As such, I keep these to at most 10% of the portfolio.  This allows an exposure to these types of stocks without affecting the max LVR too much.

E. Have between 6 and 12 stocks in the portfolio at all times
Diversification protects against volatility, but too many stocks make the portfolio too difficult to manage.  I found that 6 to 12 stocks is my ideal range.

F. Always have some cash for emergency
I always keep some cash in a high-interest savings account for any left-field event that might occur.  There will be times when the LVR might go above the range and yet no stops are still hit.  In this case, I use some cash to bring the LVR back into the range temporarily.  Often, stops will get adjusted upwards so that there is sufficient protection again.  Once this has been achieved, the cash is moved out of the margin loan and back into the emergency fund.

That's it, hope that wasn't too long.  Would be glad to hear about your strategies.

Cheers,

Dennis


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## wayneL (24 May 2006)

G. Commodity futures

....and not just metals and oil. There are several classes of commodity futures

Energy
Stock Indexes
Metals
Livestock and Meats
Grains & Oilseeds
Foods & Fibres
Currencies
Treasuries
etc

These not only offer excellent leveraged opportunities, but also provide for non-correlated distribution of returns.

All can have extended Bull or Bear parties like the metals and energies have had recently.

Can be traded using statistical seasonal tendencies for higher probability returns ( with or without deference to Bayes'_theorem   )

Tend to be more technical in nature. (Good for us techies)


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## RodC (25 May 2006)

I've got a couple of margin loans.

I must admit I run them a bit harder than Dennis runs his. They are usually running at around 60-65% LVR. 

Most of the stocks held have an LVR of 70-75% and only a couple have 60%.

It's very rare for me to buy something with an LVR <60%.

The last couple of corrections have just pushed the loan into the "buffer" zone but in each case 1 or 2 of the stocks has hit a stop which when sold has put the loan "back in the black".

I capitalize all interest to the loan, have never had a margin call (5 years) and have never had to delve into an emergency cash fund.

regards,

Rod.


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## Julia (25 May 2006)

Just a note for anyone considering a self managed super fund:  you cannot use leverage except in a very limited way.  It can be on no more than 5% of the balance of the fund and must be able to be shown to be used purely defensively.

Julia


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## RodC (25 May 2006)

Julia said:
			
		

> Just a note for anyone considering a self managed super fund:  you cannot use leverage except in a very limited way.  It can be on no more than 5% of the balance of the fund and must be able to be shown to be used purely defensively.
> 
> Julia




I know a super fund can't borrow, but can they purchase leveraged instruments like CFD's, Options or Warrants?

Rod.


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## Julia (25 May 2006)

RodC said:
			
		

> I know a super fund can't borrow, but can they purchase leveraged instruments like CFD's, Options or Warrants?
> 
> Rod.




Hello Rod

Sorry, don't know.  When I discovered how rigid the rules were I just didn't ask any further details.  

Julia


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## RodC (25 May 2006)

Fair enough,

Those rigid rules are one reason why I haven't yet gone down the SMSF path.

Rod.


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## markrmau (25 May 2006)

You can buy options and warrants. I highly doubt you can trade cfd's (but may be wrong).


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