# Margin Lending/Managed Funds



## Slick Rick (17 October 2006)

Hi All,

Have been blessed with some capital from a long-deceased grandfather and currently doing some research on the investment strategies.

Money is currently invested in managed fund and doing well but I am considering increasing my leverage through the use of a margin loan.

I understand there are a number of australian funds who are returning around the 20% p.a. mark (pre-perform/man fee's). With the cost of margin lending 8-10% (?), it seems it might be possible to take further advantage of current returns.

I am not dependent upon any cash flows from the money and am willing to take on volatility if it means longer term gain + managed funds seem like a good option whilst I learn the ropes.

Would most appreciate any advice.

Regards,

Rick.


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## Slick Rick (17 October 2006)

*Re: Margin Lending/Managed Fund*

PS. I'm as green as they come.


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## 168 (17 October 2006)

*Re: Margin Lending/Managed Fund*

I am also very keen to leverage on my portfolio. My strategy is probably to go for a line of credit instead of margin lending. I have zero debt and a medium amount of equity to play with. Anyone has any suggestions on how best to approach this?


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## tech/a (17 October 2006)

*Re: Margin Lending/Managed Fund*

Before you even consider leveraged instruments be sure you know how to turn a profit.

Ive been margin trading for years and highly recommend it for those who are anything BUT GREEN.

Its a 2 edged sword.

How long does it take to be a competent trader?

Most Tradesmen take 3 yrs.
Doctors 7.
How long did you take to become proficient at what you do?

No rush the market isnt going anywhere but your hard earned might!


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## barney (17 October 2006)

*Re: Margin Lending/Managed Fund*



			
				168 said:
			
		

> I am also very keen to leverage on my portfolio. My strategy is probably to go for a line of credit instead of margin lending. I have zero debt and a medium amount of equity to play with. Anyone has any suggestions on how best to approach this?




Hi 168 and Slick Rick, This is not advice, but would like to point out that I took a line of credit (wont say how much, but it was substantial) and quietly proceeded to lose the majority of it through lack of education .............. Follow up on what Tech and others say in various posts, and learn before you do anything .............. Education and discipline are very important.

Could I add another slant to your previous post Tech, and say that it is possible for us "greener" members to do OK at trading, but we need to take a lot more care in any decisions we make ............. Its a bit like building ............. I built a back deck (roof etc) on my house on my own....... I'd never built anything substantial in my life ................. It took me ages, but, because I kept asking questions off others who knew about building, and took the time to do it as best I could, I ended up doing a good job (much to my surprise) The analogy is obvious, but has some credence when parallelled to trading I think. Purely my opinion however.  Cheers Barney.


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## Slick Rick (18 October 2006)

*Re: green as they come*

Tech & Barney - thanks for your responses.

RE: turning profit.

With the current state of the market, how much are risk are you taking by simply lumping your capital with a managed fund?

I have seen my capital grow by over 75% since 2001, invested in a conservative bank fund. My understanding is that this isn't out of the ordinary?

Leveraging my existing capital to, say 1:2 (debt:equi), at 9% (as I have seen stated elsewhere on the forum?), still leaves a 6% profit margin, and we all know what kind of difference 6% can make once the exponential beauty of compound interest kicks in.

(Not to mention tax benefits from leveraged capital ?)

Shoot me to pieces if I'm on the wrong track.


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## barney (18 October 2006)

*Re: green as they come*



			
				Slick Rick said:
			
		

> Tech & Barney - thanks for your responses.
> 
> RE: turning profit.
> 
> ...





Hi Rick, That ones way out of my league to attempt. Hopefully some of the more knowledgeable lads will jump in to help you on that.  All the best, Barney. PS Most of them are probably asleep  :sleeping:


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## tech/a (18 October 2006)

Slick.

Try this.
If 20% return then on leveraged at 2:1 thats 40% on initial capital.
Borrow at 9% dividend return 7% nett cost on BORROWINGS only for the time you use them 2%---in some cases tax deductable.

Only problem with this is if you get it wrong and suffer a 20% decrease in your holdings and as such a 40% decrease in initial capital.

This is a real fact that many like Barney have come to suffer the hard way.


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## Slick Rick (18 October 2006)

Tech, I see where your coming from,

You multiply your risk by the same magnitude as your return.

Perhaps I have a misplaced faith in managed funds.

Thanks for your help.


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## markrmau (18 October 2006)

Slick, I would like to present an alternative view.

Personally I don't think now is the time to get a margin loan FOR THE PURPOSE OF BUYING AN INDEX FUND.

I think you should consider investing in the underlying stocks by getting a broker with one of the smaller brokerage firms such as Shaw stockbroking (I use them for my long term investment broker, but have no other connection to them).

Some people will tell you that you are better of doing it yourself over comsec (to save on brokerage) but I think that would be silly in your case. It is information you need and the brokerage isn't that much more really.

You could get a margin loan to invest in stocks as well, but you might be better seeing how you go with your current capital and a broker first.

Cheers, Mark.


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## 168 (18 October 2006)

*Re: Margin Lending/Managed Fund*



			
				barney said:
			
		

> This is not advice, but would like to point out that I took a line of credit (wont say how much, but it was substantial) and quietly proceeded to lose the majority of it through lack of education




Hi Barney,

Thank you for your advice. Yes, like you I have been burnt; not through lack of education but more through being emotional. Like not taking a lost when my stock has dropped by more than 20%, like not taking a profit for those speculative stocks, like not listening to my sell indicators, like averaging my losses; to name a few.  For the past 10 years, with the above lessons at the back of my mind, I have been playing with my own money and saw that my portfolio has increased significantly through careful trading and stock selections. So I thought this is now high time for me to start using some leveraging mechanism. My question - should I use margin lending or should I use a line of credit? What are the pros and cons of each and what should I be warried of?  

Thank you in advance.

168 - forever in luck


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## barney (18 October 2006)

*Re: Margin Lending/Managed Fund*



			
				168 said:
			
		

> Hi Barney,
> 
> Thank you for your advice. Yes, like you I have been burnt; not through lack of education but more through being emotional. Like not taking a lost when my stock has dropped by more than 20%, like not taking a profit for those speculative stocks, like not listening to my sell indicators, like averaging my losses; to name a few.  For the past 10 years, with the above lessons at the back of my mind, I have been playing with my own money and saw that my portfolio has increased significantly through careful trading and stock selections. So I thought this is now high time for me to start using some leveraging mechanism. My question - should I use margin lending or should I use a line of credit? What are the pros and cons of each and what should I be warried of?
> 
> ...





Hi 168, It sounds like you are/have been much more disciplined than I was ........... well done ..... My stuff up was partly "bad luck" and partly lack of discipline .......... history now, but I will bare the scars for a while .......... I Know little about margin lending .......... What money I am still trading with is what is left of my original "line of credit" ............ I like the line of credit idea because you are only charged interest on the money you are using from your original "allotment" ................... Others more experienced will give better advice than I can, but I think using "borrowed" money is fine, as long as the money is invested wisely with "sound" money management principles in place ............ Good luck to you, Barney.


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## Julia (18 October 2006)

markrmau said:
			
		

> I think you should consider investing in the underlying stocks by getting a broker with one of the smaller brokerage firms such as Shaw stockbroking (I use them for my long term investment broker, but have no other connection to them).
> 
> Some people will tell you that you are better of doing it yourself over comsec (to save on brokerage) but I think that would be silly in your case. It is information you need and the brokerage isn't that much more really.
> 
> ...




Mark, 

In principle that seems like good advice, but I'd just like to point out that using a full service broker is no guarantee of good advice.

In the days when I used one, out of twelve of their recommendations ten lost me money!

On other threads, various members have commented as to the level of commissions (in addition to the brokerage) earned by advisers in brokerage firms - they are very substantial indeed.  And if you believe their advice is purely motivated by a desire to see you make money you are foolish indeed (as I was once).

They have their own reasons for wanting to move a heap of particular stocks (instructions from instos etc), or even more simply, will just put a "Sell" recommendation on a stock just because it has reached what they considered three months previously to be its Target Price.  And in reverse will put a "Buy" recommendation when a stock has dropped.

Mark, you say that the brokerage isn't that much more than using an online broker.  I just can't agree with that.    On a routine buy or sell with the full service broker of around $15,000 I paid nearly $300 in brokerage, compared with $29.95 on E-trade.

As a starting point with someone feeling their way, they are unlikely to go too far wrong with buying some basic blue chips with good dividends and 100% franking.

Julia


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## barney (19 October 2006)

Julia said:
			
		

> Mark,
> 
> In principle that seems like good advice, but I'd just like to point out that using a full service broker is no guarantee of good advice.
> 
> ...





I agree Julia.  Magdoran (somewhere on another post mentioned that he gives little credence to  "analysts" predictions, because it is impossible to decifer whether they are "telling the truth" or simply "ramping" their own positions (that is MY interpretation of his words!!)  ......... For safety, Blue chip with good dividend seems a sensible entry level ......... Once we delve outside that zone ., we are subject to " market manipulation" by "Traders" etc ......... My opinion etc. I could be misguided of course, Cheers, Barney


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## Ferret (19 October 2006)

Slick,

I use the line of credit option.  The risks associated with leverage are the same with either line of credit or margin loan, but the interest rate is lower on the line of credit and I don't have to worry about margin calls.

Fully agree with the advice of Julia.  If you are a novice planning to leverage, you should stick with blue chips that have decent yield, but you might also consider the blue chip miners - BHP & RIO.

Good luck,
Ferret


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## markrmau (19 October 2006)

Both full service brokers I use charge 1%, minimum approx $75, for 'low value' accounts. If you have a considerable amount of money to invest, you can negotiate a better rate.

More importantly, both of the brokers that I use have many times said that I should ignore analyst advice in particular situations (analysts from thier own brokerage firm). This has been on both the buy and sell side.

I think that at this point in the market cycle, if you have no real understanding of what drives the market, it isn't time to borrow money and just buy blue chips.


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## Slick Rick (19 October 2006)

I was more thinking something along these lines;

Macquarie - Small Companies Growth Trust

Entry fee; 3% (Although I think that this can be waived)

% Return p.a.;

- 3 year average 31.01%

- 5 year average 20.30

Leveraged at a 1:2 debt:equity ratio, at say, 9%? At this level of debt, how likely am I to face any margin calls as a result of temporary volatility?

Thoughts?


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## MichaelD (19 October 2006)

Slick Rick said:
			
		

> % Return p.a.;
> 
> - 3 year average 31.01%
> 
> Thoughts?



All Ordinaries 1 May 2003: 2965.6.
All Ordinaries 1 May 2006: 5255.2.
Index performance for 3 years: 25.7% per annum

Small Ordinaries 1 May 2003: 1,519.0.
Small Ordinaries 1 May 2006: 2,965.9
Index performance for 3 years:  31.75% per annum

Still, matching an index isn't too shabby in the world of managed funds.


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## hardmoney (19 October 2006)

I would definitly prefer a margin loan over a line of credit.A margin call is nothing more than an enforced stoploss.If you dont act, then your lender/broker will and close down some of your exposure.

If you are on a line of credit, then it would be too easy to get lazy and just watch your portfolio tank down and down and  down .........etc. You will sit there like a dear in the headlights and someone else is gonna take all your money.

After trading for over twenty years I can you just one thing for certain, kill your losers and hold your winners.


HM


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## rozella (19 October 2006)

I couldn't agree with you more hardmoney.

I wasn't going to reply until I saw your post, as I have said this over & over on various threads.

The other point is....if we believe a particular share is good enough to buy, then why wouldn't we borrow against it, instead of some other unrelated asset.....or don't we think it is really a good buy, so we need to risk some other asset to back it up ?

rozella


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