Conservative Margin Lending?

[thecaptain]

Hi all,

This is my first post. Great site - lots of good info!

After a few years on the sideline im looking at getting back into the share market with (for the first time) a margin loan. I'm looking for some feedback on my stratagy:

My investment 200k
Margin loan 300k
Total 500k

500k to be split evenly between 10 shares (which will be various blue chip shares all having LVR's of 75% with CommSec)

My LVR would be 60% - pretty conservative i think.
I will have cash available to service loan if the market goes south.
And am planning on using dividents to offset some of the interest on the loan.

Any suggestions to my stratagy?

 

[drsmith]

I will have cash available to service loan if the market goes south.

In what form is this cash and how much ?

Margin lending interest rates are higher than deposit rates so it is better to use this cash as well to purchase your $500k portfolio and borrow less.

 

[thecaptain]

In what form is this cash and how much ?

100k in a high interest savings account earning 5%. However i plan to use this money on a separate investment (in property). It's renovation money that will be gradually used over a 12month period.

 

[So_Cynical]

I wouldn't call at 40% equity / 60% debt strategy conservative, even if it is put into ASX 50 stocks.

 

[Judd]

Hi all,

This is my first post. Great site - lots of good info!

After a few years on the sideline im looking at getting back into the share market with (for the first time) a margin loan. I'm looking for some feedback on my stratagy:

My investment 200k
Margin loan 300k
Total 500k

500k to be split evenly between 10 shares (which will be various blue chip shares all having LVR's of 75% with CommSec)

My LVR would be 60% - pretty conservative i think.
I will have cash available to service loan if the market goes south.
And am planning on using dividents to offset some of the interest on the loan.

Any suggestions to my stratagy?

I hate the acronym LVR when it comes to shares. The margin lender has an LVR against shares which are on its approved security list. You are gearing not LVRing. And you propose to gear at 60%. And you consider it is conservative.

Bear in mind that some people just before things went pear shaped for a bit "conservatively" geared at 50% against blue chip shares including the CBA and other high LVR shares. They got a margin call.

Safety is not gearing above 20% and starting to sweat a little on how to get the gearing down if it reaches 30%.

But, but if you have cash to put in should things go south, you are not really geared to that extent in any event.

However, should you wish to be all hairy chested, tearing sheep balls off with your teeth, go for it.

 

[drsmith]

100k in a high interest savings account earning 5%. However i plan to use this money on a separate investment (in property). It's renovation money that will be gradually used over a 12month period.

In that case use it to purchase the shares and borrow $200k instead of $300k. This will reduce your overall gearing to 40% and your net interest cost.

You can then draw down the $100k from the margin lending facility as you renovate. Note however that once these funds are spent on property renovations (regardless of the starting point) they obviously cannot be applied to cover margin calls in a falling market.

Another point to consider is cashflow from all sources. If this is high relative to the interest on the loan then over time the loan will be paid down quicker and a higher initial gearing can be tolerated. I generally would not gear a margin facility beyond 30% and this is with cash flow from an alternative source such as salary income to reduce the loan over time.

If you have access to credit from equity in property this is a better source of borrowings as the interest rate is typically lower and you don't have to worry about margin calls in a falling market.

 

[drsmith]

However, should you wish to be all hairy chested, tearing sheep balls off with your teeth, go for it.

Slightly off topic but as a lad in high school I can recall an ag-science teacher that did just that.

He slit the ball bag of a lamb with a knife and in turn popped each testicle out, bit it off and spat it out with military precision.

I won't go into the details of a class mates attempt at it as that was, well, somewhat more gruesome.

I cannot confirm whether or not the teacher was hairy chested as he had a shirt on.

Sorry,
Back to normal transmission.

 

[Knobby22]

Slightly off topic but as a lad in high school I can recall an ag-science teacher that did just that.

He slit the ball bag of a lamb with a knife and in turn popped each testicle out, bit it off and spat it out with military precision.

I won't go into the details of a class mates attempt at it as that was, well, somewhat more gruesome.

I cannot confirm whether or not the teacher was hairy chested as he had a shirt on.

Sorry,
Back to normal transmission.

Gross

Regarding margin calls, play railroad tycoon. It is amazing how you can lose your wealth quite quickly, I'm sure many felt the same thing during the latest crash.

 

[geea]

I'm in a very similar situation as to what you have asked about. I have a few more than 10 shares to share the load though. As long as you have access to $$$ in case things head south i reckon its a good strategy. All the interest is tax deductable which helps aswell.

Geea.

 

[wayneL]

1/Proposed gearing could be seen as conservative with a robust trend trading system with relatively lowish drawdown.

2/On a buy and hold basis.... well, I would read Taleb first.

<edit to add - On second thoughts on point one, it's still not conservative, but manageable if one knows what they are doing.

Read Taleb anyway>

 

[drsmith]

Gross

What did you think happened to lamb before it was marinated ?

Regarding margin calls, play railroad tycoon. It is amazing how you can lose your wealth quite quickly, I'm sure many felt the same thing during the latest crash.

Perhaps that ag-science teacher still had a shirt on his back because he resisted the temptation to get involved with margin lending.

 

[Wysiwyg]

Risk per position and position sizing.

 

[drsmith]

I'm in a very similar situation as to what you have asked about. I have a few more than 10 shares to share the load though. As long as you have access to $$$ in case things head south i reckon its a good strategy. All the interest is tax deductable which helps aswell.

Geea.

Better to use those $$$ instead of borrow as noted above. Also, tax deductability of interest should never be the primary reason behind investment.

 

[Sir Osisofliver]

Hi all,

This is my first post. Great site - lots of good info!

After a few years on the sideline im looking at getting back into the share market with (for the first time) a margin loan. I'm looking for some feedback on my stratagy:

My investment 200k
Margin loan 300k
Total 500k

500k to be split evenly between 10 shares (which will be various blue chip shares all having LVR's of 75% with CommSec)

My LVR would be 60% - pretty conservative i think.
I will have cash available to service loan if the market goes south.
And am planning on using dividents to offset some of the interest on the loan.

Any suggestions to my stratagy?

What is your view on the market? This is crucial to your gearing decision. I have the exact numbers around somewhere but I'm too lazy/busy to fish them out. Roughly (and from memory) speaking therefore...

If you are geared at 75% ($25,000 of your own money in a $100,000 portfolio). The Market (or more correctly the value of your shares held in the margin loan) needs to fall between 6 and 10% before you are in a margin call.

If you are geared at 50% ($50k of your own money in a $100K portfolio), the market needs to fall between 32 to 36% before you are in margin call.

If you are geared at 25% ($75k of your own money in a $100K portfolio), the market needs to fall 75 - 79% before you are in margin call.

Given that our market has seen some substantial rises from it's bottom are we more or less likely to have a corrective pattern in the near term?

Is it therefore in your best interest to gear heavily (yes I consider a 60% gearing to be aggressive), at this time?

Cheers

Sir O

 

[geea]

Better to use those $$$ instead of borrow as noted above. Also, tax deductability of interest should never be the primary reason behind investment.

In my own case i have very little $$$ not invested. I have however made sure i can meet any margin calls should they arise.

 

[drsmith]

In my own case i have very little $$$ not invested. I have however made sure i can meet any margin calls should they arise.

How ?

 

[geea]

How ?

I have a very high income and i also have credit facilities. I've calculated i could deal with a 60% drop in the market. ( i hope this isn't nessecary)

Geea

 

[Sir Osisofliver]

I have a very high income

Enough to get you out of a margin call in the required 24 hours? You do know how margin Loan works in the event of a margin call right? Most margin lenders allow a 10% buffer of the value of the portfolio. A million dollar portfolio therefore has a $100,000 buffer attached to it. If you exceed your security value and enter into a margin call, you are then required to pay the call within 24 hours.including bringing the account completely out of the buffer. Unless your portfolio is very small it would be difficult for your job to provide you with the ready cash to pay the call.

and I also have credit facilities.

Um margin lenders would not accept a credit card. I ASSUME therefore you are talking about a line of credit, overdraft facility or other means of credit other than a credit card that you can access quickly. In which case I would say that keeping some of your borrowing capacity aside as a reserve in case of emergency is a wise choice and makes for a much more secure long-term strategy.

If you are talking about a credit card however because it is an unsecured loan to you your margin lender would not accept payment in this way. You would have to draw a cash advance from your credit card, deposit and transfer the funds into your Margin Lenders account. Needless to say if you are doing this you are in BIG TROUBLE.

I've calculated i could deal with a 60% drop in the market. ( i hope this isn't necessary)


Geea

Cheers
Sir O

 

[cutz]

I have a very high income and i also have credit facilities. I've calculated i could deal with a 60% drop in the market. ( i hope this isn't nessecary)

Geea

FWIW i wouldn't bother with a margin loan, the banks charge what i consider to be an excessive amount of interest for a safe loan, i say safe because it's safe for the banks, they can dump everything and recoup their cash at the blink of an eye. Check out the storm thread to see what i mean.

If your really do have a high amount if income you can normally negotiate with the banks to give you a line on favorable terms ( i assume you own a home).

 

[thecaptain]

1/Proposed gearing could be seen as conservative with a robust trend trading system with relatively lowish drawdown.

2/On a buy and hold basis.... well, I would read Taleb first.

<edit to add - On second thoughts on point one, it's still not conservative, but manageable if one knows what they are doing.

Read Taleb anyway>

Can you expand on why a buy and hold basis wouldnt be advisable?

(Im doing some reading on Taleb!)