Am I thinking too small? / cash flow to reduce non-deductible debt

Discussion in 'Share Investing Strategies, Theories & Education' started by NG., 22nd Nov, 2017.

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  1. NG.

    NG. Well-Known Member

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    I guess we are in a low credit environment in terms of rates.

    I am considering buying some ETF's, blue chips through credit. Will borrow this via resi investment rates at around 4.5%, with the view to ramp up holdings (given the scenario) through margin lending (circa 5-7%?)

    I guess where I am looking to go with this mindset is, gear through aforementioned loans, ideally the divvies will cover the loan interest. Claim the interest come tax time along with franking credits too.

    come tax return, chuck this into my non-deductible loan. rinse and repeat

    WHY: been watching a few passive income videos on youtube, and understand that I need additional income sources to maximise income without myself being involved. Hoping this is a strategy to assist in knocking down my non-deductible debt

    RISKS:

    - I believe growth is the end game in terms of investments. Am I thinking too small and worrying about the non-deductible debt component whereas the bigger picture is the capital growth or LOSS at risk?

    - Not finding a stock that will pay above my current & future interest rates?

    - divvies being paid on a quarterly basis versus loan repayments being charged monthly?

    Thoughts?
     
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  2. Hodor

    Hodor Well-Known Member

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    Plenty of people implement a similar strategy to what you are proposing.

    When you throw money into the non deductible debt you might think about borrowing the same amount again to purchase more with what will be deductible debt. This will increase your holdings yearly and the rate at which you pay off the deductible debt.

    Think about how much you want to gear, especially with callable debt, long term high margin strategies tend to unravel. This would be the first item on the risk list for myself.

    Read about lump some investing vs dollar cost averaging (DCA), this might be relevant to you if you borrow a large amount at once.

    Compounding and time are your best friends.
     
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    This is just debt recycling. If you think share prices will go down it may not be a good idea...
     
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  4. Btaylor

    Btaylor Well-Known Member

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    I too am considering this strategy. You just need to make sure you have your loans structured properly so that the investment loan amount is completely separate from your PPOR loan otherwise the ATO won't let you deduct it.
     
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  5. Hosko

    Hosko Well-Known Member

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    I'm always interested in DCA as that is spruiked incessantly by planners. I've never made the time to do any calculations as to which is better.
    To take an extreme current example if you DCA average into Bitcoin you would be behind than if you had put a single sum in 2 years ago.
    I'd be keen to see some data on something like a CBA or WOW which have a longer history of ups and downs. Of course the answers will depend on if the stock has gone up over history and the entry point chosen........
     
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  6. grinners__

    grinners__ Member

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    From a purely mathematical point of view, dollar cost averaging is (on average) worse than buying all at once, given that (on average) shares increase in value over time.
     
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  7. twisted strategies

    twisted strategies Well-Known Member

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    that given is NOT guaranteed

    witness the ASX ( XJO ) is still well over 500 points below pre-GFC records ( in 2007 and 2008 )

    in fact in US dollar terms the ASX market capitalization the market has SHRUNK since the GFC ( but did peak higher in 2011 despite the ASX being in a correction at the time )

    i was lucky ( as a novice ) buying as much as i did in 2011 WBC and MQG each $20 a share ( may you be so lucky also )

    another point is in 2011 i inherited roughly $500K i had a choice of big or small buys , others may not be so blessed ... if say $2K a year is all the free cash you have ( it is still an important decision to you and should be treated as such )

    also big buys MIGHT cause you to lose sleep over it , money is very easy to lose , but normally very hard to earn back .

    what tactic that is good for YOU , is usually the best choice for you .

    i ( normally ) preferred small , multiple buys in a sliding market because

    1. i was a novice ( and aware i was learning on the run )

    2 . 2011 was a nasty dip ( but not a real crash ) that could easily turned into a real crash ( of 1987 proportions .. aka hardly a buyer in the market )


    Australia S&P/ASX 200 Stock Market Index 1992-2017 | Data | Chart
    ASX 200 increased 17 points or 0.28% to 5994 on Friday December 8 from 5978 in the previous trading session. Historically, the Australia S&P/ASX 200 Stock Market Index reached an all time high of 6828.70 in November of 2007 and a record low of 1358.50 in November of 1992.
    history-chart.png
     

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  8. twisted strategies

    twisted strategies Well-Known Member

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