Join our investing community

20K to spend in uncertain times

Discussion in 'Exchange Traded Funds (ETF)' started by Bonnie, 2nd Apr, 2008.

  1. Bonnie

    Bonnie Member

    Joined:
    2nd Jan, 2008
    Posts:
    16
    Location:
    Brisbane
    Hello

    We have just borrowed 20K to start our core portfolio which I was going to split between a SPDR and a more diversified Vanguard choice, but now have stage fright! Part of me just wants to jump in and do it while the other part wants to wait and see how far the market will fall...however, although not a lot, we will have to start paying interest on this money and that becomes an added expense in the mix.

    What would you do? In some ways I am happy to buy now and cop any future fluctuations just to get started, but will hate myself in a couple of months if things keep going the way they are. It always comes down to that illusive gift of picking the market doesn't it. I guess dollar cost averaging is also a thought but probably messy with broking involved.

    Anyway, would love your thoughts - just mulling but need to take some action soon, even if it is inaction.

    Thankyou

    Bonnie
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,623
    Location:
    Sydney, Australia
    What is your investing timeframe ? Are you planning on using this money for a particular purpose (eg house deposit) in the short-medium term ?

    If you plan on set-and-forget ... I'd tend to go in sooner rather than later if you've already committed to paying the interest ... no point waiting and incurring the expenses for no reason. The markets could drop further, or we could have just seen the bottom - who knows ??

    If you aren't fully committed to the loan yet - you may want to wait until the current volatility eases and the market starts trending up again ?
     
  3. Tropo

    Tropo Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    3,396
    Location:
    NSW
    Investing right now sounds to me like trying to catch a falling knife.:eek:

    Any future ‘fluctuation’ can be disastrous in some cases.
    Take your time and educate yourself.
    Market always will be in the same place in the future waiting for your money! ;)
     
  4. Rod_WA

    Rod_WA Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    324
    Location:
    Inglewood, WA
    I'm a fan of 'hedging your bets' in uncertain times.
    Half the market sells and half the market buys.
    So why not commit half now and half later?
    That way:
    - If the market falls then you'll only suffer half the loss;
    - If the market rises you'll be in there for the ride.

    Regarding fees, it's not a big concern; let's say you chose the SPDR and Vanguard.

    1. Vanguard charge you via the 'buy/sell spread' (which is the difference between entry and exit prices). Whether you put in $5k twice or $10k once, you'll pay the same amount (assuming you start with $5k and not a smaller amount since $5k is a Vanguard threshold).
    2. SPDR is an ETF that you buy through a broker. Assuming you pay $30 a trade (eg ETrade, $30 will be the same for $5k or $10k, since most % commissions will kick in around $30k); If you were to buy $5k now, then $5k later, then you'll be up for $60 commission, if you do $10k all at once, you'll be up for $30. That is, $30 difference. Nothing in the scheme of things.
     
  5. Rod_WA

    Rod_WA Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    324
    Location:
    Inglewood, WA
    By the way, yep, the sooner you get in the sooner you pay interest.
    But also, the sooner you get in the sooner you get dividends.
    Dividends can be used to help pay the interest, or you can use them to help pay down other non-deductible debt.

    It's entirely your call. Tropo will disagree, but I'm very comfortable being invested in the ASX right now. My dividends continue to pay me, and the market is about 9% above its lows of last month (maybe another bear market rally, maybe the start of a recovery, I don't care).

    Are you in it for the long haul? And do you plan to top up your investment regularly? Do you plan to reinvest your dividends, or take the divies as cash?
     
  6. Tropo

    Tropo Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    3,396
    Location:
    NSW
    I'm a fan of 'hedging your bets' in uncertain times.
    Half the market sells and half the market buys.
    So why not commit half now and half later?
    That way:
    - If the market falls then you'll only suffer half the loss;
    - If the market rises you'll be in there for the ride.



    Hedge.

    Making an investment to reduce the risk of adverse price movements in an asset.
    Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
    An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations.

    Investors use this strategy when they are unsure of what the market will do.
    A perfect hedge reduces your risk to nothing (except for the cost of the hedge).

    Hedge
     
  7. Rod_WA

    Rod_WA Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    324
    Location:
    Inglewood, WA
    Yeah I know what a hedge is.
    It's also an arrangement of bushes, shrubs or trees to form a natural barrier structure.

    'hedge your bets'
    from
    hedge bets - Idioms - by the Free Dictionary, Thesaurus and Encyclopedia.

    to try to avoid giving an opinion or choosing only one thing, so that whatever happens in the future you will not have problems or seem stupid.

    Kind of like putting half your cash in now, so you don't feel stupid by:
    - doing nothing now if the market rises, or
    - going in fully if the market falls.

    So if a perfect hedge reduces risk to zero... how do you quantify the risk of not being in the market, in case it rises? The risk is that you miss out on any gains.
     
  8. Insight

    Insight Brisbane Buyers Agent

    Joined:
    24th Sep, 2006
    Posts:
    229
    Location:
    Brisbane
    I would start with assumptions and goals..

    A piece of borrowed wisdom I like is .. the magic question...

    'Will this bring me close to my goal?'

    here is some performance data for the Asx200

    If you have trouble with the idea of capital loss then the standard deviation of the returns is an important indicator for SANF.
     
  9. Tropo

    Tropo Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    3,396
    Location:
    NSW

    First you must know that market is rising (temporary up swing means nothing).
    If your assessment of rising market is correct you’ll benefit from it. If not you’ll lose.
    To minimise your risk the ‘trick’ is to ... know when you should be in the market and when you should be out of the market.
    As for the hedging, below is another view on this subject.
    To hedge or not is the question
     
  10. Bonnie

    Bonnie Member

    Joined:
    2nd Jan, 2008
    Posts:
    16
    Location:
    Brisbane
    Thankyou for your replies - I knew I could count on a variety of views!

    We are investing for the long term - 10 years plus with dividends reinvested and regular small top-ups. We are in late 30's/mid 40s so the idea is to start building a basic, non-fuss portfolio for retirement. The loan is against an IP. It has been a few months in the getting due to various holdups but now its actually in the account so have to make a decision what to do with it - oh the dilemma!

    I appreciate all your points of view and might sit on it for another couple of weeks and see what happens.

    Thankyou again - is good to have others' perspective and ideas.

    Bonnie
     
  11. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
    Posts:
    1,367
    Location:
    Melbourne, VIC
    Bonnie, if you have a 10 year plus time frame, just get in now.. in 10 years time the market will be higher than today.

    Even if you got in just before the 87 stock market crash, 10 years later you would have still enjoyed good profits.

    Its better to trade against the flow, as fear offer opportunity to get quality investments at a discount. Waiting for 6 months might mean that a quick recovery takes place and you miss the boat and then have to pay top dollar to get in.

    Your getting in AFTER a major correction, so I don't see how you can go wrong over the long term.

    The market has already recovered, as it bottomed at 5200 and now is coming up to 5600, thats about a 8% gain for those who had the balls and entered the market in all the panic selling. Are you going to wait for the market to raise even more before you get in?
     
  12. Rod_WA

    Rod_WA Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    324
    Location:
    Inglewood, WA
    Hi Bonnie

    Do you have a mortgage on your PPOR or any other non-deductible debt?

    If not, then congrats!

    Since you mentioned dividend reinvestment...

    Points against DRPs:
    - it may cause a cashflow problem, since you don't receive cash dividends but you still have monthly interest costs.
    - you'll still need to pay tax on the dividends each year - even though you didn't 'see' them (although franking helps a bit).
    - capital gains calculations become a bit awkward, since each time you get shares in lieu of a cash dividend it's a new purchase for CGT
    - you might like to read up on 'debt recycling' on this forum, since there may be other ways to manage the dividends to accelerate the reduction of non-deductible debt.

    In favour of DRPs:
    - the direct investment compounds
    - requires less active management
    - tends to dollar cost average, since more shares are allocated when the share price is subdued (assuming consistent or growing dividend in cents per share)
    - some direct share holdings offer a discount for the DRP price compares to the traded share price - although this won't apply to an ETF.
    - no brokerage generally.
     
  13. dkmc

    dkmc Well-Known Member

    Joined:
    24th Aug, 2005
    Posts:
    165
    what if I told you you can get a guaranteed 9%

    ----- pay back your loan and dont invest should be an option

    with interest rates at 9%
    whats the point borrowing

    you add a lot of risk for minimal gain

    If you expect long term growth to be 10% after taxes and fees.

    Is there much point?
     
  14. Rod_WA

    Rod_WA Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    324
    Location:
    Inglewood, WA
    Boo hoo dkmc, Bonnie is keen on an ETF and Vanguard! She's an indexing fan, and she's being poo-poo'd by the forum's greatest indexing advocate.

    I challenge anyone to suggest that investing now is not a good idea, with a 10 yr lock-it-in-Eddy approach. What could happen?

    1. The market rises. You win (you need less than 2% growth in 12 months to be ahead after interest costs and tax - assuming ASX200 dividends and franking remain constant on 2007 numbers).

    2. The market goes nowhere and is at 5600 at end of 2008. Your holding costs amount to about $400 net, so you're down by a measly 2% (the typical daily gyration of the market! Tip: buy on a down day!).

    3. The market falls to 5000, and faffs around there for 6 months. You feel a bit sick, but nowhere near as sick as someone who invested at 6800! (hello? you can get the ASX for 18% less than it was 4 months ago! Where's the SALE sign!) The market recovers late 2008 or into 2009, and pushes past 6000. If we get to 6000 by year's end, you can have 7% growth in 9 months, plus about 4% highly franked dividends, borrowed at 9%, giving you a net return of 6% in 9 months after interest & tax on the divies.

    3. Bugger it, even if the market spends 12 months at 5000, but the ASX yield hangs at 4.5% (85% franked), then:
    - your capital is down by 10.5%
    - at 9% LOC rate the net outflow is under $400 (interest & tax out, divies & franking in; $20k loan), so you're down another 2%.
    So you're down 12.5% or thereabouts. That's $2500 lost.

    4. You buy now, and sing La-La-La for ten years. The market is then around 10,000, and pays you twice the divies that it does now. In 2018 you still pay interest on your LOC at 9%, but you get about $400 cash in pocket after paying interest on the $20k and tax.

    Now you might think I'm a bull. I may be, but I know that the market will drop 10, 20, 30% at times; it can be downright ugly. But I'm investing for my future, 20 years from now.

    Still, I did say maybe half now and half later - so I was being rather conservative by my standards!
     
  15. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
    Posts:
    1,367
    Location:
    Melbourne, VIC
    Great post Rod.. I totally agree!

    Look at the nice run the market had yesterday.. today should continue to go up as well.

    I believe we have seen the worst now. Sure we still may get volatility, but I doubt we will see the market below 5200 again.
     
  16. Mark Laszczuk

    Mark Laszczuk Well-Known Member

    Joined:
    16th Aug, 2005
    Posts:
    793
    Location:
    Brisbane
    Bonnie,

    If I had to pick only one person on the forum for whom I would go to for advice, then Tropo would be that choice by a million miles. He has consistently posted excellent information right from the beginning and he really really knows his stuff.

    Mark
     
  17. Rod_WA

    Rod_WA Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    324
    Location:
    Inglewood, WA
    Thanks for the vote of No Confidence, Mark.

    Tropo is a trader. He is interested in the current trend, not the long term rising nature of the market. But I really enjoy our banter, I appreciate his frankness and opposing view. Yep, I agree he knows his stuff.

    But surely, since Bonnie has already indicated that she's interested in buying and holding, getting her toes wet with $10k is not a dangerous step. In a previous post she has indicated that she has only $30k owing on an IP, and $120k owing on her PPOR. So the $10k is not going to jeopardise her financial security, with such substantial property equity. On the other hand, investing $10k in shares might encourage her to more involved in her self-education.

    Is Navra advocating that we should be out of the market now, or is Navra's Aus Share cash ratio very low?

    Are Navra Financial Services telling their clients not to invest in shares right now?

    Or are you recommending to clients to consider buying in this dip?

    Navra’s three key elements to a successful investment structure are:

    1. Assets should produce an income
    2. Assets should achieve capital growth
    3. You should be able to utilize the collateral value in your assets

    The Navra Philosophy is essentially to use each dollar more effectively by using all three investment mediums – Shares, Property and Cash for maximum efficiency.


    Bonnie already has property and cash. She wishes to dabble in shares. As I read it, borrowing a small amount in a LOC to buy shares satisfies 1, 2 and 3 above.

    Tropo, are you short or long the SPI right now?
     
  18. Mark Laszczuk

    Mark Laszczuk Well-Known Member

    Joined:
    16th Aug, 2005
    Posts:
    793
    Location:
    Brisbane
    Rod,

    Don't take it personally, it was a comment on my personal preference, not an attack on anyone else. Mine and Tropo's strategies (as far as shares go) are like chalk and cheese - he's a trader and I prefer long term buy and hold, ala Warren Buffett.

    But it doesn't stop me from taking in everything he says, because he's got a proven track record, posts consistently excellent information, great articles and really knows the game inside out, backwards and forwards. Like I said - If I had to pick only one person...

    Mark
     
  19. Tropo

    Tropo Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    3,396
    Location:
    NSW
    "Tropo, are you short or long the SPI right now?"


    I do not trade futures :eek:(maybe one day). I trade FX.;)
     
  20. Rod_WA

    Rod_WA Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    324
    Location:
    Inglewood, WA
    Fair enough, but if it was not an attempt to undermine my comments, you could have said something along the lines of, "I agree with Tropo. He knows his stuff... if he says to sit on the sidelines right now, then that's probably good advice."

    Since when did "forum" and "one person for advice" sit together? The whole point of the forum is to provide mixed opinion.

    A study in subtlety, I suppose.