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Borrowing to invest

Discussion in 'Shares' started by jeffery85, 7th Jun, 2013.

  1. jeffery85

    jeffery85 Active Member

    20th Jul, 2012
    Hi Everyone,

    I hope use are all having an awesome day.

    I have been a tad conservative with investing mainly investing in managed funds but i have been seriously thinking of borrowing to invest through an margin lender e.g. nab trade @ 7.9%.

    I have been managing my own super through super lite and done pretty well but i think so has everyone else this year i think. This has contributed to some of my confidence in the market. although i have lost some money over the years my first very few trades in my younger days was NHF (still around and done quite well) MGX ( still around but an industrial share far from his peak) DOM (brought out by kingsgate for almost half of the share price i brought it for) & ABC (i don't think i need to say any more). I think these experiences have made me cautious.

    I subscribe and listen to people e.g. barefoot investor, morning star, invest smart (free) etc and reflect on what they say; then i make a buying decision that i feel comfortable with. when i went to get financial advise about starting my super-lite i was told never borrow to invest in the ASX.

    Well un-fortuently i feel comfortable with gearing i brought my first house on my 18th birthday and the concept has done well for me over the years with some good taxation benefits.

    I guess what i am hopping for through this post is some experiences & thoughts on borrowing to invest?? is it a useful tool to improve financial security? or just a nightmare to keep on-top. I am a youngish fellow so have time on my side with investing & buffet states this is one of the most important things to have.

    I work in health so business is not my area but i really do love n live the asx a little & devote quite abit of my time daily researching.

    Thanks for contributing.


  2. Tropo

    Tropo Well-Known Member

    17th Aug, 2005
    Do not borrow to invest if you do not have a backup money to pay immediately if anything goes wrong with your investments.
    The lender will not wait for repayments and will ask for money straight away.
    Be also prepared to lose what you invested because this happens more often than not.

    Do not compare real estate with Stock Market...they are two different markets all together.
    Why don't you first try to invest your own spare money in the market for a couple of years and find out how good/ bad you are and how you can handle this?
    Gearing is a two way street. If you do not know what you are doing - you may experience the worse nightmare in your life.
    Buffet forgot to tell you, that you must be very knowledgeable and experienced if you are going to make money in the Stock Market.
  3. GregR

    GregR Well-Known Member

    13th Jul, 2009
    Berwick Vic
    Leverage can magnify BOTH your gains and your losses.
    If you are confident of the market direction over time, then leverage will enable you to purchase a greater allotment of shares/property/etc.

    The more important question is what security you use to finance this.
    Obviously margin loans are one form and just secured against the share portfolio themselves. The cost is higher than some other forms as the type of security carries a greater volatility than say residential property, however the risk is a margin call if the price drops below the lending ratio associated with that share. You get very little time to react and if you cannot quickly provide the funds, shares are sold which compounds the loss of selling into a falling market. As Tropo suggested, make sure you have a buffer immediately available or use conservative lending ratio's. The other limitation with margin lending is that the lending ratio can be quite low.

    A potentially lower risk finance option is to use a residential property as the security and refinance that to extract equity via a term loan or line of credit and use that to purchase shares. There is no possibility of margin calls as the security is not tied to the share price. It can also be obtained at far lower interest rates than margin loans. The inherent risk is that the finance is tied against a residential property, so if you cannot afford the interest repayments, you could stand to lose the equity in the property. An additional benefit is that you can effectively gear 100% of the shares as it can all be borrowed funds.

    I would not suggest you use both forms of lending together as Storm Financial clients found to their cost, using equity from their homes then using margin loans on top of that to gear up excessively. They made incredible money while the share market went north but lost heavily and indeed their homes when the margin calls kicked in on a falling market.

    Good luck with it.
  4. jodie123

    jodie123 Active Member

    15th Aug, 2012
    Brisbane, Qld
    Essentially it's the same with everything; don't risk money you can't afford to lose. Sounds like you've got a bit of confidence growing which is great, but make sure you keep it in check and don't blow everything on a hunch. Good luck.