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Debt Recycling

Discussion in 'Investing Strategies' started by Investaholic, 24th Aug, 2019.

  1. Investaholic

    Investaholic Member

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    Hi all,

    Hoping to gain some wisdom as someone who is fairly new to the investment game.

    Currently have our PPOR, paying interest only and storing the principal in Offset Account. Have just had our first baby, so we changed to IO to have the flexibility with our cash. Aside from our home, we do not have our money invested anywhere else, apart from of course Super. I have been in the 'research phase' for about 18 months now (both property and shares) so I understand the game somewhat, though as our baby girl has come into the picture and our income is halved for the time being (I'm currently sitting on approx. 92,000 before tax) I am becoming increasingly confused regarding whether to leave our money sitting in the offset (we have around a year's worth of living expenses sitting in the offset - I'm good with only having 6 months), or whether to go for a more 'aggressive' strategy and have our cash working for us a bit better.

    A while back I had a chat with a fairly reputable financial advisor regarding debt recycling, which worked really well with our plan and goals. However, the fees were quite expensive (the initial set up cost and ongoing management fees) and I am wondering whether anyone has a. any experience with debt recycling which could help me to decide whether to move forward with it, or b. has successfully implemented the strategy themselves? We are looking for something fairly passive and simple (nothing exciting), which can become automatic, and am wondering whether a simple 'invest in ETF/LIC' approach will have much the same long term returns, minus the management fees? Or whether the management fees in this case (the complexities of having an effective debt recycling strategy) are worth it?

    Thanks all! Looking forward to hearing your views.
     
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  2. twisted strategies

    twisted strategies Well-Known Member

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    first of all , all LICs and ETFs have management fees , but they are taken out before you get a distribution ( dividend ) ( please be careful some LICs and ETFs might not ever pay a dividend )

    now debt recycling can be attractive until there is a credit crunch ( hence the very old joke about banks lending money to folks who don't need to borrow .)

    markets ( including credit availabilty ) are cyclic , and this is somewhere near the top for shares ( and credit availabilty ) it would be fair to expect this trend to reverse in the mid-term ( say 12 months to 5 years )

    however cash in the bank is not currently your friend either ,( so the stock market is in TINA , There Is No Alternative , for fund managers who MUST park cash wisely )

    potential 'left field ' investments are reducing your debts , value-adding to your home ( i put a large solar array on mine so sell excess power to the grid ... but with current tech advances would probably go OFF-grid next time )

    the better LICs and ETFs are OK , but i am very 'old school ' and like to keep my liabilities very low ... so will be unlikely to be a 'forced seller ' ( of either property or assets )

    but please feel encouraged to improve your financial education

    cheers
     
  3. Hodor

    Hodor Well-Known Member

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    Nope, not worth it IMO. The debt recycling strategy doesn't make high fee rubbish any more attractive.

    I don't see debt recycling as a complex strategy. You basically need to decide on what kind of risk you are willing to take on (loan size), most appropriate investments, how often you will review/top up loans, then stick to the plan through thick and thin. Making sure your accountant is happy with the flow of funds for tax purposes is also important.

    We used some borrowings to kick start a portfolio, at this time we aren't planning to borrow more for investments. We currently prefer to use earnings/dividends to add to investments along with paying down non-deductible in roughly equal portions. Post a crash we would consider borrowing more. It has been quite successful for us.
     
  4. twisted strategies

    twisted strategies Well-Known Member

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    a loan AFER a big downturn , is an option for me also but i suspect my normal aversion to such an activity will persist , and will fund any extra buying out of cash reserves and opportunistic sales ( if any ) ,

    i started investing because i had inherited a reasonable amount of cash and realized in late 2010 bank deposits weren't going to grow enough for my plans to have any chance to succeed in the 10 year target period , so didn't need to 'bulk up ' the finances , which might have been a blessing in hindsight it stopped my having big positions in most shares ( except MQG which i averaged down on heavily but took out plenty of profit on the recovery of the share price )
     
  5. Hodor

    Hodor Well-Known Member

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    I should add it would be better for us to pay down and borrow the same amount from a numbers point of view. In the name of laziness and what we are comfortable with we are currently not acquiring or restructuring debt.
     
  6. Investaholic

    Investaholic Member

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    Thanks both!! Really appreciate the advice. Hodor - you make debt recycling seem so simple ha! Though I guess when you really think about it, it really is simple. I think I'll have a chat with my accountant and see what he thinks about starting it up. The management fees to get it set up seem absurd to me, and I know that they will ensure that my money is put into the right allocations, though part of me wonders whether just putting it in ETFs or LICs will yield similar results, minus they exorbitant management fees.
     
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  7. Terryw

    Terryw Well-Known Member

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    What management fees are you referring to?
     
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  8. twisted strategies

    twisted strategies Well-Known Member

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    would you be best of with frequent ( say 6 monthly ) balancing the allocations ??



    i don't rebalance ( unless absurdly warped ) but rather try to inject cash in the sector not travelling well .

    but as regular readers would know i have all but abandoned interest-bearing securities , currently , they mostly matured but i could not find sensible replacements , so have veered towards extra REITs ..
     
  9. Hodor

    Hodor Well-Known Member

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    It is very simple. You are borrowing money to buy income producing assets and using the income to pay down your non-deductible debt.
    You can make it sound really fancy if you are trying to confuse people to justify your fees.
    A mortgage broker will find you the money for zero cost.
    You accountant will advise what they require (I believe) in terms of flow of funds etc.
    What you invest in needs to produce income - you can decide on what this is, pay a once off fee for advice or pay ongoing fees.

    Hopefully it is obvious that debt carries risks, amplifying returns and losses.

    Why do you need to pay these fees? What are you paying for? Financial planners don't have some secret that you will never understand.

    Are you referring to asset allocation? This is simple, Vanguard do it for a few points (0.01% is a point) if you want to have zero decisions past deciding what is right for you. If you really are totally unsure pay a once off fee to have a discussion and work out the best allocation for you, you shouldn't need to pay an ongoing fee for this IMO. People I know have reasonable allocations for their situation however the financial planner has implemented it with a large number of rubbish high fee products that effectively guarantee under-performance, why? I can only speculate.
     
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