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Getting Into the market

Discussion in 'General Investing Discussion' started by vovo, 4th Nov, 2008.

  1. vovo

    vovo Member

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    I have recently invested in the share market, got a few stocks and they are doing well, i bought in last week.
    I would like to get in more as i think the share market is generally undervalued.
    I have put in 5k so far and have another 5k cash ready to go. Keen on getting a 20k margin loan and keeping my Debt:Equity ratio at about 50% for a while then maybe gearing a bit more.

    Also considering getting a Protected Equity Loan, but these seem expensive but i think the market has enough room to move to cover this extra expense. I am considering one of these loans as i do not have collateral and this seems a way to get a 100k loan without collateral (will get some blue chips as well as a dark horse/long shot, might as well as the risk is low).

    What are my options? what i know about, i have considered, is there anything else i should consider?

    Also would i be correct in assuming that "if" shares are undervalued that i would get a greater dividend return and thus further negating the high interest charged.

    I am 23yrs old and earn 70K p.a. incl super, currently saving about $2500/month.

    Looking for Sage Advice, don't be scared to talk straight you won't hurt my feelings.

    All contributions appreciated
    ~vovo
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Make sure you understand exactly how the protected equity loan works and how much it would cost to get out of it if your situation or goals change.

    Most loans like these are for a fixed period and there will be penalties for breaking out earlier.

    Generally a margin loan is easier and more flexible in my opinion, and the lower gearing allowed means that you won't lose as much if things go pear shaped.

    "Keep things flexible" is one of my personal rules of investing (unless you can guarantee you will never need that money over the investment timeframe - eg Super fund).
     
  3. vovo

    vovo Member

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    I think i understand how they work.

    Roughly 13-17% interest depending on the share and time frame.
    I was thinking of doing a 4 year time frame and getting a first home owners bank account at the same time.
    To break out of the loan will be "5-10% of the value of the loan multiplied by the remaining years in the loan agreement"
    So some very rough maths here.
    -100k investment
    -15% variable Interest rate
    -15k interest repayments
    -5k dividends
    -1.5k franking credits

    Taxable ivestment income = 15-6.5=8.5k
    8.5*0.7=5.95k per year out of pocket. (if i get a pay raise in the next 4 years then it will 5.1k out of pocket)

    So i need the capital gains on my investment to increase by at least 6-7% per annum.

    Is my math wonky. Also i understand that you might not be able to claim all of the interest off tax but from what i see on Commsecs website so far, it does not differentiate between the loan interest and the capital protection.

    *NB- all figures used are not actual figures just used as an example will use a spread sheet to evaluate in more detail prior to jumping in.

    Thanks Guys.
     
  4. ashwright

    ashwright Well-Known Member

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    Hi,

    In terms of maths, you have 15% interest, and 6.5% dividends. So your capital return would need to be 15%-6.5%=8.5%pa to break even. This seems quite high. (All the numbers are before tax, which is what the investment really needs to perform)

    Or looking at it another way, you need to make more then 15% pa in dividends and capital growth to break even. Considering long term ASX200 is supposed to be 11.5%-12%. You would have to be doing quite well.

    Hope this helps,
    Ash.
     
  5. vovo

    vovo Member

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    is the 11.5-12% in the long term Capital Gains or is that Earnings including dividends and capital gains.
     
  6. jrc77

    jrc77 Well-Known Member

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    Capital protected Products

    Vovo,

    If you are having a look at capital protected products you might want to have a look at the Navra Capital Protected Growth fund.

    This is certainly not a recommendation (nor a sales attempt), but the fees and interest rate look significantly less than what you quoted for capital protected products.

    Regards,

    Jason
     
  7. vovo

    vovo Member

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    Hi Jason,

    Could you do me a big favour and please post a link thanks, been to the navra website, but can't find this specific product, neither can google for that matter.
     
  8. jrc77

    jrc77 Well-Known Member

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  9. vovo

    vovo Member

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    well i did get that far the first time, but fail to see where "the fees and interest rate" , i can find the fees, about 2.6% but not where the interest rate is mentioned. As far as i can tell it seems as though it is for people with available capital. I do not have any collateral / equity save for 5k in shares and 5k in cash, so would struggle to get a loan.

    is my understanding wrong. Thanks guys
    Vovo
     
  10. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, the Navra growth product is available in 80% LVR and 100% LVR versions ... you can borrow up to the full amount to be invested provided that you pass the servicability checks.

    The loan is not covered by that growth fund PDS - it is a separate product from BT I think. You would probably need to contact NavraInvest for more information about getting loan - at the moment they are targeting existing NFS clients only, so there's not a lot of information published about it.
     
  11. jrc77

    jrc77 Well-Known Member

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    At the launch it was said that the interest rate was 8.85%. Don't know how this is affected by recent interest rate decreases.

    Regards,

    Jason
     
  12. AsxBroker

    AsxBroker Well-Known Member

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    Hi,

    You might want to have a look at AXA North. It is different to the usual capital protected investments as it doesn't sell you out to cash like some others. No one is lending against it at the moment but very shortly...

    Vovo I hope you don't get iced...otherwise I'll have to buy you in Woolies and eat you!

    Cheers,

    Dan

    PS This is general information, before making an investment decision speak to your FPA registered Financial Planner.

    PSS Apologies to Vovo...
     
  13. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Most of the younger generation probably don't even know what an Iced Vovo is (or Iced Volvo as we used to call them). :rolleyes:

    Arnotts still sell them!
     
  14. vovo

    vovo Member

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    I am not originally from Australia, but i do know what an iced vovo is though, i doubt you could possibly make a sweeter biscuit.

    would you be able to get loans from financial institutions for most capital protected funds, or only if a deal has been set up between the fund and financial institution.

    What are other methods of accessing credit without/or very little collateral or equity.

    The Navra fund looks promising with a reasonable interest rate (based on 8.85% + 2.7% Management) and reasonable get out costs.

    What is a reasonable price for management of a managed fund. Is this fee generally worth it, ie. does a manged fund generally perform better than a diverse share portfolio by more than the management fee.
     
  15. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    That's kind of the million dollar question really.

    Many funds do not outperform something like a cheap index fund or ETF on average over time - so their higher management fees are not worth it.

    The trick is to find those that do regularly outperform (not just one year, but consistently).

    In generally I think up to 1.5% MER for an actively managed retail fund and up to 1% for a wholesale fund is reasonable. But if you can find a fund which charges (for example) 3% MER and consistently outperforms everything else by 5%, then you'd still be ahead. Low fees aren't everything - you've got to consider cost vs value.

    That being said, finding a fund that consistently outperforms everything else seems to be largely impossible.

    Be careful not to get sucked in by long term averages either ... a fund which has a spectacular year one year will have great long term averages for many years in the future ... even if they horribly underperform in subsequent years! I got sucked in with Platinum Japan a couple of years back for exactly this reason - which was one of the reasons why I created the Compare Funds website.
     
  16. Insight

    Insight Brisbane Buyers Agent

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    The short answer is no.

    An index fund which is a diverse portfolio has been shown to rank far above the 50th percentile of performance, I don't have the stats but would think 80th percentile and higher.. with the stars outperforming the index being comprised of lucky fools and gunslingers and a slice of real talent.. good luck telling which is which.

    So.. no is definitely the correct short answer :)
     
  17. try anything once

    try anything once Well-Known Member

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    Vovo

    I agree with the commentary about good fund managers who can consistently outperform the index in the future - they probably exist but if you are skilled enough to spot them then you probably are one of them:)

    I am not a fan of capital protected products. In a market which has just dropped some 40% it seems a long shot to me that the market will be below todays price 5 years from now - it has never happened before in the history of the markets that I am aware.

    another way of achieving some gearing you might want to think about is with Installment Warrants on the ASX 200. see link : Using instalments to leverage into the S&P/ASX200 on ASX
     
  18. vovo

    vovo Member

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    I agree with you which is why i am pretty keen to put a lot of money in now with the view to pulling it out in 3-4 years and getting a house. Also superseding every major crash the markets have rebounded significantly in the 12 months after the bottom has been reached. Question is when will we hit the bottom, if you know, do share.

    I am just looking at capital protection as a means of guaranteeing a loan, don't understand the instalments link, but will certainly research further.

    Cheers
    ~v
     
  19. johnnyb

    johnnyb Well-Known Member

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    I don't really understand why someone would want a capital protected loan, unless they want to be a totally passive investor who doesn't really care about the performance of their investment (e.g., set up loan, invest, walk away, come back in 5 years knowing that your worst loss is the interest payments on the loan).

    Assuming you have the funds to invest (i.e., you can access debt apart from via a capital protected loan) why wouldn't you invest in the same fund, but monitor the performance and exit it if the value drops below some predefined level (i.e., protect your capital, without paying a fee for it, and still maintain flexibility). Or invest directly into blue chip stocks and set up trailing stop losses.

    I've been reading threads on the Navra forum about their capital protected product, and I really feel like I'm missing something. Please explain? :)
     
  20. Chris C

    Chris C Well-Known Member

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    Tell that to those who were invested in the Japanese Nekkei nearly two decades ago - they still haven't got there money back:

    BigCharts - Interactive Chart for Japan NIKKEI AVERAGE INDEX(225)

    The only reason stocks will definitely go back up is if people deem them to be good investments that will generate good profits in the future.

    The current correction seems to at least partially to do with a bubble correction (especially in property) where people have been paying ALOT more than something is really worth on the basis this value will continue to climb regardless of actual performance as an investment.

    So with that noted don't expect things to bounce in any particular fashion back just because that's what they have historically done. If and how they bounce back will be based on fundamentals for the foreseeable future as the world has just had a big kick in the ass when it comes speculating on continued asset price growth regardless of performance. Some say there are more kicks to come...