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LOE in a falling market

Discussion in 'Investing Strategies' started by moonbeamzz, 16th Aug, 2006.

  1. moonbeamzz

    moonbeamzz Member

    Joined:
    8th Aug, 2006
    Posts:
    23
    Location:
    Melbourne, Vic
    Not sure if this is the right place to put this little discussion item however here goes. There seems to be a 'Catch 22" situation emerging in that we have a margin loan, capitalise the inerest and are following the LOE strategy. However with a falling unit price (such as Navra funds at the moment), dividends cannot be used for living expenses but must be reinvested to maintain the margin level. Have read lots of discussion on income funds but without capital growth you run a real risk of 'trading water' or going backwards. Ok in the short term but scary in the longer term. Our understanding is that income is great 'cash is king' and that income we live on i.e. the dividends to pay our loans (loans on IPs and PPOR) and living expenses but some capital growth in the form of rising unit prices is part of our life blood to maintain our LVR. Appreciate others thoughts/strategies on this subject.
    Cheers
    Moonbeamzz
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    You are never going to get growth all the time, indeed there will be years when your entire portfolio goes backwards. However, this all averages out, and it should start increasing again as the markets move through their cycles.

    The trick is you need several things to make LOE work:

    1. a broad enough portfolio (ie multiple properties and fund/share investments) to ensure you aren't held ransom by a single poor performing asset or asset class

    2. enough cash available to keep you going through tough times while you wait for the markets to pick up again

    3. a low enough LVR to ensure that you can afford for it to increase in a down year without facing a margin call

    If you aren't in this position, then I don't think you are ready to live on equity.
     
  3. pudsa

    pudsa Well-Known Member

    Joined:
    19th Oct, 2005
    Posts:
    55
    Interesting discussion, can understand Moonbeamzz's concern but your points are well made Sim. The bottom line appears to be that you need a very strong asset base to make LOE work effectively. The question is what constitutes a 'very strong asset base' and I guess that varies from person to person dependant on their lifestyle requirements.