Managed Funds Low LVR = wait or buy?

I am sitting on a low LVR in my margin loan atm (43%). My target LVR is 50%. I've been holding of buying more managed funds using the logic that I'll buy in after the next correction but things just keep going up!

I will also get a .25% further discount on my margin loan if I buy/borrow more. It wouldn't take much.

What do people think. Is a correction looming or is it a case of buy now because the party is in full swing? Is it a case of the one who hesitates misses out?

What would you do if your LVR was below your target- wait or go?

MJK

 

"What do people think. Is a correction looming or is it a case of buy now because the party is in full swing? Is it a case of the one who hesitates misses out?"

Frankly speaking, the effective strategy would be to buy during bullish trend.
On the other hand you should expect a reasonable pull back to around 5700 level or below.
At this point of time I would wait (only my opinion) and see what happens if XJO hits psychological level of 6000 (round number).

 

You guys have perfectly laid out the arguments for and against.


I think I'm still leaning towards waiting. I invested a large amount at the start of May 2006 and had to suffer the buy sell spreads and the May correction or the "5000" correction.

I think the pain of corrections and B/S spreads is worse the pain of missing out on some more growth so I may just wait it out to see what happens when we hit "6000".

MJK

 

MJK,

Nobody knows what will happen.
XJO may hit & break 6000 and pull back (that is what happened between March & May 2006 when XJO broke 5000 and pulled back from 5407)
You should have a plan no matter what market may/will do, and react accordingly.
No pain – no gain !!

 

MJK:

Just a thought: maybe you could short the SPI to hedge that market risk you speak of. Of course that also caps any upside caused by market movements, but if you've picked stocks that you believe will outperform the market, you may still profit. Or you could long SPI put options to hedge the portfolio but at least you'd still receive profits from large movements; obviously at a cost.

Maybe this sort of hedging is best suited to those already with a position who would rather not sell (trans costs) when they have a bearish market view.

Come to think of it (on a completely different topic), why wouldn't people who are in ASX index funds just long the SPI? Lower fees, lower investment for the same position, smaller spread, etc. Surely there's a reason that they don't, I just don't know the answer. Maybe because of expiries, but you can role positions forward easily an inexpensively.

Anyway, back on topic now...

 

yup..........

 

hehe... The SPI (Share Price Index) trades as a futures contract. I'll try to explain it simply.

Firstly, a futures contract is a type of investment that you can buy or sell on an exchange, just like shares. But you don't actually pay money for them; you "enter a position". Let's use a familiar example: a BHP share. Normally you can buy BHP for $28 or so per share. If the price goes up, you make money, if it goes down, you lose money. Now... you can "buy" a BHP futures contract too. On the exchange they might quote the futures price as $28.50. What this means is you can "enter a position" at $28.50. If you enter a "buy" (aka long) position, you profit in the same way as the share. If it goes up to $29, you make $0.50 and if it goes to $28, you lose $0.50. The difference is, you don't actually pay any money to enter this position. You have a linked (margin) account and at the end of the day if you make $0.50 that is deposited into your account or if you lose $0.50, they take it out of your account.

The alternative is entering a "sell" (aka short) futures position. This is just the opposite; you profit when BHP goes DOWN, and lose when it goes UP.

There's a lot more to it, but they are the basics. Essentially it's the same as a share position, but you actively swap losses or profits on a per day basis. It saves transactions costs and you can get into a much bigger position (which can be dangerous).

As for the SPI, it is a futures contract very similar to the BHP futures contract, but it represents the top 200 or so shares on the ASX. So basically it represents the whole market. If you enter a "sell" position in the SPI, you make money when the market as a whole goes down. So it can be protection or insurance for your portfolio. Again, much more to it, but they're the basics.

I'll leave it at that for now; I could have just made it worse

 

iiinvestor,

Do you suggest that anybody without hands on experience in trading (even ordinary shares) is able to successfully trade SPI ??

 

No, not at all. I don't know the background of anyone here and since this is an investment forum, I thought I'd throw it out there. MJK's response seemed to sum it up though. I just thought I'd do the courteous thing and explain futures in my second post.

Also, hedging market risk probably isn't as risky as trading the SPI itself. It is a risk mitigation strategy after all (although I know you can increase risk by hedging too). Anyway, maybe we should just forget the whole SPI thing.

 

What's the furthest out expiry date you can get a contract on the SPI for?
How much does it cost to take a position?
Who writes the contract?
Does the SPI work on an accumulation basis or does it strip dividends?

Cheers

 

a. I think about 18 months.
b. Depends on broker, but SFE fees are low. Less than $1 per contract.
c. Market makers mostly.
d. It's based on the standard S&P ASX 200, which is a price index.

The multiplier for most Australian index futures is $25 (whereas in the states they're normally $100). So one SPI 200 contract provides exposure to $25 x index. At the moment the index is about 5900, so one contract is $147,500.

There's a very easy to use trading simulator here.