Margin loan advice

I have $140K invested in managed funds in an Asgard Investment Funds Account. The managed funds are 93% australian shares, 7% cash. $102K of the investment is a margin loan from colonial, giving me an LVR of 72%.

Over the next 12 months, I will pay approximately $10K interest on the loan. I will be charged about $3K in fees by Asgard. My personal income will be around $55K, therefore my tax benefit from claiming the loan interest as a deduction will be about $3K (tax rate is 30c for each $1 over $34,000).

I recently got tired of my financial adviser's lack of advice (despite his high fees and trailing comission), so have ditched him and signed up with yourshare, who charge no fees and will rebate 50% of trailing comissions to me instead of it all going to the adviser. Effectively this would be a rebate of about $500 over the next year.

So, for the next 12 months the total cost of the investment will be roughly 10K + 3K - 3K - 0.5K = $9.5K.

Now, for me to break even (that is have a net gain of 0) I would need the value of my investment to increase by 9.5K / 140K = roughly 7%. This of course doesn't factor in inflation.

Some questions:

1. Have I figured this out right? or am I missing something

2. I've been thinking about all the money I've lost in the 2.5 years since I started this investment... Actually its been making me quite angry and distressed. I'm kicking myself for ever signing up in the first place... Now I am stuck making interest payments on a loan that has already caused me so much loss.. How do you know when to cut your losses and sell? I mean is it realistic to expect the market to rise by more than 7% over the next year? Even if it does of course I will still be down relative to my starting position, but perhaps can at least recover some of my loss from the past year...

3. If I dont sell, I want to change my managed funds account to one with lower fees. One possibility is changing to the the Asgard eWrap account, since I may be able to do this without selling/rebuying the shares, meaning I wouldn't suffer any losses from the buy/sell differential. However, I've come to realise Asgard is a rip off... What other wrap accounts are people using? If I change to someone other than Asgard, will I need to sell and rebuy the shares or can I circumvent this?

4. If I do sell, I would probably put whatever I have left into a basic share portfolio... What stock trading accounts are most of you using? Obviously I'm looking to minimise fees...

I just feel like I'm stuck in bad place right now, and want to do whatever I can to improve my situation...

 

Not unrealistic at all if you think the market has bottomed already.
In every example over the past 60 years after a significant correction like we are experiencing now the market has risen a minimum 40% in the 12 months after hitting the bottom.

When are we at the bottom? your guess is as good as mine, but I bet you we are closer to it than we were yesterday.

 

hi BJKS,

In relation to Asgard, it sounds like your in the mastertrust, you should investigate either the ewrap or elements (baby mastertrust) these are generally more cost effective.

Mastertrust was one of the first platforms around, hence it hasn't kept on evolving as ewrap (for bigger amounts) and elements (for smaller amounts) were marketed more heavily. Also if your adviser was charging high fees, this just adds to your total ongoing cost.

Not sure about the in-specie transfer across platforms, though obviously Asgard contact centre can give you more information about that.

Cheers,

Dan

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

 

The only way to "know" is to get more "knowledge". Read until your eyes bleed.

If this doesn't sounds attractive then you might want to size up whether making leveraged "investments" into things you don't "know" too much about is the best strategy.

That said, I think a good investment strategy should also include an exit strategy. Obviously what this strategy is, is going to be different for different people as some people are willing to ride steeper roller coasters. I can appreciate that the vast majority of people that are average joe investors (including myself) originally entered the market with the intention of being in the market over the long term and thus relying on the constantly preached principle of "in the long run the stock market ALWAYS goes up", therefore we don't need an exit strategy. Unfortunately I now know that thinking like that is just naive gambling, and not really "investing".

Of course in hindsight the lack of exit strategy cost me more than I would have liked, but I'm still thankful that I sold out of my remaining shares (all financials) when I did (late November). I saved myself the further 20% loss I would have copped if I had continued to hang onto hope rather than focus on facts and reality.

No one has a crystal ball, so this question completely depends on who you ask.

I personally think you'd be lucky to make any gains at all over the space of 12 months, but that's just my opinion, which is based on my beliefs of the likely length, depth and progression of events as we move through this crisis, but then again most people on these forums think I'm an over the top doomer and gloomer.



Best of luck with it all (not that I think luck has a lot to do with it).

The dow futures are down 1.8%, if it closes at that level I think you could confidently expect that the All Ords would find new lows tomorrow, and with no truly good news on the horizon at this stage I wouldn't be holding my breath of finding a bottom in the next month or two.

What's wrong with using a time frame that is longer than 60 years?? Does it break your predictive model??

I'd be careful offering advice for the likely progression of this crisis using recent history as an indicator for future performance. Recent historical figures that people love to quote look very messed up when you start comparing them over longer time frames. Plus you can get stats to say anything. Like for example this fun little fact...

Every time the Dow Jones has fallen over 50% in a bear market a Great Depression has followed...

It's the truth, but does that mean this crisis is destined to become the next Great Depression? Of course not. Or does it?

And it will be an odds on bet that tomorrow will closer to the bottom than today if the Dow futures are good reflection of what we can expect tonight.

I'm personally becoming less interested with "when" we will hit bottom, and more interested in what hitting bottom will bring in terms of changes in investing culture. I am reasonably confident by the time we reach bottom, the methods of investing that have been used for investing for the last four decades will shelved for quite a long period of time. So people waiting for the "bottom" hoping to reinvest for the quick gains that normally come in a V shaped recovery might be sorely disappointed.

 

BJKS

We are going through a difficult period where many world economies are having a recession all at the same time.

The US is not in it's best shape and could drag our market down as well.
It's impossible to know what the markets will do in the near future
but looking at your portfolio, risk minimisation comes to mind.

If I was in your situation I'd be paying back the loan and looking at your LVR you probably have been doing this over time so this would be the right thing to do in this environment.

I think......

 

Thanks for all of the comments. One of the reasons why this situation has been so difficult is that my (ex) financial advisor is my brother... Normally I'm a cautious person, like to be in control, and if someone else had recommended this plan to me I probably would have told them to go jump. However, being trusting of family, and given that my parents had followed his advice previously and seemed to be doing well from it, I figured he would know whats best. How wrong I was ! So let this be a lesson to anyone else in the same situation, family or not, dont follow any financial 'advice' unless you completely understand every aspect of what is going to happen with your money and have taken a lot of time to consider every possible risk involved.... if you want something done right in this world, you're better off doing it yourself. You will learn far more and save a whole lot of money on fees.

This is actually what I plan to do. I dont mind so much that the investments are falling in value, as I'm sure it will come back up at some point in the future, its the interest payments I'm constantly making on my margin loan that are really getting to me.... Making it very difficult to save any money for anything else... car rego, tax bill, insurance etc, let alone having any fun. So I'll work my ass off to pay down the loan, which will reduce the risk of a margin call, and *hopefully* in the long run things will start to come good again...

 

Managed Funds, really at the end of the day should never have been allowed to be used as margin loan security, because they do not allow investors and advisers for that matter the ability to judge whether the initial price when first invested into represents a "discount" to current market value.

managed funds are just a hodge podge of securities thrown together by "experts" who do not care at what price you get into those securities, as they generally must stay fully invested because they are mandated to. Indeed many long only managers just end up being basically index funds, which unforunately perform below the index anyway.

However, individual shares allow you and hopefully your financial adviser to derive an "intrinsic value" based on current economic climate and the companies previous business history and record. If this "intrinsic value or price" comes up as below the current market value then this should become a candidate for investment whether margined or not. Of course value calculations will always have some lag because they are based on past numbers, and given current conditions prices may smash through your valuation to the downside, but generally it will keep you from purchasing stock when you shouldn't be and at the end of the day even if you are wrong, then you wont be as wrong as the guy who bought the same stock at a much higher price. However looking at quality companies which are trading at only discount (what you think is a safe discount level depends on your risk level i suppose) should keep you in good stead, keeping those dreaded margin calls further away than if you had bought at much higher prices and suffering much larger downfalls.

A little known guy called Warren Buffet has made billions from it, of course he's had a rough year just like the rest of us, but you can't deny a 17%+ average for some 40 odd years. And even though his capital value has taken a hit, the guys making huge bankroll with the cash flows he's getting, take a look at this goldman sachs play, his capital value is down but he's getting a 10%+ coupon that's worth millions each year, that's not bad.