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Small neutral or larger negative gear ?

Discussion in 'General Investing Discussion' started by salsa, 8th Jul, 2008.

  1. salsa

    salsa Well-Known Member

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    You were in the 50's (as in age) . Would you rather a smaller portfolio that is neutral or a larger portfolio but negatively geared ? I am talking all property here.
    It may look like a "no brainer" to someone but I would like to hear your view please.
    (Just sold and feel remorse !)
    Thanks
     
  2. Waimate01

    Waimate01 Well-Known Member

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    Negative gearing is an amplifier. It amplifies your gains and it also amplifies your losses. The second part of that means it reduces the amount of down-swing required to completely wipe you out. Without gearing, you need a 100% downswing to wipe you out. With 80% gearing, a 20% downswing will do it (oversimplified to more clearly illustrate the principle).

    If you are young and are not worth very much, you may as well gear all you can. If you are within sight of your desired retirement age and have built up a truly useful and life supporting amount of capital, then it comes down to your appetite for risk.

    In assessing your appetite for risk, ask yourself this: when you get your annual tax refund cheque (or some other handy little windfall), do you (a) pop it in the bank, (b) blow it on a new TV, or (c) pop down to the local casino and whack it all on red. Opps, I mean black.

    It sounds like you already know the answer and are acting upon it. You probably already know all of the above.

    The only real insight I can offer is to get to know your own comfort level calibration and make a concious decision to stay within it, and another concious decision not to pine after people with differently calibrated comfort levels who may seem to do better than you at some times, but crash and burn at others.

    Many studies have shown that looking out the window to compare your own situation with that of others leads to unhappyness and incorrect investment decisions. Happiness from wealth is an absolute thing, not a relative thing. When we compare ourselves to others we pretty much always compare *upwards*, and that's the source of the unhappyness. So if you've made a decision which feels right for you, then that makes it the right decicion.
     
  3. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Waimate01, that's some excellent advice. It's all up to the person, really. I know people that are happy working towards a goal that will provide them with a small income that allows for necessities and some luxuries, because that is the level they are happy at and I know some people who want tens of millions of dollars worth of assets with a few hundred thousand dollars of income each year.

    Nothing wrong with either scenario - it's as you said - completely up to the individual. I know what I want from my investment goals and I work towards those, with a small amount of tinkering here and there to fine tune the structure. What the next guy wants is no concern of mine, because I'm not in it for a pissing contest, I'm in it to achieve what makes me happy and make my choices based on that.

    Mark
     
  4. crc_error

    crc_error The Rule of 72

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    I think you need to decide when your planning to retire.. if you have 15 years to go, then higher gearing of say 60-70% may be good, if your planning to retire sooner, then lowering your gearing may be good. If your starting out and are young, gearing of 90-100% may be good.

    Negative gearing also only works when your working and earning money. If you have a good income, and wish to reduce tax, than more negative gearing may be better for you. If you work less, no point in increasing your gearing level.

    Then you might want to consider diversification. If you only have investments in direct property, you may want to consider moving into some quality shares/funds.

    Its a personal decision with many factors to consider.. If you have 1 million in paid off property with income of say $50k PA from rent, you may be happy with that income, so why take risks to loose what you already have? Retire early and enjoy! no point in been bed-ridden and a multi millionaire!
     
  5. Billv

    Billv Getting there

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    Waimate
    great post and I think your sentence above summarises it nicely.

    Salsa
    don't feel bad mate, I think you've got out just in time.
    Think of it this way, Property that had double digit gains since 2000 has to correct because wages and rents haven't caught up with it.
    If it doesn't, it's going to stagnate for a few years.
    IMHO
    Cheers
     
  6. crc_error

    crc_error The Rule of 72

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    You think so? I have read property should be the best performer in the next few years due to a up-coming chronic housing shortage fueled by the RBA's inflation fight. Nothing is been built at present and immigration is at record levels. Rents are set to sky-rocket and so are house prices.

    ANZ Property Outlook click on the Australian Property Outlook 2008
     
  7. Billv

    Billv Getting there

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    I know, but there are others who are predicting corrections.
    I'd say it really depends on what happens to interest rates and it's not looking good.
    The general feel is that the banks will continue to increase interest rates
    and even if the RBA drops rates to stop the economy from going into recession the banks won't necessarily follow them.
    So we have high interest rates hurting our wallets and we also have fear spread by the media and by many ecomomists therefore I'd say that corrections are not unikely.
    cheers
     
  8. crc_error

    crc_error The Rule of 72

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    We actually don't have high interest rates.. long term we are now about average..

    Housing is the first thing people have to buy, so they will cut back on everything else before they are kicked out onto the street. For the moment, we are not seeing major job losses, so as long as people can continue to pay their loans, house prices will be supported. Since we have a cronic housing shortage brewing, people will just have to pay more to aquire them..

    Rents also still have lots of room to raise.. this will also fund investor interest in IP's.
     
  9. salsa

    salsa Well-Known Member

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    All great responses and they did help thank you.
    Yes I should know all this but sometimes as you talk through the issue with someome things become clearer !

    Waimate, I took your suggested "test" and it showed I did not have any appetite for risk at all :).

    I don't think I was comparing my situation with that of others.
    I guess I didn't feel comfortable/satisfied coz I wanted a solution that would optimise lifestyle as well as investment, which most of the time is hard to be achieved.
    Yes It was more greed/want on my part rather than need/achieving goals.
    My real financial need is small so in that sense I have already achieved it.
    The problem is I don't have concrete goals. I just want to be able to make "the most of everything" and I would be in agony if I found out my decision was not "the best it could be".
    I need to work on changing this expectation I think :)
     
  10. AsxBroker

    AsxBroker Well-Known Member

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    Hi Salsa,

    Personally if I was in my 50s (age not era ;P ) I'd be looking first at different structures and then investments. Have a read up on Transition to Retirement, if your still working you can save an absolute motsa in tax.

    Eg, someone 60, with $500k in super, earning around $130k could potentially save around $20k a year in tax. This is before you've even worried about shares, property, cash or term deposits...

    Good luck with it all,

    Dan

    PS Before making an investment decision speak to your FPA registered Financial Planner.
     
  11. Billv

    Billv Getting there

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    ASX

    good point, we often overlook the bread and butter stuff.
    Super is one area we could all be salary sacrificing into.

    Cheers
     
  12. salsa

    salsa Well-Known Member

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    Thanks ASX an BV. Yes s/s into super was the main reason ...
    In the next 4 years both our salaries will be fully s/s into super we won't have much taxable income left hence we decided to sell this one IP to pay off debt to make the portfolio neutral - BUT i believe the IP' s value will still continue to grow, hence the greed & agony of cannot have them all !:) .
    (I have asked on another thread should I select cash or balanced , I think BV's opinion is cash in the forseen future)
     
  13. salsa

    salsa Well-Known Member

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    Hi all,
    Back to a larger but negatively geared portfolio !!
    Just want to update that the purchaser cancelled the contract on the last day of the cooling off period and we felt quite relieved that they did.
    No more selling ! It will become a registered student accommodation very soon :D
    Thank you for all your comments.
     
  14. AsxBroker

    AsxBroker Well-Known Member

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    Hi Salsa,

    Sorry to hear about the buyer pulling out.
    Saying that, it may be a silver lining ;)

    Hope it all works out well.

    Cheers,

    Dan