Starting to Invest in current volatile market....

The simple idea would be to calculate your % return and % std deviation against the ASX200 or accumulation index if you fancy yourself as a stock picker. This allows you to compare an approach with a similarly leveraged indexing approach.

It's not speculation then but simple math, cuts like a hot knife through butter.

It's the same with the oceans of junk you deal with and a whole truck load of industries built around selling the lie that anyone can win, all you need do is play the game. Show me the stock picking money and it's hard to argue.

 

Cost averaging on a loser is still going to make you a loss.

How do you know if for example ABC at $3 is good value
when this price is based on current earnings?
If earnings for whatever reason drop (and many company earnings will drop this year due to lower economic outlook) then we've bought a lemon.

I've sold my IAG's at $6 and today they are $3.60
which I think is a fair price but I don't know if it's good value.
If it was good value other companies would have already bought it.

I don't know what you guys think but today IMHO many share prices are way too high. Some could be considered good value but these will also be dragged down by the current market volatility. And so will funds etc.
In fact the markets are so volatile that we could get into a fund and because of management or exposure issues we could risk losing a lot of money.

I'd rather put my money into a term deposit and wait.
Today I am still buying my work's shares because they are bought with pre-tax $ and I also get 1 free share for every share I buy otherwise I wouldn't touch them.
I've lost confidence in the markets.

IMHO

 

“.......but I don't know if it's good value.”

You’ll never know because market is made up of many opinions of intrinsic value, so the price is a consensus of those opinions.
What drives share prices is the way people think about them.

“I've lost confidence in the markets.”

Don’t you know that the markets are not an elevator that goes one way?

 

The problem with the share markets is that you might have a great run over 3 years, say 15% each year

Say you start with $100,000.. 3 years worth of compound 15% growth will give you $152,000 at the end.. Great result!

Then in year 4 you get a 20% 'crash' at the end which means you loose $30,000 bringing you BACK to $121000 essentially losing 3 years of investing.

If your geared, this situation is worse as your paying interest each year, and then your loss is multiplied.

Is it worth investing in the markets for 4 years to make $21,000? You would have been better off investing in fixed interest!!!

some food for thought..

 

So what would you recommend? Attempting to pick the high and get out, possibly missing another 6-12mths of 15-20% gains?

Or do you hold on, cop the 20% loss on the chin and prepare for the next 3-4 year period of gains???

 

I think it just reminds us of how much 'risk' you carry when you invest into the markets..

I would say it just shows you need to be in the market for the longer term.. now would not be a good time to be getting out.. the longer your in, the more these drops will average out...

It also shows the importance of regular contributions, rather than investing a large sum in one go.. at least your dollar cost average your entry points and reduce the chance of been caught at the top..

I for one am reviewing the 'benefit' of gearing.. as it seems it can simply multiply your loss right at the end!! Like it has for me..

I would/am continuing to hold on.. and markets will recover over the next 3-4 year period.. but I have reduced gearing quite significantly.

 

C'mon CRC, it's not that bad!

Let me use your example,
(i) cash in the bank
(ii) cash purchase of shares
(iii) assume $100k borrowed through an LOC at 8%.

(i) Cash in the bank
Say the bank paid you 6.5% pa over this period, then your net return is 4.5% after tax at 31.5%. This is a real return (after inflation) of about 1.7% (assuming 2.8% inflation average over 3 years).
Whoopee.

(ii) Shares purchased with cash
You go out and spend your $100k on shares.
After 3 years the shares have grown to $152k but then they crash to $121k. Boo hoo. But your net capital growth is still 21% over 3 years or 6.75% effective growth pa.

Meanwhile the shares have paid you 3.8% dividends, franked at 80%, over the three years, so about $12k dividends and $4k in franking credits.

The franking credits don't quite knock out the tax payable at 31.5% (80% franking), leading to an after tax dividend return of $11k over the 3 years, so 3.5% return courtesy of the dividend alone.

So the total return over the period - after tax is paid on the dividends, but no CGT event since no sale - is 10.2% pa. This is a real return of about 7.4%. That's better.

(iii) Shares via an LOC at 8%
The holding costs come out to about $6k over the 3 years after franking credits, interest and tax at 31.5% are taken into account.

But the $6k costs are much less than the $21k capital gain, ie you're $15k better off, a return of 4.8% after tax (again, no CGT event assumed).

Comparing this to cash in the bank or shares bought with cash is awkward, since the LOC funds are entirely borrowed. But the 4.8% return is a great result for little effort.

Looking at it another way, you only need 2% capital growth to be in front (at 8% LOC rate). At 10% LOC rate (let's get a bit paranoid!), the net holding costs increase to about $10500 over the 3 years, which demands capital growth of 3.4% pa. It's worth noting that the incremental change in required capital growth is less than the change in interest rate, ie 2% increase in interest rate demands 1.4% increase in capital growth.

I could do the calculation of a margin loan if anyone's interested.

 

On a separate thought, I reckon that the whole market is far too short sighted. Fund managers are only interested in quarterly performance, to stay at the top of the charts.

There is very little long term focus (>5 years), which is entirely where I'm looking. In fact, I intend to keep borrowing regularly over then next 10 years as more equity becomes available, in order to maintain a reasonable LVR. My property LVR is now around 30% but I have taken the equity through LOCs for share investments. In the process of setting up a ML (MQ Prime) which I will gear up to 50% by moving my shares in and purchasing over the next 6-8 months.

While I'm working I'll keep borrowing, then at 50 I intend to have a positively geared overall portfolio of shares and property, no PPOR debt, and an excess investment income return that both pays me a constant passive income and pays down the investment loans at a radily increasing rate (investment income growing with the portfolio value, whilst interest payments simultaneously reduce).

By the time my super is available, I will be long retired and ready to go hang out with my grandkids.

Meanwhile, back to building Lego with my son.

 

How old are you now Rod (if it's cool to ask)?

 

My head says 28 , my driver's license says 38 , but my body says 48!

 

Hi Rod_WA,

Can you run your calculations to find out how long it will take (in years) to have a $ 1 mil (net) when $ 100K is invested today in Stock Market (assuming the average return 12% per annum) - after subtracting interest rates (say 8%), tax, inflation etc.

 

very long time tropo!! essentially your making 3.5% PA once costs are deducted, and I think you will be waiting a long time before you make 1 mil!

 

Hahahahahaaaa... Tell me about it...
That is why I do not put my money into MFs.

 

so where do you put your money? Casino?

 

So what do you do with it?

 

Buying IPs and trade myself.

 

Buying IP's sounds good, but how do you go about trading yourself..what do you wear, how do you find the "right" street corner as part of your Due Dilligence etc?

 

You must have a money management & trading/investing system in place.
Not always you’ll find ‘right’ street corner but if you face a brick wall stop loss become very handy.
Technical Analysis is my 'Due Diligence'. I totally ignore fundamentals.
Do not expect to be right all the time (mission impossible), so learn how to manage a risk.
I think that trading rules (below) may help you in successful investing.
http://www.invested.com.au/79/trading-rules-366/

 

Is it still worth using a Margin Loan? Comsec now charge 9.9% PA