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Author Topic: Does anyone here gear their investments?  (Read 16588 times)

Patrick

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Does anyone here gear their investments?
« on: May 22, 2013, 08:49:49 am »
I know the traders do it all the time, but what are the thoughts on gearing your investments? My access bond has funds available at under prime, I've been considering for some time putting into either an ETF or just adding it to my unit trust account.

Obviously the risk here is that the market takes a dive, and at the current levels I think it's too expensive to consider this. Perhaps I'd be better off holding into it, and in the even of a big correction i could use it to double down.
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gcr

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Re: Does anyone here gear their investments?
« Reply #1 on: May 22, 2013, 09:40:30 am »
I use spare funds within my bond and also within my overdraft to purchase shares from time to time. I do this primarily to top up on shares which have taken a hammering and yet their fundamentals are sound - like Woolworth's, Barlows, BHP Billiton and others
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Orca

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Re: Does anyone here gear their investments?
« Reply #2 on: May 22, 2013, 11:49:35 am »
If you are, make sure you use a separate account from your investment as your tax will become a nightmare like mine.
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gcr

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Re: Does anyone here gear their investments?
« Reply #3 on: May 22, 2013, 12:05:14 pm »
Quote from: Orca on May 22, 2013, 11:49:35 am
If you are, make sure you use a separate account from your investment as your tax will become a nightmare like mine.
Orca - it only becomes a tax issue if you sell within 3 years, what I do is use the funds to get into the market and then pay down my bond and o/d from my pension, LA, and interest on my FD
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Orca

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Re: Does anyone here gear their investments?
« Reply #4 on: May 22, 2013, 03:43:02 pm »
Don't quite understand. If you use gearing then you are borrowing money and will pay interest on it. Keeping it for 3 years is not a good idea.
I used gearing of 1.5 to 2 with SSF's for 3 months max at a time.
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MarketMaker

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Re: Does anyone here gear their investments?
« Reply #5 on: June 11, 2013, 04:07:35 pm »
Never ever, ever gear from an indebted position. Quite simply do not use existing debt to finance a leveraged trade,particularly heavily geared trades, well not traditional debt like a bond, at least. You're gambling an existing debt - it's just not worth it, imo.

If you want to play in the margin account business then start small and build your account up. You'll soon realise why not using existing debt was a good thing as your downside potential is substantial, depending on your gearing of course, and the markets you're going to be exposed to will not see you on the upside all of the time. As a trader in leveraged products, I square trades more often than being right, but when you're right you make it count.

If anything, rather move your booked profits into the bond than borrow from the bond to hopefully pay it back, or worse, be subject to a margin call and have to remortgage your property because you were geared to the max. No, thank you...
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Aragorn

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Re: Does anyone here gear their investments?
« Reply #6 on: July 08, 2013, 01:13:03 pm »
I’m looking for some opinions from fellow forumites on the flowing:-
I borrow 60000.00 @ 6.0%. This gets repaid monthly with interest, and, at 1825.00 per month, it will be repaid in 3 years, resulting in a total outlay over 3 years of 65700.00.
If I took this 60K and invested into STXIND, over 3 years based on current growth/performance, it would be worth around 146K (divi’s reinvested). Result is that I make around 80K in 3 years.
Now, instead of borrowing the 60K and repaying the debt, I use the 1825.00 per month and invest it monthly into STXIND. Over the same 3 year period I would have invested 65700.00, and it will be worth around 106K (divi’s reinvested). Result is that I make around 40K in 3 years.
Assumptions – 1.) Interest rates remain static and 2.) STXIND growth remains consistent.
So why would I not borrow the money for this investment strategy?
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Patrick

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Re: Does anyone here gear their investments?
« Reply #7 on: July 08, 2013, 02:33:01 pm »
It's the exact same question I ask myself all the time. The only reason I haven't done exactly that is the potential end of QE which may knock a chunk off the price (in which case I will cash in the bond and buybuybuy).

What you need to take into account in your case is what you could expect from the three year returns. Luckily for you that's the timeframe FT.com uses, so If you look at the following chart you'll see all the trailing 3 year returns: funds.ft.com/uk/Tearsheet/Performance?s=STXIND:JNB:ZAR

The best returns were from April 2003 to 2006 at 127.9%!

The worst on the other hand were from March 2006 - 2009 at just 16.1%.

Now that was a pretty big crash, but you would have still been up, but definitely below the prime - 1.5% I get on my bond even after adding in the +-2% dividends the indi pays.

So in the end it's a gamble, but if you were willing to consider the best and worst trailing 5 year returns I think you'd struggle to find a historical case where it loses out to your bond rate... But like I said. I'll wait for QE to end before I do it myself.
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Aragorn

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Re: Does anyone here gear their investments?
« Reply #8 on: January 24, 2014, 09:06:03 am »
I've just done another quick (and not precise) excercise (I may do it properly later if I feel like it) related to gearing.

On 2/1/2013 I bought 10000 STXIND cfd's @ 40.90 (On OST 10000 cdf's = 10000 shares). This gave me an exposure of R 409 000.00. To cover this exposure I had to place a margin of R 37 000.00. To fund this margin, I had to borrow the funds from my bond. I pay exposure interest @ 7.5%, receive margin interest @ 4.73%, and pay 6% on my bond.

On 31/12/2013 the following position existed:-
Margin Variation: R 135 900.00
Exposure Interest: -R 35 980.89
Margin Interest: R 1745.31
Interest on Bond: -R 2213.92
Profit: R 99 450.5

I sell the cfd's, and get my margin back, and repay into my bond.

What has not been accounted for here is -
 - Compounding factor on the interest on the Bond
 - Interest received on the Margin variation and the compounding effect of that
 - Dividends recieved.
 - The effect of tax on the profit.
 - Fees and commissions
However - all these considered, I should still walk away with around R60 000.00

On 2/1/2014, using the profits I bought 16000 STXIND cfd's............

I wonder where I'll be on 31/12/2014?

Note - this did not happen - it's only an exercise.......(pity).
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Bevan

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Re: Does anyone here gear their investments?
« Reply #9 on: January 24, 2014, 09:58:37 am »
Unless you know exactly what you are doing, one of the golden rules of corporate finance is to never use debt to finance equity. Assuming that debt costs around 15% then you need CONSISTENT equity returns at this level just to break even. I've seen too many people lose their shirts in this game to recommend this approach. Equity markets rise and fall but debt is constant and lasts a lot longer than people expect.
 
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gcr

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Re: Does anyone here gear their investments?
« Reply #10 on: January 24, 2014, 10:26:09 am »
I am with Aragorn on this borrowing matter with some proviso's - I borrow from my bond account quite often to buy shares as my bond interest rate is 7.5% and the amount I borrow can be repaid within 6 months from my pension income. I can do this because my only debt is my 2 credit cards (which are liquidated monthly) and my bond - which I service monthly. I use my bond to top up or buy new holdings in shares when their prices have fallen quite substantially. The only problem is that my ceiling on my bond is R 100,000 (don't want to record a bond increase as the costs are quite horrendous and the banks are quite short sighted lending to people over the age of 65)
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Nios

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Re: Does anyone here gear their investments?
« Reply #11 on: January 25, 2014, 10:56:50 am »
This is the reason for this post if mine Patrickhttp://www.shareforum.co.za/off-topic/accuratley-calculating-portfolio-performance/

Using the surplus funds from the access bond would yield a larger return on the lump sum purchase at the beginning of the year and allow one to reach said goal 2years earlier than if one had to invest monthly alone. In my eyes its a risk I don't have the appetite for.

However, I've now decided to play it safe and rather pay the bond off over the next 5 months, securing the roof over my head, not having to endure interest rate hikes with increased bond installments should they occur and the possibility of watching the etf prices decrease on the lump sum investment. Doing it this way for me and at the same time being more conservative allows for rand cost averaging while the portfolio grows in value.

Yes it will take 2 or so years longer to reach the goal, but at the same time I won't be betting the house on the market. I will sleep a lot better knowing this and won't be having to check how the portfolio is performing or underperforming every day.
« Last Edit: January 25, 2014, 05:23:34 pm by Nios »
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Aragorn

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Re: Does anyone here gear their investments?
« Reply #12 on: February 14, 2014, 11:34:50 am »
I've got a few bob spare at the moment, so I'm going to put my money where my mouth is (so to speak...).
I have an order in to purchase 500 STXIND CFD's @ 52.82. I will consider the funds required as if I had borrowed from my bond (I'll use my few spare bob instead of adding it to my bond). If the order is filled, I will have an exposure of cR26 500.00 and a margin requirement of cR2 175.00. I will 'consider' that I borrowed R5000.00 from my bond for this deal and put that into the calculation pot.

As the exposure is small, I will avoid placing a stop-loss (against my normal strategy), but will monitor and perhaps exit if the price drops below 51.90ish.

Let see how this turns out.
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