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Borrowing to invest?

Discussion in 'Beginner's Lounge' started by Aussiesteve, Jun 8, 2013.

  1. Aussiesteve

    Aussiesteve

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    I just read on ASX that the average long term (7-10 years) rate of return on shares is only about 5% pa by the time you account for tax and inflation. If that's the case - how can borrowing money (at a rate presumably much higher than 5% pa) to invest ever work? Of course the loan expense would be tax deductible but it looks to me like profit would still be neglible. Am I missing something here?
     
  2. pixel

    pixel DIY Trader

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    you got it in one !
    The catchphrase that the lenders use is "you're smarter than average and we'll help you outperform the market." They're quite willing to lend you the money, but they take your shares as security. If it fails, they'll ask for more margin or they sell your shares to cover your debt. Means they can't lose. You will.
     
  3. tech/a

    tech/a No Ordinary Duck

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    Learn how to trade.

    Out perform the maker average.
    Leverage your winning formula
    Join the 5 %,of consistently profitable
    Business owner.

    Just like any profitable business
    Money makes money.
    It's a two edged sword.
    Make sure you know how to handle
    Knives---
     
  4. TheUnknown

    TheUnknown

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    more like 5% per month
     
  5. coolcup

    coolcup

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    Is this total return including dividend and franking credits? If it is only capital gains then you are missing a big component of the total return. I look at it as follows:

    1. Dividend plus franking credits plus expected capital gain; vs
    2. Margin loan borrowing cost

    If 1 is greater than 2, then I will be ahead through using a margin loan.

    I personally don't borrow to invest in the market though. I view the companies I invest in as being leveraged so adding further leverage on top compounds the risk for me.
     
  6. blue0810

    blue0810

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    I've been using margin since 200x

    Brokers Rates
    IB -> 4.25
    MQ( Macquarie) -> 7.70

    Both brokers allow me to go short as well.

    You must know when/how to use margin.
     
  7. tech/a

    tech/a No Ordinary Duck

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    ---????
     
  8. TheUnknown

    TheUnknown

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    ?

    ? ?
     
  9. tech/a

    tech/a No Ordinary Duck

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    ---!!!
     
  10. TheUnknown

    TheUnknown

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    :banghead::banghead::banghead:

    5% a month
     
  11. tech/a

    tech/a No Ordinary Duck

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    Fail to see it in context to the two 5% referred to?

    No need to keep smacking your head in a wall.
     
  12. TheUnknown

    TheUnknown

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    OP mentioned 5% P/A and i said more like 5% per month on avg
     
  13. tech/a

    tech/a No Ordinary Duck

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    Required?

    Or what the markets return rather than his 5% assumption?

    Your 5 % had/has no reference.

    Hence ?
     
  14. TheUnknown

    TheUnknown

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    Jan 7.76%, Feb -0.63% , Mar 13.28% , Apr -1.19% , May 7.38%.

    Should give you about 5% per month.
     
  15. galumay

    galumay learner

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    ???

    that has nothing to do with the OP's quoted piece which said,

    "I just read on ASX that the average long term (7-10 years) rate of return on shares is only about 5% pa by the time you account for tax and inflation."

    I, like tech/a, am really struggling to see what your point is, of course if you select a group of 5 months in an individual year you may find 5% growth - or 5% loss, or 20% loss, or 0% change - none of which has any relevance to the long term rate of return on shares.
     
  16. CanOz

    CanOz Home runs feel good, but base hits pay bills!

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    The safest way to use IB's margin if you are swing trading is to base your risk on your actual trading capital, eg. 1% of 50k = $500 risk per trade. Then use the margin to take more positions up to a limit, i think 10-15 is plenty for me to try and manage.

    CanOz
     
  17. tech/a

    tech/a No Ordinary Duck

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    If you used fixed fractional position sizing
    You can be heavy leveraged without increasing risk.

    The fear of leverage can be placated if you know how to
    Implement it properly.
     
  18. Zedd

    Zedd

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    Leverage will multiply your gains when the markets on the up, but multiply losses on the way down, and cost you money when the market is going nowhere. Buy bigger on dips, and pay off debt on peaks is the idea.

    Just from my experience with my ML, leveraging has let me:
    1. Access more opportunities than if investing using my limited cash flow
    2. Enables me to keep long-term investment stocks, while using their capital gain as security to further grow my portfolio.
     
  19. bullhunter

    bullhunter

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    are u guys talking about forex trading. using margin loans and leverage?

    if your talking about the share market can u let me know how I can trade it like how you guys are saying i.e. what platform you use.

    my experience with investing is limited to only purchasing shares for the full price. to me its like a big capital risk.. surely there is a smarter way.
     
  20. sydboy007

    sydboy007

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    Most listed companies are already geared investments - just look at their debt to equity ratio and you'll see some companies can be running along at 60-70% debt to equity. Admittedly most companies are probably using around $1 of debt for every 3$ in equity.

    So now you decide to bowwow money to gear up the already geared up investment.

    Gearing multiplies the gains and losses. Can work nicely if you can pick the upturn of the market / particular share, but can also loose you a lot of money very quickly.
     
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