Opinions on Capital Allocation?

Hey Folks,

I’ve been lurking here for a few months now. On the occasion of the All Ords dropping 3.5% today, I thought I’d ask the posters their opinion (I know no on here gives “advice” LOL) on my capital allocation as it stands. (I turned 30 a few months ago, if that makes much difference. I am single and live alone, renting, working full time.)

So here goes, as of today:

E*TRADE
ARR (Arasor): $465.00
QBE: $3,349.50
STW (SPDR S&P/ASX 200 Fund): $5,490.90
Fidelity China Fund: $10,017.77
Cash: $181.97

NAB
Everyday Savings Account: $2,204.00
iSaver (high interest account): $5,000.00
Margin Lending (invested almost equally in MLC IncomeBuilder, MLC Properties Securities Fund, and Ausbil Australian Emerging Leaders Fund) – market value $49,490.05 - loan balance $33,066.20: $16,423.85

HFA Octane Global Fund (Capital Guaranteed Hedge Fund) – I paid the first $4,650 (interest and put option) on 50k loan for this at end of June; I must pay similar amount every year until the fund matures in 2015; I have no idea what the current value is so will assign a default amount: $4,650.00
PORTFOLIO WORTH (VERY APPROXIMATELY): $47,782.99
OR, MORE REALISTICALLY: 40K

(Excluded from above…I have excluded my old student debts – HELP and SFSS ($28,103.88 combined as of last reckoning). I have no intention of paying these off any earlier than tax requires as they only grow according to inflation and would be extinguished upon my death. Additionally this debt, I suppose, is partly compensated for by my superannuation, currently standing at at least $19,993.84 – maybe a bit more as I might have missed 1 or 2 when consolidating. I have no other debt than mentioned student debt (no credit card debt, home loan, car loan, personal loan etc.), apart from the leverage used in my margin loan and hedge fund described above.)

I see myself as basically a “buy and hold” type of guy. I was planning on taking out an E*TRADE margin loan on my STW holdings but the market seems way too jittery at the moment.

Having read quite a bit at this forum, I’d guess my outlook seems somewhat similar to Realist’s but I’m in awe of dudes like wayneL who can make a good living thru trading alone.

SO, what would you do next – at my age and with 40k capital? (GOD, THIS WENT LONG)

No takers?? I was sure someone would say "managed funds suck, man" etc lol

You need leverage,...

I would recomend taking your $47,000 and using it as a deposit on a property worth about $300,000 and put aside a portion of your pay each week into smashing down this loan, each time you have $1000-$2000 available to redraw on your loan use this money to invest in shares,

"Why use this stratergy".... well what I am suggesting is that you are using debt as a way to increase your growth,...

If your current portfolio increase by 10% you will make $4,700.

if your portfoilo was leverage to 90% debt level meaning that you used the $47,000 as a deposit on $470,000 worth of investments and your portfoilio increased by 10% you would have made $47,000, so by using debt you have doubled your money.

If you use this stratergy of using Property and Shares together you will really accelerate your growth.

Tysonboss1 said:

You need leverage,...

I would recomend taking your $47,000 and using it as a deposit on a property worth about $300,000 and put aside a portion of your pay each week into smashing down this loan, each time you have $1000-$2000 available to redraw on your loan use this money to invest in shares,

"Why use this stratergy".... well what I am suggesting is that you are using debt as a way to increase your growth,...

If your current portfolio increase by 10% you will make $4,700.

if your portfoilo was leverage to 90% debt level meaning that you used the $47,000 as a deposit on $470,000 worth of investments and your portfoilio increased by 10% you would have made $47,000, so by using debt you have doubled your money.

If you use this stratergy of using Property and Shares together you will really accelerate your growth.

Click to expand...

Thank you very much for that considered reply. It's given me a bit to mull over.

I was really not thinking about property at the moment. As regards using the 47K to do this or that etc....I've been trying to hold fast to the "NEVER SELL -- IF A HOLDING GOES SOUTH (AND IS NOT AN OBVIOUS BARGAIN) JUST DIRECT FUTURE CAPITAL ELSEWHERE" principle.

I'll have to consider what you say. After all, whatever gets me into The Millionaires' Club faster (but still with OK risk) is best lol

StockyGuy said:

hold fast to the "NEVER SELL -- IF A HOLDING GOES SOUTH (AND IS NOT AN OBVIOUS BARGAIN) JUST DIRECT FUTURE CAPITAL ELSEWHERE" principle.

Click to expand...

Hello Stocky,

What if you simply make a mistake (and who amongst us has not?) in buying a stock? Or if its fundamentals change? Still not going to sell?

StockyGuy said:

Hey Folks,

(Excluded from above…I have excluded my old student debts – HELP and SFSS ($28,103.88 combined as of last reckoning). I have no intention of paying these off any earlier than tax requires as they only grow according to inflation and would be extinguished upon my death. Additionally this debt, I suppose, is partly compensated for by my superannuation, currently standing at at least $19,993.84 – maybe a bit more as I might have missed 1 or 2 when consolidating.

SO, what would you do next – at my age and with 40k capital? (GOD, THIS WENT LONG)

Click to expand...

Why don`t you pay back the money you borrowed.It seems debt these days is someone elses responsibility.

Julia said:

Hello Stocky,

What if you simply make a mistake (and who amongst us has not?) in buying a stock? Or if its fundamentals change? Still not going to sell?

Click to expand...

Basically, no. I suppose what what you're asking is: if I happened to catch the next HIH or Enron etc., what would I do? By the time I knew I had such a bad deal the stock would be so worthless anyway. Those who trade for a living would've driven the price down by the time I got home to check E*TRADE. Furthermore, even shareholders in Enron eventually got a few cents lol.

Naturally, tho, I would remove any leverage on a badly wounded stock. But I'm very much a non-spec buyer now. Bluechips and index funds with leverage are the likely future direction with any surplus income from work -- I reinvest thru DRPs wherever possible. (I'd hopefully never buy another Arasor, e.g. I wacked a speculative grand in that and it has now more than halved in value.)

Regardless, I'm here to learn and my approach may change.

Thanks for your reply

Wysiwyg said:

Why don`t you pay back the money you borrowed.It seems debt these days is someone elses responsibility.

Click to expand...

I pay it according to the Commonwealth's tax deductions. I sense a slight value judgment in your post. But it simply doesn't make sense to pay it early where I can make likely signifcantly more thru investing than paying it off.

For normal consumer debt I agree with you, tho. Investment debt / leveraging is good debt if wisely apportioned. Government-sponsored student debt is a lil bit different. What WAS free, costs now -- it may be free again.

(Excluded from above…I have excluded my old student debts – HELP and SFSS ($28,103.88 combined as of last reckoning). I have no intention of paying these off any earlier than tax requires as they only grow according to inflation and would be extinguished upon my death.

Click to expand...

Lately I have decided to include a bit of extra HELP debt repayment into my overall savings/investment strategy. It may be worthwhile investigating for your own situation, but this is how I see it:

- Any additional contribution and the government reduces debt by an additional 10% (not as good at what it used to be, but instant 10% return)!
- When the debt is paid off, I will access 8% more income every fortnight sooner than I would have otherwise.

I am just going to ensure I only pay in lump sums every year on around the 29th June every year, with the cash held in high interest savings until then (ATO only reduces principal at tax time).

Interesting. Thanks for your input, Earl

The markets sure are lookin dodgy at moment

hey stockyguy, i'm in a similar situation to you. in reality at our age and situation we are still playing with peanuts and a good goal to shoot for would be owning our own apartment straight out so we have a roof over our head. so thats $450,000 for a nice area 2 bedroom which seems like a reasonable goal to shoot for.

starting with $40k you'll want some sort of plan to take you there, but this will all depend on your personality. if you are happy with more risk and possible margin calls you'll get there quicker with margin loans. so push that margin to the limit and invest in something the world will want in coming years - gold, oil, iron, oil, hydrogen fuel cells etc. ride the obvious trends in mid stocks like lihir or oxiana or avoca and harvest that money tree every few months. i wonder why i'm not doing it but debt annoys me and i'll apply for a mortgage the day after i shoot myself.

looking ahead you'll want to see where the market is going in the next 12 months and set some positions accordingly. find a few good producers with solid demand and ride the trends. for more risk pick a few speccies for a variously quicker windfall, or research other options like forex or cfd's to suit your risk/reward style.

either way set a first goal and pick your best way towards that. i have wasted a lot of profit dicking around deciding whether i am an investor or a trader (usually an investor when it turns bad and a trader when i'm out with profit) but set a goal and have an image in your head otherwise you'll drift. i have a much clearer picture now i see that $450,000 unit paid for with cash a few years down the track. or maybe several $150,000 units. or a few kilos of gold.

bank is a safe and sure 7 - 10% over the next few years. if you want to beat that pick a niche, research the hell out of it and then join the game.

Tysonboss1 said:

You need leverage,...

I would recomend taking your $47,000 and using it as a deposit on a property worth about $300,000 and put aside a portion of your pay each week into smashing down this loan, each time you have $1000-$2000 available to redraw on your loan use this money to invest in shares,

"Why use this stratergy".... well what I am suggesting is that you are using debt as a way to increase your growth,...

If your current portfolio increase by 10% you will make $4,700.

if your portfoilo was leverage to 90% debt level meaning that you used the $47,000 as a deposit on $470,000 worth of investments and your portfoilio increased by 10% you would have made $47,000, so by using debt you have doubled your money.

If you use this stratergy of using Property and Shares together you will really accelerate your growth.

Click to expand...

Couldn't agree more. Firstly GET SOME PROFESSIONAL ADVICE it was the best money I ever invested. 5 years ago I had a property worth $260k and a mortgage of $230k fast forward to today and I have 3 properties and starting to grow my share portfolio with my total equity about $500k. 5 years ago I had no idea how I could possibly afford a rental property so I paid for PROFESSIONAL advice, put in place some clever financial arrangements and the results are now starting to show. But it wasn't easy and you have to make sacrifices. Be patient and remember that time is your friend when it comes to investing. It's only money and remember to have some fun along the way.

Cheers
Warren

I'm not sure I'd be recommending an aggressively leveraged property investment strategy in the current credit climate, with the sub-prime situation in the US and the property market collapse over there. Though how that impacts here is unpredictable, but it seems likely that credit will become tighter here as well. Tighter credit will translate to less demand. (though how an inflation breakout, including wage inflation, could affect this picture is another matter)

I've been trying to hold fast to the "NEVER SELL -- IF A HOLDING GOES SOUTH (AND IS NOT AN OBVIOUS BARGAIN) JUST DIRECT FUTURE CAPITAL ELSEWHERE" principle.

Click to expand...

Why this idea that you need to buy and hold forever? - imo all assets should be reviewed regularly for their investment-worthiness - and if they're going down the gurgler from a fundamental perspective then they're not worth holding.

disarray: Thankyou for your thoughts. Yes, "roof over head" is psychologially satisfying.

2BAD4U: WOW! Extremely impressive gain in 5 years!

cuttlefish: I agree, using aggressive leverage (in anything) is a bit worrying at moment. I'm really only "buy and hold" because my expertise is not yet such I'm comfortable moving around capital regularly. I think it's been shown that too many novices shift around their capital regularly to their detriment. I've just got a kind of moratorium on selling anything until I'm more sure of myself in the markets.


Peace,

S.