Is this the start of the crash?

No margin calls, yes. But the pds says that they can change the list of approved investments at anytime.

 

If you stick to the likes of ARG, AFI, MLT, VAS, VGS I doubt they will be culled from the product choice.

 

Well. That was all of a bit of a fizzle out wasn’t it.

 

Ultimately we all need to be out of debt (or have such negligible debt it carries very low risk) to enable retirement in comfort. I see too many situations where smart people have built good size asset bases but years later they still owe it all and due to poor cash flow management, and weak strategic management and structuring of the assets the plan still has not delivered one extra $ of passive income. As all my clients know my definition of retirement is not a massive asset portfolio, it's a massive multi-source, tax efficient passive income stream.

Overleveraging on margin lending has been the thorn in the side for the inexperienced share investor and at times it has given leverage in to shares a bad name. The fault is not with the loan, it's the way it's managed and typically problems stem from greed. These days a lot of providers have changed the way they do things and more than one provider have 'no margin call' versions now which is a big improvement post GFC.

There are other safer alternatives to achieve the same leverage effect without margin lending these days. Therefore I advocate a 'no margin lending' approach to investing/debt recycling unless a client insists they want it and even then they are given profuse warnings and limited to a maximum of 30% LVR. I stress tested this through the worst of the GFC period with a range of stock standard equities and index funds and there were no margin calls at this LVR providing the portfolio is in diversified blue chips.

All debt based accumulation strategies need to be underpinned by a disciplined, detailed and realistic forward cash flow map that has also been stress tested at 3% higher than current interest rates.

I find that the reality of life for mums and dads in the suburbs is that they pretty much always have to take on debt to achieve their first goal of purchasing a PPOR and once this happens, many find it difficult to save towards investing due to the high cost of living and housing in Aus. For people with a PPOR and non deductible mortgage - debt recycling using the mortgage is often most powerful and efficient debt reduction/wealth accumulation strategy to solve this issue relatively quickly. For those circumstances, providing one is prepared to accept the risk of leverage many 30 year mortgages can be cut down to under 10 years and sometimes much less depending on the client's saving capacity. Debt recycling is far more efficient under these circumstances than simply saving cash in to the investment as debt recycling allows the surplus $ to be used twice and potentially three times if further leverage strategies are applied.

 

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I think you may have misconstrued the message in the video.


I interpreted the message to be: Its foolish to risk something you do have and do need (enough money) for the sake of something you don’t have and don’t need (more money).

Nodrog, you havn’t made much of a secret of now having enough for a comfortable retirement. So, I’m interested why you still seem to contemplate taking on future debt risk in a pull back. It seems you would take the 1 bullet in a thousand-chamber risk? Why would you do that at your stage and position in life; Thrill seeker? Ego? Greed? Insecurity? Satisfaction from managing risk and the score card (return) is more important than the security of unecumbered equity? Confidence that you can anticipate the future and avoid the bullet?

Are you and your wife as one on the risk reward of taking low probabilty high consequence decisions, would she be making an informed decision or following your advice? Why wouldn't she follow your advice - you've probably pulled the trigger a 100 times already without consequence to get where you are.

I’m sure you won’t take offence at this post– I’m just endlessly fascinated by the psychology of investing and taking the chance to ask you the same question I ask myself. I would actually like to have this sort of risk/consequence discussion with my wife, but she just wants to leave it upto me. Like it or not I have to make these judgements for her and our kids and that is much harder than just making them for myself.


Also really grateful to see SatayKing’s response as somebody who’s obviously asked of himself and answered a lot of questions in his journey.

 

Ah, ok. That's not what it said to me at all. That does sound unwise. But then that's not really the propositon against "debt", is it? It's more the case against taking unecessary and unjustified risks.

 

Mr. Buffett uses a sort of leverage this from Berkshire's 2015 letter to shareholders

"Berkshire’s huge and growing insurance operation again operated at an underwriting profit in 2015 – that makes 13 years in a row – and increased its float. During those years, our float – money that doesn’t belong to us but that we can invest for Berkshire’s benefit – grew from $41 billion to $88 billion. Though neither that gain nor the size of our float is reflected in Berkshire’s earnings, float generates significant investment income because of the assets it allows us to hold."

 

Thanks @dunno. I enjoy your commentary.

You may have missed or misunderstood an important point in my previous post. That is “ When accumulating ...” . This was when we were “pre-retirees” still very much in accumulation mode. In a number of recent posts I’ve made it clear now that we are “retirees” it’s unlikely we will ever use debt again. Not only that but we are also increasing the “risk free” allocation of our portfolios.

As for my wife she has less issue with using debt than me but leaves it up to me to make the call as she knows how nervous I can get about it. She spent most of her working life in the area of Risk at very senior levels.

That said, I don’t see a problem if some retirees choose to use a small amount of leverage. Peter Thornhill has continued to do so through retirement. Even a Great Depression type event would not put him and his wife in peril given the sheer amount of cash flow. You wonder why he does this when he has way more than they need? Because he’s very much the Philantrophist intending to leave the ongoing income from half their wealth (keeping the portfolio intact) to a number of charities. So some are investing for beyond the grave and hence think differently to those who only focus on their own needs.

 

Thanks for the response @Nodrog. Yes, I was under a mis-understanding, thinking you were still intending to use debt again in the future, which did seem at odds with the other more conservative actions you otherwise seem to implement.

Any rate, you seem to be all over adjusting your risk as circumstances change but it’s a discussion I need to continue with myself (yep I know talking to myself) I'm guilty of continuing to take more risk than needed and I still haven’t fully resolved why I do it and whether it's fair on family to indulge my ego and passions for chasing return when there is a chance of a bullet on the end of the trigger and I don't value the accumulation of the extra money - it probably has negative marginal utility to me personally.

Sorry for the drift - resume crash contemplations now.

 

How does interest rate rises impact on share market??? Curious

 

He he. Truth be told there’s not a week go by where I don’t question the amount of equities we own. But it’s like an addiction. We don’t need more equities but I can’t resist buying them when I consider them good value. It’s not about wealth or income anymore. I seem to just like bargain hunting and “collecting” them. Bit like any collector I suppose. I suppose I take some comfort in that should another Great Depression occur we’d likely still be ok. A sizable cash buffer adds further to SANF.

We should think ourselves lucky our passion is investing even if it’s more equity focused. The vast majority of the population do a lot worse things with their money.

 

This reinforces my point earlier that it's not about debt, it's about risk. What you are doing sounds risky and if you are not comfortable with what you are doing then you should definitely examine why you are doing it.

Debt doesn't have to be risky or unnecessary. For example, my last loan has an LVR of 27%. The funds are to complete a build project and at completion the loan will be 'covered' by 2 separate properties which equates to an LVR of 15%. The utility I have gained from this debt far outweighs the risk of the debt.

 

Usually negative to varying degrees.

People chase returns on their money. Why invest in the share market with the risks involved if you can get decent bank interest? At the moment you are lucky to get around 2.5% from the Big 4 which makes shares more attractive than when bank returns of over 6% were offered.
Marg

 

From Bloomberg

How Spiking Bond Yields Could Topple a Stock Market Rally

 

Enjoyed this discussion. Very much fits with the Bill Bernstein line about why are you still playing the game if you have already won? Perhaps find another hobby.

The problem with the greatest game of all is that it is so very interesting, so helpful in learning about how the world works, learning about yourself and why others act the way the do with money etc....its hard to stop if you have the bug.

Personally I will limit taking on debt to the fabled one foot high hurdles. I've come across one of those in my life but I don't expect I'll find another. Taking on debt to invest in public equities after a significant pullback i don't see as a one foot high hurdle so wont take on debt to buy stocks. However, many people will see it as that and thats absolutely fine. My view on this changed after understanding how I respond to margin (thankfully no harm done)...but largely due to change of circumstances that means I don't need to take on debt to meet our future financial needs.

So perhaps put a "fiduciary" hat on and seperate church and state here....run the family investments as a company with a firm, conservative, documented investment policy / asset allocation and run a small personal account on the side as a hobby if you wish to stay in the game. Never the twain shall meet.

 

Thanks Falcon.

I’m heading off straight away to tell the misses that the most insightful poster on PC suggests a bit on the side for excitement.

Have you been advising Barnaby Joyce as well?

But seriously - really appreciate your posts. Segmenting seems a very viable solution.

 

Proven mathematically that buying a lump sum now defeats dca. Do you mean the timing is now?

No-one can predict the future of the share market with certainty.

 

Seeing as I don’t check prices, care for an update @pinkboy

 

Nicely put sir!

 

No. Barnaby is the poster child for sequencing risk!!