Leverage - Do you use it?

I am doing a bit of research into leverage and was wondering if people use it maximise returns. If they do, how do they lose leverage (i.e. use it during a massive dip like last years election, GFC, etc)? People use leverage to buy property but it appears riskier in shares. With NABs Equity builder and no chance of a margin call, this may minimise risk??

I read this article and it got me thinking about potentially borrowing to invest. I am 33, have a family have already a large sum in super so am willing to accept high level of risk in our vanguard wholesale fund/share trading account outside of super. We have 20% Cash, 40% Aus LICs, 40% Vang Wholesale fund split.

I read Benjamin Graham;s book and he highly recommends a very conservative split of 50% Bonds/50% Shares and zero leverage. Over time though, this does;t provide the most returns.

 

Leverage? Never heard of it!

Seriously though, it magnifies returns on the money you've invested ie your cash but also amplifies the risk too. Should the shares fall in value at often happens, your LVR will increase and the lender will want more cash from you to lower their exposure.

 

Or, if you don't have the funds, sell sufficient shareholdings to cover the margin. Seen it happen many, many times and, in some extreme cases, even that may not be enough to clear the debt so the "investor" is in hock for a few thousand (if you can call $150k or more a few.)

Dangerous stuff can be gearing it can.

 

Imho the more volatile the investment instrument the more dangerous leverage is.

 

Maybe, maybe not. It's a question of properly managing the debt and not over committing, in my view.

I recall reading on this forum and elsewhere about a number of people (one being a real estate agent) who invested in property and went to the wall owing heaps. It was a slow burn to some extent.

In the case of margin loans, yes, it can happen rapidly but, ideally, one should not gear excessively, unless them low, dangly bits are made of steel, and should always have a cash buffer put aside for a "just in case" situation, which effectively means the gearing is not as great as first appears.

 

NAB Equity Builder could solve the margin loan issue but sensibly restricts investment choice. However the choice offered includes a number of my favourite diversified investments being the major old LICs:

NAB Equity Builder

 

I was thinking this is why people take out investment loans against the equity in their PPOR. Then the laon is secured against the PPOR - and not the shares. Hence no margin call???

Interestingly - I have done this. I have an investment loan IO against the equity of my PPOR (I also have an I&P normal home loan). I haven't actually used the IO loan yet to do anything as I still haven't worked out if I would be better off buying shares (and having the interest as tax deductible) or just pushing all my funds into the Home Loan first (the non-deductible part).

 

Looks like the Nodrog reverse naming convention is gaining popularity. P&I —> I&P. The forum’s definately going backward.

 

Yeah - lack of coffee is my excuse.

 

@Nodrog, sent your alter ego a PM a little while back not sure if you are checking them...pls get in touch