My Failing Debt recycling strategy using..... HVST

So here's the story: As many in this forum I had some luck, with my Sydney PPOR growing in value in the past 5 years. The property was revalued and through my mortgage broker I raised a handsome equity loan of $300k.

As this fund was sitting there doing nothing, and I was not keen on using this as a deposit for a new IP, I decided to use a big chunk of these funds for debt recycling and bought some Beta-shares Dividend Harvester (HVST) units. The interest on the equity loan was around 4.8%, while HVST was paying 11% in dividends early on. I had some success in using this dividend money to reduce my original PPOR loan. However the value of HVST is slowly eroding. Its down almost 20% from my original purchase price.

What do I do from here? If I sell up all my HVST units, I will not recover my capital. If I hold it, I can sustain the equity loan repayments through its healthy dividend. But my fear is HVST might be using their capital to pay dividends, and its value will continue to slide. Anyone else has a similar story or suggestions on how I can turn things around?

 

get some financial advice.

 

Doesn't look good on the chart, keeps making lower lows. That's why using equity from real estate to plow into a higher risk asset class always carries this very real possibility of losing your capital fast, Like terry said, get financial advice. If it were me, I'd be getting the hell out.

 

Well you have certainly recycled the debt. Borrowing to buy income producing income will always have a capital element with HVST. Its not a 11% term deposit. Unless capital is maintained your yield isnt 11%. And if you lost 20% you need the upside to be 25% to break even. You will be paying tax on income and losing money too

HVST wont pay dividends from capital. Indicates lack of understanding in your investment. 59% of HVST is banks....Banks have fallen v's broader market. The exposure to Banks at Oct is shown here
https://www.betashares.com.au/files/factsheets/HVST-Factsheet.pdf

One of the problems with some ETFs is that they have a mandated allocation. So if banks are 59% and banks crash they may actually seek to buy into the falling market. It can compound the problem. Beta may trim the allocation but to get the income they need the banks based on high divs.

Its essential that you know the holding in the ETF. Bank shares price collapses have been well publicised. Typically down 15%

 

This is also why risk management is so important, especially when using leverage - you need to know when your idea is wrong, and get out. It's not enough to see a high yield, you also need to look at the trend when you buy, and monitor.
This has been trending down forever. One quick look at this tells me it's not a buy. And this is a crappy 3 year chart off Google.


There's big push toward sharemarket investment now that borrowing for property is tough, but you can't just buy and hope - you need to educate yourself same as you should before you buy an IP.

 

Hi @Paul@PFI thanks for pointing out that HVST has a higher exposure to the Big 5 banks, compared to the wider ASX200. However where in the fact sheet does it say it will not return capital? I do own another fund which has returned capital. Plus I don't understand how HVST are able to pay dividends monthly, when most of the underlying shares they hold pay dividends twice a year.

 

If you do sell at a loss get some tax advice on how much of the loan to pay off. You might be able to continue claiming interest.

 

Advice is needed as Terry said, too many issues at stake with potentially life impacting effects long term to try and solve with Dr Google.

 

Hi folks, I do appreciate financial advice has its place, and I have sought it previously with poor results. The intention of this post was to highlight that some debt recycling strategies can end up being 'debt building' strategies and to tread the waters carefully. I have invested in managed investments for over 15 years, and one thing I have noticed is many funds/LICs produce outstanding results for a few years, then proceeds to lag behind the index for some time. This is partly because good managers move around in the industry. The intention was to understand how other people have handled a similar situation.

 

thanks for the post Southboy. You would have had to assume going in though that the capital was a good chance of reducing? are you at a loss if you include dividends? maybe DRP a portion to try and keep capital a similar level

 

Highlights the importance of diversification. What % of that pool of funds did you allocate to this fund? One of the best things about equities vs property is the ease of spreading risk through diversification. Personally I would never put more than about 10% of total portfolio into one stock, because you can't get it right all the time.

 

Most conservative people probably won't do that, what you doing is fairly high risk
you throw all your eggs in a basket because you attracted to high yield

with equity, you need to split your money into a dozen of areas so that one bad move won't hurt you and the other move may make up and make you more money

In equity market, very high yield usually tell you something isn't right about the business it either unsustainable or the share price going to drop

 

No the intention was was to pay the monthly equity loan interest, with the monthly HVST dividend and the surplus dividend will go and repay my PPOR loan balance. DRP will not work when you want to debt recycle, as you need cashflow to service the new "equity loan". No I didn't think the capital will reduce, as it had a good mix of blue chip shares, similar to VHY.

 

This is a single fund....yes, but has a collection of blue chip shares, like many LICs and ETFs

 

but I think this is the mentality of most buying shares?

please no one shoot me, but from what I have read investors are not too concerned about their capital, its just a paper loss as they say. Too bad if you need to access funds.... life happens....

You just put all your eggs in one basket that is the difference.

 

What's your time horizon. Are the dividends still paying the interest? Do you believe HSVT will recover?

 

I never thought this was possible. So in other words if I borrow $200k from my bank, to purchase an asset and if I sell this asset, at a loss at $150k, and settle $150k of the loan, then the interest on the unpaid loan of $50k can continue to be claimed as a deduction, even though there's no income producing asset held by that loan?

 

Years ago now, someone made a $200K loss Navra posted it on SS forum, cut their losses, moved fast, best thing they ever did, otherwise they would have ended up with nothing

 

No shooting involved @MTR. I think it might be a tad unfair to say that with share investment, wherein the main driver is dividend income, we should "not" be concerned with capital. There a other factors involved, such as time frame.

I don;t know much about HVST but, my dividend income play has been with the oldest LICs around.

1. WHF (1923),
2. AFI (1928),
3. ARG (1946),
4. AUI (1953),
5. MLT (1958),
6. BKI (2003/1980 for BKW).

Not an LIC but ..

1. SOL (1872)

And, agree - never put everything in the one basket.

 

The dividends are paying the equity loan interest, so no impact to cash flow yet. Beta shares is also a well know brand, so I am optimistic price will pick up. Then again it might take years before this happens.