learning about shares.

(c) (b) does not include the MINIMUM 5% cash buffer I always try to maintain (eg) $1 million in margin loan, means there is $50k sitting in a cash management account. I get whacked for differential interest (difference between lending rate and borrowing rate) on this but I don't care. This forms part of risk mitigation

Why would you do this, don?t trust yourself ? It?s just throwing money down the drain.
 
Why would you do this, don?t trust yourself ? It?s just throwing money down the drain.
It's for SANF. Imagine the broker closed up shop one night - happened recently to a couple. Imagine you go on holiday for a week, another twin towers type event happens, market tanks 30% in that week - margin calls happens.

In both scenarios the whole portfolio disappears. With $50K in cash stashed elsewhere it's easy to survive the short term.
 
Shares held in a DT or HDT

Does anyone have any ideas or experience with holding shares in a trust structure instead of own name?

Dave
 
It's for SANF. Imagine the broker closed up shop one night - happened recently to a couple. Imagine you go on holiday for a week, another twin towers type event happens, market tanks 30% in that week - margin calls happens.

In both scenarios the whole portfolio disappears. With $50K in cash stashed elsewhere it's easy to survive the short term.
I strongly disagree. If you have the self control to manage the extra 50K within your margin loan (via maintaining a lower LVR than normal, and treating the 50K as if it was not there), you are in a much safer position. In the events described, prices often gap down, spreads widen, stops are taken out and margin calls are made, sometimes all within a few minutes before the market massively rebounds. If you have your reserve 50K stashed elsewhere you have no time to save your positions. It takes hours to transfer money.

So really, there is no benefit to keeping the money outside the margin loan unless you don?t trust yourself to not use this cash buffer as margin, or if you get better returns with the cash elsewhere (not in this case). It just costs you money (thousands in this case), and puts the portfolio at higher risk.
 
Hi Wategos

With Margin Calls you are given a time frame to bring your LVR back to its limit, if you don't have the cash then unfortunately you have to sell shares (at the worst time).
 
I strongly disagree. If you have the self control to manage the extra 50K within your margin loan (via maintaining a lower LVR than normal, and treating the 50K as if it was not there), you are in a much safer position.
That's not the point I am making. People who can afford to keep $50K under the mattress are thinking at a much more sophisticated risk mitigation level, and probably have investments at couple of orders of magnitude higher than the average.

In the events described, prices often gap down, spreads widen, stops are taken out and margin calls are made, sometimes all within a few minutes before the market massively rebounds. If you have your reserve 50K stashed elsewhere you have no time to save your positions. It takes hours to transfer money.
I described 2 scenarios. You've addressed only one of them. And then only put a highly conditional scenario on it.

The 1st risk that is being mitigated is the broker going broke - see MF Global as a recent example.
In late October 2011, MF Global experienced a spectacular meltdown of its financial condition, directly caused by improper transfers of over $891 million from customer accounts to a MF broker-dealer account to cover losses created by trading losses.
....
the losses incurred by customers of MF Global stood at $1.6 billion
....
In January 2013, a judge approved a settlement that would return 93 percent of customers' investments
....
In 2014, all MF Global customers who had not sold on their debt claims were repaid in full
So you could be without access to any of your $$$ for an extended period.

The 2nd one which you do address is dependent on 2 things. Firstly, that the market bottoms exactly somewhere between the two margin call levels (X and X+$50K), and secondly that $50K will make a significant difference. If the ML is well into 7 figures, then $50K will be insignificant.

As an example, assuming a $6M portfolio with LVR of 50% (ie loan of $3M) a market fall of 29.7% with cause a margin call. However, having a ML of $50K less (ie same figures, except for $2,950K loan), a market fall of 28.5% will cause a margin call. The scenario you are proposing to mitigate is that the market will fall somewhere between 28.5% and 29.7%, before it bounces.

Of course, I acknowledge that in the scenario where the fall is exactly between 28.5% & 29.7% then your risk mitigation strategy will cover it without any further action being required (however see below).

So really, there is no benefit to keeping the money outside the margin loan unless you don?t trust yourself to not use this cash buffer as margin, or if you get better returns with the cash elsewhere (not in this case).
As redwing has mentioned, some margin lenders give you till 2PM the next business day to top up or sell. And the majority of investors who have acquired sufficient net worth to be able to keep $50K cash equivalent, also have sufficient self control to not use it as margin.

It just costs you money (thousands in this case), and puts the portfolio at higher risk.
The difference in IR between a ML & LOC/offset a/c is less than 200bps. So $1Kpa is cheap insurance on a $6M portfolio.

If you have to start again from nothing or if funds are frozen for 3 yrs while the legal processes grind on, then $50K in cash will be invaluable - the alternative is $0. And the first $50K is the hardest.

Of course, if you have a $200K portfolio, then it all changes. You don't have the luxury of mitigating certain risks by keeping 6 months living expenses in cash equivalents.
 
50K is insignificant on a 6M portfolio so either approach will get clobbered.
I'm talking about a 10-20% buffer. I keep it in the margin loan via a 33% LVR limit and it has served me well over 19 years of margin loans. To each his own.

I'm not worried about broker collapse, I'm not investing in broker funds or structured products, just standard chess registered equities.
 
Have recently used margin lending to gain more of a share of the market.. Have thought that an lvr of 50% was still relatively safe due to a 25% gap before margin calls arise.... Thoughts?
 
Have recently used margin lending to gain more of a share of the market.. Have thought that an lvr of 50% was still relatively safe due to a 25% gap before margin calls arise.... Thoughts?

Keep some cash in your offset account just incase. I prefer to keep it less than 40% with some cash in offset.

If you are buying individual shares then the LVR on each can be different, so don't assume it will be around 70%-75%. Some smaller companies shares can have LVR as low as 40%.

Cheers,
Oracle.
 
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Ahh yes, good point on the more risky stocks with smaller LVR guidelines!

I guess I will add up the LVR's with all the stocks in said ML, find the average, and see 75% of that...
 
The ML that I have in joint names has average LVR of 57.5%, thus .75 of this is 43%. Thanks for the reminder as I will realign the rule I set for this ML instead of keeping it a blanket 75%!

ta!
 
Guys found this Westpac product the other day, 5.49% 12 months prepaid on the BT Integrated loan facility, max 250k and they have 100 securities approved so not the full bag, but the interest rate is very sharp.

http://www.westpac.com.au/personal-banking/investments/loans/investment-loan/?view=Standard#s3

Giving some thought to this product to juice up my existing debt recycling scheme, would keep 33% LVR on this product if I was to do it.

Erko depending on how large your portfolio is it is definitely possible to get normal variable rates around that interest rate. So no need to pre-pay.

Best to call few different banks and make them bid for your business.

Some inconvenience but worth it if you are in it for the long term.

That is what I did in the past and am paying similar rates for my margin loan currently.

Cheers,
Oracle.
 
Erko depending on how large your portfolio is it is definitely possible to get normal variable rates around that interest rate. So no need to pre-pay.

Best to call few different banks and make them bid for your business.

Some inconvenience but worth it if you are in it for the long term.

That is what I did in the past and am paying similar rates for my margin loan currently.

Cheers,
Oracle.

Appreciate the info mate. I am using an LOC only @ 4.90% but looking to get a cheap margin facility lined up, only say 250k max.
 
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