Margin Lending - the good, bad and the ugly.

Margin loans are simply an investment loan that is secured against the assets you are purchasing, such as shares and managed funds.   You don’t need to sign over your house and that is why so many people like them.    However, investors can get into trouble if their investment falls below a certain level, known as the loan to valuation ratio (LVR).

You may have heard of margin calls.   When these happen, investors are in a bind.  They can either sell down their investment to restore the LVR,  in other words forced to crystalize losses, or have to find the funds to top it up.  What a tough decision to make in this current economic climate.  You could be buying bargains, or perhaps throwing good money after bad.    Some institutions also allow you to assign other assets.  Read more

How safe is our fixed term deposit with Suncorp?

Q.  How safe is our fixed term deposit of $260,000 with Suncorp that we have deposited for 3 years? I have heard a few rumours that Suncorp could be sold and wonder how safe are our funds a) if suncorp is not sold and b) if suncorp is sold. My husband and I are both now retired and wanted to be sure of our investment.

Josie’s answer:   Lots of rumours flying around at the moment that Suncorp will be gobbled up by the Commonwealth Bank or ANZ.  CBA have already pounced on Bank West.

Oh the poor banks they really seem to be really suffering at the moment (with my tongue firmly in my cheek!).   Suncorp are a second tier bank, which means they don’t have the same rating as the big four i.e. Commonwealth, ANZ, NAB and Westpac. Read more

Investment paying 12%pa - is it too good to be true?

Q.  I recently saw an investment for a sporting club raising funds that advertised 12% per annum compounded, calculated annually (over 5 years in unsecured notes.)  I have no intention of investing, but the return is interesting and seems too good to be true. Have I misunderstood the 12% pa compounding annually.

Josie’s answer:  Compounding annually means that they credit interest 12% interest on 30 June and the following year, they will pay 12% on the original investment, plus the 12% paid the previous year … and so on it goes until the end of year 5. Read more

My Financial Planner wants me to take out a margin loan?

 

 

 

Q. My financial planner has suggested I take out a margin loan to buy into Australian shares via a managed fund. Is this is a good idea?

Josie’s answer: Margin lending is not for everyone, you need to be a savvy investor and happy to take risks.

Before committing yourself to a margin loan, make sure you have extra income to cover the interest payments, even if the interest rate suddenly goes up or your investment makes a loss.

Most importantly, you must be committed to investing for the long term and emotionally be able to cope with making a loss.
Read more

Is Topping up margin loans risky?

Q. I’ve heard of people who have a margin loan being asked to top up their geared investment at a moments notice. Sounds risky?

Josie’s answer: If your investment loses money, not only is the loss magnified as well, but you still have to pay back the loan. With a margin loan, your lender will ask you to repay part of your loan or top up your account with some other security, such as other shares you may have. If you can’t do this, you might be forced to sell part of your investment.

It is all to do with the debt to equity ratio. If you keep this at a reasonable level, around 50% equity/50% debt, normally things are OK, but there are never any guarantees.

Read more

How Safe is a Bridging Loan?

Q. How safe is a bridging loan? I have found a property that I would to purchase. I have two other properties that I have on the market now. With the way interest rates are at the moment are bridging loans taboo?

Josie’s Answer: Personally I would not feel comfortable with a bridging loan regardless of whether interest rates are going up and down.

I have heard some horror stories whereby real estate agents have given vendors the impression that their property will sell within a short period of time, only to find that there were no buyers around.

As a result, they are placed under immense financial pressure to pay off, in effect, two home loans. The only way they can relieve the financial burden is to have a fire sale, in other words they were left with no option but to drastically reduce the price of their property.

Of course, I am not familiar with your entire financial situation. If the new property you are purchasing is a great buy a quality investment and if you are financially comfortable, then you may be in a position to easily service both loans. Read more

Investing Internationally - Is it Risky?

Q. My adviser has recommended that I invest some of my money overseas. It sounds a bit risky?

Josie’s Answer - The main reason why you would allocate some of your funds, overseas is for diversification.

For your info, the Australian sharemarket represents around 2.3% of the world’s total sharemarkets, which means that nearly 98% of the world’s shares are not available to you.

A bit of trivia, you will be surprised to know that Australia’s sharemarket is actually smaller than the markets of Switzerland (3.1%)The size of our market is not too dissimilar to some of the world biggest companies. Read more

What is a Wrap Account?

Q. What is a Wrap Account and what are the advantages of having one?

Josie’s Answer - Sometimes Wrap accounts are also known as master trusts. Basically they are an “administration service” that allows you and other investors to pool your money, so that you can access managed funds at wholesale prices.

For example, the investment management fee for the average retail managed fund is approximately 2%, whereas the average for wrap accounts tends to be 0.5 – 1.5%.

The cost depends on what the fund manager wants to charge (some think they are better than others! But are they?). Read more

Please tell me when the share market started to decline

Q. I listen to the show every week. Could you please tell me with reasonable accuracy when the share market started to decline. Thanks Robyn

Josie’s answer: Hi Robyn. Thanks for your question and I am crossing my fingers that your investments have not suffered too much with the recent volatility.

I am assuming you are referring to the All Ordinaries Index, which represents the top 500 stocks listed on the Australian Share Market.

This index appears to have peaked on 1st November 2007 at 6853. As at today’s date (2nd April 2008), the index closed at 5544, which means it has dropped approximately 19% since that date (as you would know it has been lower!).

To get back to its peak, the market now needs to increase by nearly 24%. Who knows when it will reach its peak again, but historically speaking it is not unusual to see it exceed its previous high within 5 months. Read more

Currency fluctuations and investing

Q. I have some money invested in international shares. How does the fluctuations in the $A affect my return?

Josie’s Answer - Once a decision has been made to invest in a security of another country, it automatically involves an investment in that currency.

An investment in an American share will mean that the return will be affected by any movement in the US Dollar relative to the Australian dollar. If the US Dollar strengthens, then the value of an investment in a US share will also strengthen.

So depreciation of the Australian dollar adds value to an overseas investment, and an appreciation of the A$ means that it will detract from returns. If you are invested in a managed fund (and you probably are through your super), some fund managers have the option to employ hedging strategies or active management of currency.

Hedging is a tool employed as insurance, to protect a portfolio from future exchange rate variations. If you fund states it is ‘unhedged’ it means that it will benefit from a depreciating $A, but the return will reduce by an appreciating $A. Read more

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