Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

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Saturday, 14 April 2012

Borrowing money to buy shares?

This can be done, via the use of what is known as a margin loan.

Depending on the cash and collateral you have available, a lending counter-party such as ANZ Bank will extend you a loan facility of $25,000, $50,000, $100,000 or even more for the purpose of investing in shares.

Interest rates on margin loans tend to be higher than mortgage lending rates (perhaps around 9% at present) so the investor needs to make a decent return on investment to get ahead.

The good, bad and ugly of margin loans

In a raging bull market, margin loans are an excellent means for investors to boost their returns by using leverage to put more capital to work for them.

The downside, as noted, is that the investor must make a decent return just to break even.

Where margin loans can become particularly troublesome is in sideways-trending markets.

In a bear market with sliding values, investors tend to be forced to sell shares bought on margin when the lending party issues what is known as a margin call (insisting that the investor either sells shares to reduce the loan to value ratio, or pay in more cash to top up the account balance).

With the market trending sideways, the investor has a harder decision – he or she is unlikely to be making the return to cover the loan interest but doesn’t want to miss the opportunity to participate in the upside potential if the share market makes a positive breakout.

Margin loans right now?

I have a total facility of $100,000 for investing in margin loans which I have used in full in the past to help magnify returns, but I’m only using a very small percentage of it right now – I’m just not feeling it at the moment.

While the market might continue to drift upwards a little in the absence of bad news, I feel that potential market shocks could see the market with more downside risk just now. It’s down to personal choice, of course, but it would certainly be smart to exercise caution in the current market.

Warren Buffett famously once said of leverage: “If you’re smart then you don’t need it – and if you’re dumb you definitely shouldn’t use it!”

Negative gearing and tax effects

Under current Australian law, margin loan interest is tax deductible, which is a handy benefit for leveraged investors. Thus from a tax return perspective:

-Dividends are treated as taxable income
-Margin loan interest is treated as tax deductible
-Capital gains/losses are taxed in the normal manner

So if you’re receiving dividend income of say, 4.5% and paying margin loan interest of 9%, then this leaves the investor still needing some reasonable capital growth to finish in the black. 

I don’t know whether we’ll see this kind of growth over the rest of 2012, but time will tell.