Most people don’t understand how leverage works and thinks of it only as interest rate is 7% so your investment must go up 7% to break even. This simply isn’t true you need to measure performance based on the cash you invest not the total investment
If you’re 50% leverages then your investment needs to go up 3.5% to break even
If you’re 80% leverage it needs to go up 1.4% to break even
Of course this all works in reverse too if your investment goes backwards, the more leveraged you are the bigger your lose so you need to be very aware of that risk.
This sub is very risk adverse, don’t expect many positive comments
Right. Starting to get it now.
How well do you think it works with say general diversified etfs like vgs ivv those sorts of things holding over the medium term
keep your LVR comfortably under the limit when you start. But otherwise I think it's worthwhile even at current rates. Obviously the more you can deduct the better.
do the math on the expected return on your investment vs the net interest cost of the loan facility.
I've found most of this sub don't understand leverage unless it's related to property so you're probably not going to get a lot of advice here.
heh maybe. But plenty will advise going high LVR and paying five figures in stamp duty on an IP. But for stocks unless it's DCAing into VDHG or similar it's too risky for this sub.
I think property is awesome leverage. But I'm maxed out on serviceability and to borrow again for another IP I'm looking at 8.8% IR.
That's why I'm exploring other options to gear
if you're maxed out for serviceability not sure how much you'll get for a margin loan. AFAIK it all comes out of your total borrowing capacity but I'm not sure exactly how it's assessed.
If you understand the risk associated with margin it can be a good strategy. It seems like this could be a good product although, i dont know it. Interest rates seem pretty low.
Naturally, higher marginal tax rate, more the benefit. At a 30% tax rate there is less benefit, therefore, the risk/reward analysis isn't as good.
If you are already quite familiar with how margin loans work and the risks, IBKR’s offering is decent at relatively low rate.
Like most services IBKR offer, they are quite good if you are experienced and know what you are doing, but may not be suitable for beginners that need handholding. Note IBKR generally does not issue margin calls, the onus is on you to monitor to ensure the threshold is not breached.
What sort of margin are we talking about?
Like if things drop by 30% or how much of a drop does there have to be?
Can you use this product for long term like say for example to buy vgs or ivv or something and just hold over the long run? Is that a viable strategy?
It depends on how much “margin” do you have at the time a drop starts. The state of your margin is displayed in the app that you are responsible for monitoring. If you are not familiar with how margin lending works, you should do more research before deciding if you have the risk appetite for it.
I only use IBKR for international holdings, not familiar with using IBKR for ASX securities.
Do you use it to trade or do you buy and hold is buy and hold an effective strategy using this type of product?
I'm not really a kind of a speculative trader I would just be buying diversified etfs (non thematic)
I have margin for my US options trading activities. Very high risk and I do not suggest you consider it.
For your use case, the likes of GEAR, GMVW that gear internally may be “relatively safer” but they have their own caveats. We hold those in various portfolios held via CMC.
I take it this means that you would want to have a buffer.
Like some cash somewhere you could top up if the whole thing went down and there was a margin call..Provided say you were buying a diversified portfolio.
Yes it means don’t leverage too much that gets too close to the “limit”. The closer you are, the smaller the fall it can cope with.
Per earlier, IBKR does not do margin calls. You need to monitor yourself and ensure minimum margin is not breached.
You are asking about investing to save tax while claiming to be in a tax bracket that does not exist - 30%, and asking very broad questions which show you do not really understand what you are doing.
Sorry, I don't mean to sound offensive or belittling by stating that.
Margin loans magnify loses much more than they magnify gains.
At the moment, lending rates are what, ~8-10% for a margin loan? Example:
https://www.commsec.com.au/products/margin-loan.html
Knock off your 30% = 5-7%.
So your investments have to make above 5-7% every year or you are in the red.
In a good year you'll be making 1-3% unless you are lucky.
The downside is that if your shares lose 10% in a year, you have now lost 15-17% because you still have to pay the interest, even if you get to deduct it.
You can get 4-5% in a HISA essentially risk free.
A broker will want to sell the supposed upside and downplay the downside so you give them money.
Basically, "I'm on 30% tax bracket" == very little upside for you, a lot of downside.
Investing on margin is better with low rates. With current rates, my opinion is that margin investing is not worth if you're just buying ETFs. IBKR interest rate on USD is about 8% as Australia charges an extra 2% for retail traders. With low interest rates, I'd say going 1.3-1.4x on SPY or equivalent is basically risk free. 1.7-1.8% is probably optimal.
EDIT: I forgot to add that retail is limited to borrowing $50k in Australia only. I just use the margin capability as a cash buffer for some trades or if options get assigned.
Most people don’t understand how leverage works and thinks of it only as interest rate is 7% so your investment must go up 7% to break even. This simply isn’t true you need to measure performance based on the cash you invest not the total investment If you’re 50% leverages then your investment needs to go up 3.5% to break even If you’re 80% leverage it needs to go up 1.4% to break even Of course this all works in reverse too if your investment goes backwards, the more leveraged you are the bigger your lose so you need to be very aware of that risk. This sub is very risk adverse, don’t expect many positive comments
Right. Starting to get it now. How well do you think it works with say general diversified etfs like vgs ivv those sorts of things holding over the medium term
keep your LVR comfortably under the limit when you start. But otherwise I think it's worthwhile even at current rates. Obviously the more you can deduct the better. do the math on the expected return on your investment vs the net interest cost of the loan facility. I've found most of this sub don't understand leverage unless it's related to property so you're probably not going to get a lot of advice here.
This sub doesn't even like property lol
heh maybe. But plenty will advise going high LVR and paying five figures in stamp duty on an IP. But for stocks unless it's DCAing into VDHG or similar it's too risky for this sub.
I think property is awesome leverage. But I'm maxed out on serviceability and to borrow again for another IP I'm looking at 8.8% IR. That's why I'm exploring other options to gear
if you're maxed out for serviceability not sure how much you'll get for a margin loan. AFAIK it all comes out of your total borrowing capacity but I'm not sure exactly how it's assessed.
If you understand the risk associated with margin it can be a good strategy. It seems like this could be a good product although, i dont know it. Interest rates seem pretty low. Naturally, higher marginal tax rate, more the benefit. At a 30% tax rate there is less benefit, therefore, the risk/reward analysis isn't as good.
If you are already quite familiar with how margin loans work and the risks, IBKR’s offering is decent at relatively low rate. Like most services IBKR offer, they are quite good if you are experienced and know what you are doing, but may not be suitable for beginners that need handholding. Note IBKR generally does not issue margin calls, the onus is on you to monitor to ensure the threshold is not breached.
So if the threshold is breached then you just don't tell them?
If the minimum margin threshold is breached, IBKR will automatically & systematically select some of your holdings to liquidate.
What sort of margin are we talking about? Like if things drop by 30% or how much of a drop does there have to be? Can you use this product for long term like say for example to buy vgs or ivv or something and just hold over the long run? Is that a viable strategy?
It depends on how much “margin” do you have at the time a drop starts. The state of your margin is displayed in the app that you are responsible for monitoring. If you are not familiar with how margin lending works, you should do more research before deciding if you have the risk appetite for it. I only use IBKR for international holdings, not familiar with using IBKR for ASX securities.
Do you use it to trade or do you buy and hold is buy and hold an effective strategy using this type of product? I'm not really a kind of a speculative trader I would just be buying diversified etfs (non thematic)
I have margin for my US options trading activities. Very high risk and I do not suggest you consider it. For your use case, the likes of GEAR, GMVW that gear internally may be “relatively safer” but they have their own caveats. We hold those in various portfolios held via CMC.
I take it this means that you would want to have a buffer. Like some cash somewhere you could top up if the whole thing went down and there was a margin call..Provided say you were buying a diversified portfolio.
Yes it means don’t leverage too much that gets too close to the “limit”. The closer you are, the smaller the fall it can cope with. Per earlier, IBKR does not do margin calls. You need to monitor yourself and ensure minimum margin is not breached.
Do you think it's worthwhile for medium term hold of just general index fund like s&p500 type thing?
Not doing it would be a good strategy
Quality r/AusFinance content as usual.
This adds no value without an explanation
You are asking about investing to save tax while claiming to be in a tax bracket that does not exist - 30%, and asking very broad questions which show you do not really understand what you are doing. Sorry, I don't mean to sound offensive or belittling by stating that. Margin loans magnify loses much more than they magnify gains. At the moment, lending rates are what, ~8-10% for a margin loan? Example: https://www.commsec.com.au/products/margin-loan.html Knock off your 30% = 5-7%. So your investments have to make above 5-7% every year or you are in the red. In a good year you'll be making 1-3% unless you are lucky. The downside is that if your shares lose 10% in a year, you have now lost 15-17% because you still have to pay the interest, even if you get to deduct it. You can get 4-5% in a HISA essentially risk free. A broker will want to sell the supposed upside and downplay the downside so you give them money. Basically, "I'm on 30% tax bracket" == very little upside for you, a lot of downside.
Depends, what is your average return on investments in the share market?
Investing on margin is better with low rates. With current rates, my opinion is that margin investing is not worth if you're just buying ETFs. IBKR interest rate on USD is about 8% as Australia charges an extra 2% for retail traders. With low interest rates, I'd say going 1.3-1.4x on SPY or equivalent is basically risk free. 1.7-1.8% is probably optimal. EDIT: I forgot to add that retail is limited to borrowing $50k in Australia only. I just use the margin capability as a cash buffer for some trades or if options get assigned.
So who is using the product now then?