Author Topic: I want to invest harder, but I can't work out how. (Australia).  (Read 10423 times)

This_Is_My_Username

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I'm hoping the forum here can advise me on how to invest more dollars sooner. 

Assets: house value $355k, mortgage value $284k (80%). 4.49% variable interest rate.

Shares: 25k.

Superannuation: 80k(?) inaccessible. 

I save $1000/week. 65% savings rate.

Currenly, I am simply directly buying $4000/month of shares. 

Is there any way to get more money to buy more investments?

(1) I redrew the maximum possible out of my home loan, while avoiding LMI (80% LVR).  I used the money to buy shares. 

(2) Margin loans are expensive.  Currently 7.65% at commsec.  It is a risky gamble to hope my share investments will return greater than 7.65% p.a.

(3) Investment property.  It is a lot of hassle, and a lot of transaction costs, and a lot of ongoing costs, and undiversified, and high risk, and costs a lot of time!, and causes increased stress.  But at least I can borrow at 80% LVR and 4.6%

Any other ideas?

bigchrisb

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #1 on: June 11, 2014, 11:31:44 PM »
Hi,

I've played hard with leverage - it did very well on the way back up from the GFC, but I also got rather hammered on the way down.  As I stuck to my guns, I've done ok.  Do you think you will be able to stick the course when/if your leverage ends up in negative equity?  If not, then I'd suggest limiting your exposure to it.  I'll also steer clear of the market timing questions on leveraging to stocks right now.

Assuming its what you want to do, have you considered?

1. If you redraw from your home loan, make sure you split the loan so the interest is separable, and then tax deductible.  That said, it looks like you are already at 80% LVR, so no real funds to access there?
2. Shop around and negotiate harder on margin loans.  My margin loan is in the low 5% range, but it took a lot of shopping / working one lender against another to get it there.   Suggest you use the promo rates for refinance at NAB as a starting point http://learn.nabtrade.com.au/marginlending then click on the interest rates / learn more link
3.  You already have almost 80% of your assets in Australian residential property - do you want more exposure to that one asset class?

Given your income (about $80k after tax), I'm guessing you are well into the 37% (39% with medicare and NDIS levy) tax bracket.  So, paying down your mortgage, even at 4.49% is equivalent to a risk free, pre tax return of 7.4%.

Why not pay your $1000/week into your mortgage, and once you have some headroom, take out a line of credit for the remainder and invest that into stocks.  With $1000/week, you could have that mortgage nailed in about 5 years, and have it replaced with a similar size stock holding + deductible loan, at residential secured interest rates?





milesdividendmd

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #2 on: June 11, 2014, 11:52:45 PM »
What's the rush?  At your savings rate you'll be FI in <10 years.

Absolutely no need to swing for the fences.

I think of borrowing as compound interest in reverse. Your borrowed dollars are constantly working against you rain or shine, bull or bear.





This_Is_My_Username

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« Reply #3 on: June 12, 2014, 01:10:53 AM »
Thanks for the respose bigchrisb.

I am happy with high risk and negative equity, as long as the long term returns are there.

I have calculated the $ interest payable on each redraw/share purchase, so it is all squared away from a tax standpoint.  The loan is not split, but the deductions for interest will be claimed. 

You are correct, I can't redraw (without LMI penalty) due to being at exactly 80% LVR.

I changed my loan to interest only, to gain an extra 400/week in principal payments not made. 

(2) is a good idea, cheers.  I'll look in to it.   Are you able to explain further how you got <5.5% margin loan?  That sounds very desirable!

(3) good point. 

When interest rates go back up, i'll pay back the mortgage.  I am wagering that franked dividends + unrealised capital gains will be higher than 7.4% pretax.  What do you think about that wager? 

Quote
Why not pay your $1000/week into your mortgage, and once you have some headroom, take out a line of credit for the remainder and invest that into stocks.  With $1000/week, you could have that mortgage nailed in about 5 years, and have it replaced with a similar size stock holding + deductible loan, at residential secured interest rates?
  That is my plan, but more agressive.  Every time I am $5k ahead on the mortgage, i'll redraw to buy shares.  Also, dollar cost averaging.  No need to wait.  What do you think?

Thanks for the help 

This_Is_My_Username

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #4 on: June 12, 2014, 01:14:54 AM »
Quote
What's the rush?  At your savings rate you'll be FI in <10 years.

Absolutely no need to swing for the fences.

I think of borrowing as compound interest in reverse. Your borrowed dollars are constantly working against you rain or shine, bull or bear.

The long term outcome is better with borrowing. 

I agree there is no absolute 'need', but I should end up better off to the tune of $100k, or retiring 6 months earlier, or etc. 

Surely that is a benefit worth pursuing?

bigchrisb

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« Reply #5 on: June 12, 2014, 01:40:29 AM »

(2) is a good idea, cheers.  I'll look in to it.   Are you able to explain further how you got <5.5% margin loan?  That sounds very desirable!

When interest rates go back up, i'll pay back the mortgage.  I am wagering that franked dividends + unrealised capital gains will be higher than 7.4% pretax.  What do you think about that wager? 

For the interest rates, by negotiating hard.  Trade them all off against each other.  Much better done by phone than by email too.  I don't enjoy the process, but each time I've done it its been time well spent.  Take your best rate you can find to a lender, and see if they will beat it to win your business.  If they do, use this as the next benchmark to beat.  My margin loan is currently $500k, so perhaps a bit of scale to get them interested in negotiating?

As for your wager, I've been geared into stocks for the last 7 years, so I'm a believer in this approach.  However, I'd note that my gearing is currently at its lowest level of the 7 years at the moment, and with cash and cash equivalents held in a trust, I'm effectively ungeared right now.   I'm taking this stance because:
- I feel that markets are not as good value at the moment as they have been (market timing of leverage)
- I have a fair bit of cash tied up waiting to be paid to me over the next two years from the sale of a business, so I'm less liquid than I would appear
- I'm shopping around for a primary place of residence, as I'm currently 0% residential property.
- As my portfolio has grown, I've become more conservative, and less prepared to risk total wipeout.

That said, my average yield (including franking) covers my interest rate.  I reckon long term that there will be some capital gain, but I'm also OK with losing 25% next year.

One option you may want to consider, which I've used, is to leverage up in your own name (deductible interest), but invest through a trust structure (gets the earnings into a different tax entity).  Has some up-front costs, but if you are investing significant $$ over the next decade, may be a better long term structure for you.

« Last Edit: June 12, 2014, 07:19:59 AM by bigchrisb »

marty998

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« Reply #6 on: June 12, 2014, 06:14:07 AM »

I have calculated the $ interest payable on each redraw/share purchase, so it is all squared away from a tax standpoint.  The loan is not split, but the deductions for interest will be claimed. 

Sounds like a sticky situation. Hope you are good at maths, otherwise the ATO will have your arse if you are audited.  Every time you make a repayment you can't put it all to the "non-deductible" part of the loan, you'll have to keep splitting every repayment by the %'s between redrawn funds and the original loan.

Split your loan or get a LOC and make it easy.

Grog

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #7 on: June 12, 2014, 09:25:52 AM »
What do you mean by "invest harder"?
You want to get more rich, but what's you time horizon?
Getting "more rich" usually means one of these 2 things:

1) Increase investment
2) Increase return by assuming more risk

If you want to get richer in a short time, you have to go for strategy one becase with 2 you can't control where you are 5 years from now.

Strategy one can be further divided like this:
a) reduce TER on your investments
b) saving more, reduce cost of life/tax optimization
c) add new income (second, third, fourth job) + selling stuff you have you don't need
d) borrow money and hope to outgrow the interest

From you comment I think you have (b) pretty good covered, what about the other options?


This_Is_My_Username

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« Reply #8 on: June 13, 2014, 12:53:39 AM »

I have calculated the $ interest payable on each redraw/share purchase, so it is all squared away from a tax standpoint.  The loan is not split, but the deductions for interest will be claimed. 

Sounds like a sticky situation. Hope you are good at maths, otherwise the ATO will have your arse if you are audited.  Every time you make a repayment you can't put it all to the "non-deductible" part of the loan, you'll have to keep splitting every repayment by the %'s between redrawn funds and the original loan.

Split your loan or get a LOC and make it easy.

Thanks Marty998.

I'm pretty good with excel, so I have calculated all the interest amounts on each part of the loan.

My home loan is currently at 80% LVR.  Every month, I pay it down to 78% LVR, then redraw ~$4k to buy shares, putting me back at 80% LVR.

It seems like it wouldn't be worthwhile to adjust the loan-split percentages or LOC each month?  Is there a way to go about this without restructuring the loan too often?  Can you please explain in detail?  Cheers


This_Is_My_Username

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« Reply #9 on: June 13, 2014, 01:01:51 AM »
One option you may want to consider, which I've used, is to leverage up in your own name (deductible interest), but invest through a trust structure (gets the earnings into a different tax entity).  Has some up-front costs, but if you are investing significant $$ over the next decade, may be a better long term structure for you.

Is the purpose of this to make the assets(shares) owned by the company/trust, which gets taxed at 30%, and make the margin loan or home loan owned by the individual, who receives tax deductions on the interest at (38+2)% ?

so, there is lots of interest owing (reduced by 40%), and no income (reduced by 40%),

and also no interest owing (reduced by 30%), and lots of income (reduced by 30%)

?

This_Is_My_Username

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« Reply #10 on: June 13, 2014, 01:05:05 AM »
Strategy one can be further divided like this:
a) reduce TER on your investments
b) saving more, reduce cost of life/tax optimization
c) add new income (second, third, fourth job) + selling stuff you have you don't need
d) borrow money and hope to outgrow the interest

From you comment I think you have (b) pretty good covered, what about the other options?

(d) I'm trying to find more money to borrow, but all the rates are too high.  Looking for less than 6%.

Grog

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #11 on: June 13, 2014, 05:22:09 AM »
usually this is bad advice but I'll give it anyway, every personal situation is different.
What about asking for a loan to relative/partner ? You could sign a contract that you will give back the money within ten years, adjusted for inflation or with a small gain.

Or another option is to empty out completely your emergency fund if you know that someone (partner, spouse, children, parent) is ready to step in if you need money with short notice.


But my golden rule is to keep family/frineds and finance as separate as possible.

This_Is_My_Username

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #12 on: June 13, 2014, 07:16:45 AM »
good ideas, thanks Grog. 

i've already spent my emergency fund.

and my experience agrees with yours, friends and money dont mix. 

milesdividendmd

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #13 on: June 13, 2014, 02:23:04 PM »
How about a zero interest credit card?  free money for 15 months!

But seriously, instead of leverage, why not just cncentrate your holdings in high risk/high return classes like momentum, SCV and EMV?

This_Is_My_Username

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #14 on: June 13, 2014, 08:08:17 PM »
momentum, SCV and EMV?

what are these things?

milesdividendmd

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #15 on: June 13, 2014, 10:32:49 PM »
Sorry. Small Cap Value, momentum, and emerging market value funds all have higher expected returns and higher volatility relative to the market.

And unlike with leverage the worst you can do is to lose all of your money. You can not end up in debt.

And my favorite swing for the fences strategy is the simple ETF momentum strategy described here.

http://www.cxoadvisory.com/momentum-strategy/

But you must keep your trading costs low and you should only pursue it in a tax advantaged account if Australian tax laws are anything like ours. (I wrote about these cost issues in a Post on my site entitled "keep it simple")




bigchrisb

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« Reply #16 on: June 15, 2014, 03:58:56 AM »
Is the purpose of this to make the assets(shares) owned by the company/trust, which gets taxed at 30%, and make the margin loan or home loan owned by the individual, who receives tax deductions on the interest at (38+2)% ?

so, there is lots of interest owing (reduced by 40%), and no income (reduced by 40%),

and also no interest owing (reduced by 30%), and lots of income (reduced by 30%)

?

Pretty much.  Other benefits/issues are:
- Some asset protection (good)
- Franking credits stay in the company - so if you had a low income year, and paid them out to yourself as dividends, you would "save" the franking credits until this point. (good)
- The money is not usable by you until you put it back into your tax (with the associated franking credits) (good and bad)
- Companies don't get the capital gains tax discounts (bad)
- Running the company is some extra paperwork and cost (bad).

On balance it has stacked up for me.  Do your own research.  Might see you at the CBR meetup?

Leisured

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #17 on: June 15, 2014, 04:27:59 AM »
Username, I suggest that you leave the mortgage alone and concentrate on shares or mutual funds.

1. Accumulate an emergency fund of, say, $10K.

2. Borrow $25K from the bank using your shares as collateral and buy $25k of shares. You now have $50K in shares and equity of 50%. I would not get below 50% equity.

3. Pay down the bank loand.

4. Once you have nearly paid off the loan, and with nearly 100% equity in $50K of shares, borrow another $50K and buy $50K of shares. You now have $100K in shares, 50% equity.

5. Pay down the loan.

6. Borrow another $50K and buy $50K of shares. You now have $150K in shares, 67% equity. You may decide to borrow more than $50K as you share portfolio increases.

And so on.





 

idjces

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #18 on: June 16, 2014, 03:55:57 PM »
https://www.commbank.com.au/corporate/solutions/global-markets/equity-products/bank-instalment-warrants.html

Warrants have certain advantags and disadvantages over a margin loan. No credit applications or margin calls. There's a good range of leverage and effective interest rates. Fwiw NABs base margin rate is 6.65% not the 7.65 I think is advertised.

Bigchrisb - that rate is amazing! Thanks for sharing

This_Is_My_Username

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« Reply #19 on: June 17, 2014, 05:59:37 AM »
Is the purpose of this to make the assets(shares) owned by the company/trust, which gets taxed at 30%, and make the margin loan or home loan owned by the individual, who receives tax deductions on the interest at (38+2)% ?

so, there is lots of interest owing (reduced by 40%), and no income (reduced by 40%),

and also no interest owing (reduced by 30%), and lots of income (reduced by 30%)

?

Pretty much.  Other benefits/issues are:
- Some asset protection (good)
- Franking credits stay in the company - so if you had a low income year, and paid them out to yourself as dividends, you would "save" the franking credits until this point. (good)
- The money is not usable by you until you put it back into your tax (with the associated franking credits) (good and bad)
- Companies don't get the capital gains tax discounts (bad)
- Running the company is some extra paperwork and cost (bad).

On balance it has stacked up for me.  Do your own research.  Might see you at the CBR meetup?

Yeah, hoping to see you at the meetup. 

Thanks for the clever tax strategy!

It seems like it would only be worthwhile with several hundred thousand of assets, because of the annual costs of operating the company (accountants mostly) ?

This_Is_My_Username

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #20 on: June 17, 2014, 06:09:32 AM »
https://www.commbank.com.au/corporate/solutions/global-markets/equity-products/bank-instalment-warrants.html

Warrants have certain advantags and disadvantages over a margin loan. No credit applications or margin calls. There's a good range of leverage and effective interest rates. Fwiw NABs base margin rate is 6.65% not the 7.65 I think is advertised.

Bigchrisb - that rate is amazing! Thanks for sharing

Thanks for the warrants tip - I didn't know about them!

now, I am trying to work out whether to go with a margin loan or warrants, and trying to find a good interest rate. 

thanks for the help

Leisured

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #21 on: June 22, 2014, 12:47:36 AM »
Thank you idjces for reminding me about warrants. I have never used them, but I suggest that endowment warrants may be better than instalment warrants, because the warrant pays itself off using dividends. I understand it is now possible, in Australia, to buy a warrant over a basket of securities.

An endowment warrant would be a useful gift for a small child, and would have paid itself off when the child grows up.



AustralianMustachio

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #22 on: June 22, 2014, 09:48:28 PM »
Following this thread with high interest (pun intended)

Milesdividendmd - that link was very interesting to me, but it seems I have to subscribe to a not so cheap financial website to continue reading it. I don't quite follow what the "momentum strategy" is - something to do with ETFs, but "re allocating" them monthly to capitalise on higher risk and higher gains? I was impressed at the results though. It was at about that point that the article stopped allowing me to read further.

EDIT -  didn't include the link
http://www.cxoadvisory.com/momentum-strategy/
« Last Edit: June 22, 2014, 09:51:00 PM by AustralianMustachio »

milesdividendmd

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I want to invest harder, but I can't work out how. (Australia).
« Reply #23 on: June 22, 2014, 10:03:27 PM »
Following this thread with high interest (pun intended)

Milesdividendmd - that link was very interesting to me, but it seems I have to subscribe to a not so cheap financial website to continue reading it. I don't quite follow what the "momentum strategy" is - something to do with ETFs, but "re allocating" them monthly to capitalise on higher risk and higher gains? I was impressed at the results though. It was at about that point that the article stopped allowing me to read further.

EDIT -  didn't include the link
http://www.cxoadvisory.com/momentum-strategy/

I never paid to subscribe either. Cheap minds think alike!

The strategy is simple. Follow the total returns for the following asset class ETFs for the prior 5 months

Vb
Schf
Voo
Dbc
Eem
Vnq
Gld
Tlt
Shy
Efv


Whichever has the highest total returns, invest 100% in that etf for the month.

I have also added small value, large value, and Momentum funds to my screen. And I've  experimented with a one month delay (ie investing in last months winner) which is closer to the classic definition of momentum.

Next months etf will be TLT! Follow along.

Alexi

AustralianMustachio

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #24 on: June 23, 2014, 08:40:30 AM »
Thanks for explaining that. I am new to investing in general, and your post put me on a path of reading about this momentum strategy. I read the post on your blog re: momentum entitled "inertia", and this article (as well as the one it quotes at the beginning):

http://seekingalpha.com/article/1350651-seeking-alpha-momentum-investing-with-etfs

What I got from it - higher than average returns with ETFs, potential tax problems, and potential for profits to be eaten into due by brokerage costs.

But a few questions - the momentum method you seem to be describing is a self-run one, where you rebalance your own portfolio every month. Is this correct?

The method described in that article mentioned certain momentum funds or something similar, that you could buy into. I also seem to recall one quote of "if the $5 million minimum seems a little steep..." which would be putting that approach so far beyond my range it's not worth thinking about. If I hit $5 million dollars I'd retire! :p Do you know of any such funds that automatically apply the momentum approach? If so, any available internationally? (like the OP, i live in Australia)

And a general question - is the risk a lot higher? Because I haven't found anything that states that the risk or volatility seems a whole lot higher with the momentum approach. If it isn't much riskier, and yet the approach yields superior returns (14% or something annually, in the global momentum approach), why doesn't everyone apply this approach?

milesdividendmd

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I want to invest harder, but I can't work out how. (Australia).
« Reply #25 on: June 23, 2014, 01:40:04 PM »
Aussie stash,

I'm afraid I won't be much help for you in terms of your options down under.

Here in the US we have several options for momentum based funds.

The mutual fund company that is most well known for this is AQR, and there is one ETF that I know of that is momentum based, MTUM.

Incidentally my favorite resource for looking for different passive fund choices is this one.

http://www.altruistfa.com/dfavanguard.htm

In terms of explanations for the momentum factor, some say it is risk-based, some say it is behavior-based, some say it has to do with the flow of institutional funds in and out of mutual funds.

The truth is no one knows. But the momentum factor has been shown to be present in every market type (Us, developed ex-US, emerging markets.)

One point to make about the risk however is that momentum tends to select out growth-stocks. This makes it a great diversifier for a value strategy, which should lower overall portfolio risk.
« Last Edit: June 23, 2014, 08:16:29 PM by milesdividendmd »

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« Reply #26 on: June 23, 2014, 09:46:11 PM »
Thanks for the additional tips on investing aggressively.   Keep them coming :)

Thank you idjces for reminding me about warrants. I have never used them, but I suggest that endowment warrants may be better than instalment warrants, because the warrant pays itself off using dividends. I understand it is now possible, in Australia, to buy a warrant over a basket of securities.

An endowment warrant would be a useful gift for a small child, and would have paid itself off when the child grows up.

Leisured, Do you have any further information/experience on endowment warrants? 

deborah

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #27 on: June 24, 2014, 01:29:05 AM »
Try the ASX, they have really good educational information about all types of Australian shares, including warrants.

Leisured

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #28 on: June 24, 2014, 01:56:09 AM »
Username, it seems that endowment warrants no longer exist, and I cannot find warrant prices. In the past, warrant pries were printed in the financial pages of newspapers.

I have explored the Australian Stock Exchange website, and some of the webpages relating to warrants no longer exist.

This makes me nervous, and suggests that demand for warrants is so low that there is no point in trying to buy any.

i heard of warrants a long time ago, but I have never used them.

deborah

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #29 on: June 24, 2014, 02:26:18 AM »
Yes, endowment warrants appear to be morbid - the only one I could find was closed  - http://www.macquarie.com.au/mgl/au/advisers/products-platforms/investments/closed/macquarie-endowment-warrants

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« Reply #30 on: July 14, 2014, 08:26:12 PM »
So, this is what I bought, thanks to the comments in this thread:

IOZ is "ISHARES MSCI AUSTRALIA 200 ETF",  It is a capitlisation weighted index ETF of the top 200 australian companies by value.

today's price is $23.90. I could have bought 246 of IOZ for $5900.

instead I bought 460 of IOZSWG at $12.79 for $5900.  It is a self-funded instalment warrant.  I am required to pay $12.1568 on 30/6/2016.  This is a loan of $12.1568.    The final payment (12.1568) is reduced by dividends from the ETF, and increased by an interest rate of 5.15%pa variable. THe ETF annual fee of 0.019% is taken from the dividends before they are paid. 

Hopefully this will be better in the long run than buying IOZ directly. 

Let me know what you think. 


bigchrisb

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #31 on: July 14, 2014, 09:13:29 PM »
Where did you find the interest rate for these?  I couldn't in my brief searching.

I assume you have had a look at the PDS (http://www.asx.com.au/PDF/11-002WBC.pdf)  It shows there is a trailing commission on these.  You may want to see if you can get this refunded through a service like "yourshare" or one of the other trialing commission ticket clippers?

Looks like a reasonable way to get exposure (reasonable interest rate and no margin call).  What do you plan to do come expiry in 2016?  Do you plan on having the additional cash to pay them out at this stage?  I'd be hesitant about being able to sell them easily on the secondary market, as there hasn't been a lot of volume, and all investors will be in the same basket at that time?  Maybe ensure you have access to debt if you need it at that stage to cover this risk?

This_Is_My_Username

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #32 on: July 14, 2014, 11:35:58 PM »
cheers bigchrisb, the interst rate is here:

http://www.westpac.com.au/personal-banking/investments/loans/self-funding-instalments/
and search for "indicative pricing sheet"

5.15% sounds quite good, so I'm a bit skeptical. 

Thanks for the tip re: trailing commissions.  i checked with westpac's call centre, and trailing commissions are only payable with an application (with an advisor's name on it) though the promary market.  I purchsed these SFI's via online brokerage through the secondary market, so there is no trailing commission.  but it is important to check, thanks for pointing tha out to me!


For expiry, I'll need to ensure i have the cash available at that time.  With the high savings rate we have, it only takes a short while of accumulating fortnightly salary in the offset account. 

THanks for the comments :)

bigchrisb

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #33 on: July 14, 2014, 11:56:54 PM »
Thanks, I'm a bit of a pleb when it comes to derivatives.

Sounds like a reasonable deal - what's the catch?

I'm assuming that if the warrant value went to zero, it would cease to exist?  This would seem to take out some of the portfolio diversification that you would otherwise get, no?  i.e. if a security tanked in a portfolio of 10 securities with a margin loan, it wouldn't matter too much as the rest would provide some cushion, where as if you had a portfolio of 10 warrants, you would lose the value of one warrant?

As you are taking a warrant over a diversified index I guess its kinda a moot point for you though?

This_Is_My_Username

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Re: I want to invest harder, but I can't work out how. (Australia).
« Reply #34 on: July 15, 2014, 12:49:10 AM »
Quote
Sounds like a reasonable deal - what's the catch?
That is what I am thinking.  I don't know.  I'll probably find out on 30 June 2016. 

An instalment warrant is a non-recourse loan, from the creator (westpac) to the investor. 

as a simple exanmple, XYZ shares are $50, XYZ warrants dated in 12 months from today, with an exercise(strike) price of $27 are trading for $25.

So, an investor pays $25 now, and $27 in 12 months, and receives the share now. 

If XYZ falls to $10, then the warrants become worth $0, because no-one would pay for the ability to pay $27 for XYZ.  But they would probably still exist, due to the chance that XYZ will go back up. 

The investor chooses whether to pay the final $27 and receive XYZ.  So, if XYZ is valued at $10, the investor will only lose the initial $25, instead of the full $40 loss.

If XYZ goes up to $80, the investor will pay only $52. 

If XYZ goes down to $40, the investor will have a $25 sunk cost, and pay an additional $27 for a total loss of $12. 

A portfolio of warrants is not a thing I have heard of.  They are illiquid, and require a completion payment at the end of the period, so the investor would need to find a lot of cash.