Hi all
Just wondering if anyone had any thoughts or experience with buying index funds on margin?
In an ideal world I would own my own PPR and use the equity on that to buy index funds. But I don't (due to relationship changes, moving interstate, the priciness of property and other factors).
I've also thought it would have been great to have ploughed into the market post GFC and scooped up broad based indexes, and waited for the recovery. But I appreciate that this is something that only becomes obvious in hindsight, as during big falls no-one knows when it will recover.
Currently I'm not timing at all. I'm ploughing all my savings in to a Vanguard Life Strategy Fund. Its great. But it also means I don't really have any cash to snap up bargains. Again, i'm generally committed to dollar cost averaging so happy to keep it this way for now.
However, I've known that the chinese market seems a bit irrational for a while. I've sensed there may be a correction, but this has not dissauded me from my regular strategy as I have no faith I'd be right. But seeing the Chinese market starting to stumble is provoking me once again to try and get my head around buying on margin if there is a dramatic fall.
I've used this helpful calculator / cynical marketing tool, to calculate a possible scenario.
https://www.commsec.com.au/mleofy?icid=124248:commsec:cm:public:Public_Home:B1:text:MarginLending:EOFY_ACQ (Note: I think its pretty outrageous that they set the default expected growth and returns to 5% each. There is a disclaimer but they are definitely trying to max out the return to try and drum up business.)
I've input some numbers as an example, and used:
$160k equity
$0 cash contribution
$100k loan
(giving a LVR of 40%)
and assuming growth of 3% and income of 3%
The calculator tells me that the non-geared strategy will outperform the geared strategy by about $600. This is a fantasy calculator of course and assumes that you will get the growth/income you have entered consistently across a year.
Now the appealing thing about this is that the interest expense is $7,178.08, which then becomes deducted against your income for the year reducing your taxable income.
Australia seems to have so many distortions in the tax system that punish the non-PPR owning PAYG earner, that this seems the only legitimate, investment aligned, non superannuation related, tax minimisation strategy available to us non-PPR owning chumps!
Of course, the downside is the increased risk resulting in falls to the index funds, “The market can stay irrational longer than you can stay solvent." etc etc.
But with a long term investment horizon, and a conservative gearing ratio, what could go wrong.........?
I'm in no rush to implement this idea. I've been toying with it over the past few years so not going to lose my head. But very curious to hear what other Australian mustachians might have to say about it.
I do appreciate that there are quite a few threads about the dangers of margin lending into the market. I do plan to read some, but if anyone can point me in the direction of a particularly good one that would be appreciated too.
I think what may may give this strategy an advantage in Australia (compared to the same strategy in the US example) is the fact that interest on an investment loan is tax deductable against your personal income. If so many crazed property speculators can chase tax deductions on over priced off the plan investment properties, wouldn't it make sense to gear (to a conservative level) into indexes, which may be volatile, but over the long term seems to provide consistent gains?
Feel free to deliver some face punches as well if you think there deserved. Cheers!