#298: Leverage your portfolio

“Brought to you by Absa ETFs”

Simon Shares

• The new cabinet is of course a compromise, that's the nature of our political system. But the important departments are markedly better hands (SOEs, treasury & mining).
• New tax-free year kicks off today. R33,000 per year and transfer are now also possible.
• Up coming events;
  • ABSA NewFunds ETF seminars (DBN, CPT, JHB and webcast)

Leverage your investment portfolio

Borrowing money to increase your portfolio is something most investors ponder at some point, but two questions come up. How and what are the risks? The theory is easy, over the long-term equity markets do better than the cost of borrowing, but there is more to leverage then just that. So here are some options, with the risks involved.

• Derivatives such as CFDs;
  • Easy enough. But costs and margin calls are real issues. Keep it small.
• Home loan
  • Clean and simple if you can afford the repayments remembering that when markets collapse interest rates typically rise. Make sure you can make the repayments with higher interest rates and what if your income drops?
• Personal loan
  • Banks don't like lending against shares and again can you afford the repayments? Also unsecured loans typically attract higher interest rates meaning the numbers no longer add up.
• Margin
  • Some brokers will lend against a portfolio with the amounts varying depending on the shares being used as collateral. The risk here is that loan amounts may be adjusted and you may be squeezed out.

Personally I have leveraged my portfolio once. In 2008 I maxed out my bond to add to my portfolio. It worked and I slept well enough but I have no plans to do so again.

On page 10 of his latest annual letter Warren Buffett writes "This table offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions." 

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