WEBVTT - Margin loans: powerful tool or dangerous trap? 0:00:01.639 --> 0:00:04.000 Welcome to How Do They Afford That, the podcast that 0:00:04.000 --> 0:00:07.560 peaks into the financial lives of everyday Australians. I'm Michael Thompson. 0:00:07.600 --> 0:00:09.360 I'm an author and the co host of the business 0:00:09.360 --> 0:00:13.160 news podcast Fear and Greed, And as always I'm with 0:00:13.440 --> 0:00:17.759 financial planner Canna Campbell, the founder of the financial literacy 0:00:17.800 --> 0:00:21.320 platform Sugar Mama TV, and my co author on our 0:00:21.480 --> 0:00:25.599 upcoming book, Twelve Months to Financial Freedom. It is out 0:00:25.640 --> 0:00:28.960 on the first of September. Hello, Canna, good morning, how 0:00:29.000 --> 0:00:31.280 are you. Oh? You know what, I'm a little bit 0:00:31.400 --> 0:00:38.240 wary about today's episode. Why because it is a topic 0:00:38.400 --> 0:00:45.080 that can be controversial, right, Okay, so you're with me 0:00:45.159 --> 0:00:47.880 so far. We are talking about one of the more 0:00:47.960 --> 0:00:53.240 controversial tools in investing. I would say margin loans. 0:00:54.480 --> 0:00:56.760 So I would say we fear what we don't understand. 0:00:57.040 --> 0:00:58.320 That is as controversial. 0:00:58.720 --> 0:01:04.160 Okay, all right, that's probably also fair. Some investors swear 0:01:04.240 --> 0:01:08.240 by them, others won't go near them. So today I 0:01:08.360 --> 0:01:15.160 ask you, margin loans a powerful wealth building tool or 0:01:15.200 --> 0:01:16.440 a dangerous trap? 0:01:20.360 --> 0:01:22.880 I am bring it on because let's just we're going 0:01:22.959 --> 0:01:26.760 to diffuse any fears were people are going to have 0:01:26.800 --> 0:01:30.000 a very informed, educated opinion after this episode as to 0:01:30.040 --> 0:01:34.840 whether margin loan is powerful or whether it's a dangerous 0:01:34.920 --> 0:01:38.039 trap and tool, and whether it's maybe right or wrong 0:01:38.120 --> 0:01:40.080 for them or perhaps something they can consider for the 0:01:40.120 --> 0:01:40.640 down track. 0:01:40.760 --> 0:01:43.120 Indeed, so, and of course, as you're listening to this today, 0:01:43.200 --> 0:01:46.440 know that everything that we're talking about is general in nature. 0:01:46.880 --> 0:01:50.280 It is never personal, investment, strategic or product advice. It 0:01:50.360 --> 0:01:55.280 is purely for financial education purposes only. You need to 0:01:55.320 --> 0:01:59.720 see a financial planner to get advice tailored to your circumstances. 0:01:59.720 --> 0:02:01.320 If you listening to this and going, oh, this is 0:02:01.360 --> 0:02:03.800 something I'd like to explore, talk to a professional and 0:02:03.840 --> 0:02:08.920 get some advice, let's start with the basics. What is 0:02:09.240 --> 0:02:12.880 a margin loan? Isn't a dangerous trap? No? No, I 0:02:12.919 --> 0:02:15.000 just tell us the margin loan bit and then leave 0:02:15.080 --> 0:02:16.160 the restport till later. 0:02:16.560 --> 0:02:19.600 No, it's a very powerful tool. It is a risky tool, 0:02:19.639 --> 0:02:22.040 but when it's used for the right reasons and the 0:02:22.120 --> 0:02:25.080 right time, the right goals, it can be powerful. So essentially, 0:02:25.120 --> 0:02:28.360 it is a loan that you borrow, well, sorry, amount 0:02:28.400 --> 0:02:30.160 of money that you borrow obviously through a loan that's 0:02:30.160 --> 0:02:34.160 secured against existing investments. So say, for example, I have 0:02:34.240 --> 0:02:37.160 fifty thousand dollars worth of shares, and I really want 0:02:37.200 --> 0:02:39.000 to grow my portfolio, and I want to start being 0:02:39.000 --> 0:02:41.880 a bit more savvy and strategic in building my wealth. 0:02:42.280 --> 0:02:44.720 I would go to a margin loan provider, normally through 0:02:44.760 --> 0:02:48.120 the online share trading accounts, and apply, for example, for 0:02:48.160 --> 0:02:51.680 a fifty thousand dollars margin loan, and I would assume 0:02:51.760 --> 0:02:54.240 it's approved. I would have fifty thousand dollars to go 0:02:54.280 --> 0:02:57.320 and buy fifty thousand dollars worth of shares. So now 0:02:57.360 --> 0:03:00.480 my portfolio is worth one hundred thousand doors from a 0:03:00.520 --> 0:03:02.679 gross value point of view. Obviously the net position is 0:03:02.720 --> 0:03:05.080 still fifty because I've got a fifty thousand dollars loan, 0:03:05.160 --> 0:03:07.600 and I would just take that out and invest it 0:03:07.639 --> 0:03:09.440 for long term growth opportunities. 0:03:09.880 --> 0:03:13.120 And so the initial value of your portfolio was fifty 0:03:13.160 --> 0:03:18.520 thousand dollars, and so you have borrowed that full amount again, Yes, okay, 0:03:18.720 --> 0:03:23.160 all right, A lot of questions coming off that for me. 0:03:23.600 --> 0:03:28.480 But why would someone use one Lots. 0:03:28.240 --> 0:03:32.920 Of reasons, but predominantly to be more efficient in building 0:03:32.960 --> 0:03:36.120 wealth and creating wealth? Obviously, you know you're borrowing money 0:03:36.120 --> 0:03:39.200 at a cost and expense to then try and get 0:03:39.200 --> 0:03:41.240 that money to grow at a faster rate than what 0:03:41.280 --> 0:03:46.120 you're paying. It's also a great tool for diversification. For example, 0:03:46.400 --> 0:03:50.800 I have had situations where clients had impressive in portfolios, 0:03:50.880 --> 0:03:54.360 but it was mainly held in one particular stock or 0:03:54.400 --> 0:03:57.200 just a couple of stocks, you know. Particularly was very 0:03:57.200 --> 0:03:59.960 common with employee share plans where they can't actually sell 0:04:00.120 --> 0:04:03.160 the stock necessarily because it's part of their contract. So 0:04:03.240 --> 0:04:05.520 this was a way of actually allowing us, you know, 0:04:05.520 --> 0:04:07.320 if they didn't have the cash foil the cashflow was 0:04:07.360 --> 0:04:10.800 going elsewhere, to use the shares that they already owned 0:04:10.880 --> 0:04:13.800 as equity to borrow money and then go and invest 0:04:13.840 --> 0:04:18.160 in other assets to help diversify the portfolio and reduce risk, 0:04:18.279 --> 0:04:20.840 as well as help and support their financial goals and 0:04:20.920 --> 0:04:24.400 risk profile. And then of course tax because the interest 0:04:24.520 --> 0:04:26.720 of your tax, the interest of your tax, the interest 0:04:26.760 --> 0:04:31.000 of your margin loan typically is tax deductible, So you 0:04:31.000 --> 0:04:33.160 would never make a decision like this purely for the 0:04:33.200 --> 0:04:36.080 tax savings, but it definitely is an added advantage in 0:04:36.160 --> 0:04:40.440 this type of strategy, and it's secured against the investments 0:04:40.480 --> 0:04:44.440 inside the portfolio, so there is that I guess, additional protection. 0:04:44.600 --> 0:04:47.480 Some people don't they Even if they have a home 0:04:47.640 --> 0:04:49.880 and they are able to get recycle, they don't want 0:04:49.920 --> 0:04:53.840 to put their home security. They would rather quarantine it 0:04:53.839 --> 0:04:55.760 through a margin loan. And I have done it. 0:04:55.800 --> 0:04:56.840 I've used a margin loan before. 0:04:56.839 --> 0:04:58.600 I've used it a couple of times actually in my life. 0:04:58.960 --> 0:05:02.839 Okay, let's do the maths a little bit. What's the 0:05:02.920 --> 0:05:06.560 upside here? Then if things go well, if the market 0:05:06.640 --> 0:05:10.520 is going reasonably well over a long period of time. 0:05:10.560 --> 0:05:14.240 So the pendulum swings both ways with loverage, so it's 0:05:14.240 --> 0:05:17.000 obviously going to amplify what's going on. So say, for example, 0:05:17.040 --> 0:05:19.440 you know fifty thousand dollars of my shares, did I 0:05:19.480 --> 0:05:21.600 go and borrow fifty thousand dollars through marginalan, We've go 0:05:21.600 --> 0:05:25.400 one hundred thousand dollars invested. The market moves up ten percent, 0:05:26.200 --> 0:05:29.280 so now my portfolio is worth one hundred and ten thousand, 0:05:29.400 --> 0:05:33.000 whereas if I had not taken out that marginalone, my 0:05:33.000 --> 0:05:35.520 portfolio is worth fifty five thousand. So you can see, 0:05:35.720 --> 0:05:38.599 you know, obviously you've got playing with larger amounts, obviously 0:05:39.080 --> 0:05:44.159 bigger financial compounding growth opportunities. But as the pendulum swings 0:05:44.200 --> 0:05:48.679 the other way, you're magnifying the losses. So fifty thousand 0:05:48.760 --> 0:05:53.359 of my own shares fifty thousand borrowed market cut corrects 0:05:53.400 --> 0:05:57.919 ten percent. That portfolio is worth ninety thousand dollars. But 0:05:58.160 --> 0:05:59.920 I still have that fifty thousand dollars loan. 0:06:00.839 --> 0:06:04.040 Okay, two questions Off the back of that. I'm learning 0:06:04.200 --> 0:06:07.159 a lot out of this so far, but I want 0:06:07.160 --> 0:06:09.520 to ask you about cash flow for one thing, and 0:06:09.560 --> 0:06:11.880 the importance of having cash flow to make sure that 0:06:11.960 --> 0:06:17.400 you are able to service what is alone. But before 0:06:17.440 --> 0:06:21.159 we get to that, can you explain a margin call 0:06:21.800 --> 0:06:23.919 in plain English? 0:06:24.640 --> 0:06:28.120 So a margin call is where your portfolio from the 0:06:28.160 --> 0:06:31.239 gross worth point of view, drops below a certain level. 0:06:31.320 --> 0:06:33.160 And when you've got to apply for a margin one, 0:06:33.160 --> 0:06:35.120 you can see the thresholds that they have and it 0:06:35.200 --> 0:06:38.240 is very reflective as to the quality of the investments 0:06:38.240 --> 0:06:41.279 inside your portfolio, or how volatile they are, the types 0:06:41.360 --> 0:06:44.080 of companies you know, how well diversified your portfolios. You know, 0:06:44.279 --> 0:06:48.000 things like ETFs help reduce that risk quite significantly. But 0:06:48.080 --> 0:06:50.640 when it hits a certain threshold, and they'll give you warnings, 0:06:50.760 --> 0:06:54.080 you know, they'll call you or message you, they'll email you, 0:06:54.279 --> 0:06:57.280 they'll do smoke signals send doves like that. It's their 0:06:57.320 --> 0:06:59.400 responsibility to let you know that you're getting into this 0:06:59.560 --> 0:07:03.320 margin call a danger zone. But what happens is the 0:07:03.320 --> 0:07:06.120 portfolio has now dropped below a certain level that makes 0:07:06.120 --> 0:07:08.960 the lender uncomfortable and nervous that they've got, say a 0:07:09.240 --> 0:07:12.360 you know, in our situation, say one hundred thousand dollars 0:07:12.360 --> 0:07:15.240 worth of shares initially bought fifty thousand dollars alone. Say 0:07:15.240 --> 0:07:17.960 the market has a massive correction and drops, you know, 0:07:18.000 --> 0:07:21.720 from one hundred thousand dollars to say sixty thousand, that 0:07:21.800 --> 0:07:23.960 might trigger a margin call because all of a sudden, 0:07:24.560 --> 0:07:26.880 that fifty thousand dollars alone is looking a little more 0:07:26.920 --> 0:07:30.440 dangerous as the portfolio continues to drop in value. So 0:07:30.520 --> 0:07:33.480 they will call you, email you, message you. And you've 0:07:33.480 --> 0:07:36.280 got a couple of different options. So when you get 0:07:36.320 --> 0:07:38.400 hit with a margin call, you need to either put 0:07:38.440 --> 0:07:42.400 some money towards that loan, or you need to add 0:07:42.600 --> 0:07:45.640 transfer some shares that you might have elsewhere, so you 0:07:45.720 --> 0:07:48.360 might have another online share trading account attached to a 0:07:48.400 --> 0:07:51.480 different HIN number you might roll them across. Or worst case, 0:07:52.080 --> 0:07:55.080 the margin lend provider will actually go and sell some 0:07:55.280 --> 0:07:57.320 down some of your shares in this situation with a 0:07:57.400 --> 0:08:00.000 very dramatic example, you know, that'd sell down the share 0:08:00.080 --> 0:08:02.440 portfolio and you'd walk away with just ten thousand dollars 0:08:02.560 --> 0:08:04.920 left over after they've taken back at they're fifty thousand 0:08:04.920 --> 0:08:08.800 dollars alone. Okay, so it is it is risky, but 0:08:08.920 --> 0:08:12.080 those risks are actually quite manageable. 0:08:12.320 --> 0:08:14.960 Okay, How how do you manage those? Is it about 0:08:15.000 --> 0:08:17.920 having cash flow? About keeping cash and reserved to pay 0:08:18.080 --> 0:08:20.880 if this situation does come up so that you avoid 0:08:20.920 --> 0:08:24.680 having to liquidate shares and crystallize a loss. 0:08:24.960 --> 0:08:26.840 So there's probably about seven or eight different things you 0:08:26.840 --> 0:08:28.800 can do, and I actually have a podcast on Sugarmum's 0:08:28.800 --> 0:08:31.560 Fireplay dedicated purely to all the different things you can do, 0:08:32.040 --> 0:08:34.400 and I would recommend you do all of these. But 0:08:34.760 --> 0:08:39.400 you know number one is don't borrow too aggressively. There's 0:08:39.480 --> 0:08:41.559 lots of data to show that even with the biggest 0:08:41.559 --> 0:08:44.439 market corrections, you know, example the GFC even which is 0:08:44.480 --> 0:08:47.160 when a lot of these margin calls got triggered, if 0:08:47.200 --> 0:08:51.040 yourfolio was not to was geared at a very conservative level, 0:08:51.120 --> 0:08:53.240 not exceeding fifty percent, you never got hit with a 0:08:53.280 --> 0:08:55.800 margin call. Getting hit with a margin call and having 0:08:55.840 --> 0:08:59.200 to sell is the worst outcome possible. So if you 0:08:59.200 --> 0:09:01.120 were in this zone, you wouldn't have actually got a 0:09:01.160 --> 0:09:04.480 margin call. Where people did during the GFC get caught 0:09:04.480 --> 0:09:07.560 out is because they had really aggressive gearing levels around 0:09:07.640 --> 0:09:11.800 sort of eighty ninety ninety five percent, which is just 0:09:11.920 --> 0:09:16.760 absolutely ridiculous and I think it's just irresponsible lending. That 0:09:16.880 --> 0:09:20.719 means they borrowed so aggressively, So they borrowed huge multiples 0:09:20.720 --> 0:09:23.440 of what they had in their investment portfolio. All right, 0:09:23.720 --> 0:09:27.160 so you want to don't borrow more than you can afford. 0:09:27.840 --> 0:09:29.520 The other thing is to make sure your portfolio is 0:09:29.559 --> 0:09:33.280 probably diversified so that when market volatively hits you, you've 0:09:33.400 --> 0:09:35.760 put yours in a variety of different baskets to help 0:09:35.800 --> 0:09:38.800 smooth out that volatility. The other thing is obviously always 0:09:38.840 --> 0:09:41.920 having emergency money set aside. Now we've spoken about emergency 0:09:41.920 --> 0:09:43.680 money how important it is, but it's not a generic 0:09:43.760 --> 0:09:47.640 number or a formula. It's reflective of your situation. Okay, 0:09:47.679 --> 0:09:50.240 and again we talk about this in detail in our 0:09:50.280 --> 0:09:54.199 book Twelve Months to Financial Freedom. So that definitely what 0:09:54.280 --> 0:09:57.400 you want to can take into consideration reviewing your emergency 0:09:57.400 --> 0:09:59.280 money going, well, we're about to take out a margin loane. 0:09:59.360 --> 0:10:01.880 We probably should bump up our emergency money before we 0:10:01.880 --> 0:10:05.400 take this loan out, so that should anything happen, we can. 0:10:05.440 --> 0:10:08.400 You're actually preparing just in case things do go wrong 0:10:08.440 --> 0:10:10.400 and you need to stump up the cash to pay 0:10:10.440 --> 0:10:12.160 back part of that loan. You can do so. 0:10:12.480 --> 0:10:14.800 You know, when it comes to these types of strategies, 0:10:14.880 --> 0:10:17.599 you're buying long term investments, So being forced into a 0:10:17.600 --> 0:10:19.599 position where we have to sell that quality asset just 0:10:19.640 --> 0:10:22.600 because of a natural market correction is a disastrous outcome 0:10:22.679 --> 0:10:25.360 that you want to avoid that at all costs. Another 0:10:25.440 --> 0:10:28.880 important thing to think about is the dividends. So when 0:10:28.920 --> 0:10:31.440 you set up this type of strategy, you obviously receiving 0:10:31.480 --> 0:10:34.880 dividends from your shares. So a way of actually managing 0:10:34.880 --> 0:10:37.080 that risk is you have the dividends paid to the 0:10:37.080 --> 0:10:39.360 margin loan to help pay it down, so you're creating 0:10:39.400 --> 0:10:42.840 more and more equity naturally reducing that LVR. You know, 0:10:43.160 --> 0:10:44.959 every six months when those dividends come in. 0:10:44.960 --> 0:10:47.959 Okay or what sorry, no, I was going to ask 0:10:48.000 --> 0:10:50.600 you about that, because otherwise, when do you pay it back? 0:10:50.679 --> 0:10:53.280 Or is this just a loan that exists forever and 0:10:53.320 --> 0:10:55.800 you are just servicing the interest on it. 0:10:56.040 --> 0:10:59.960 Most is such a great question. Most margin loans are 0:11:00.080 --> 0:11:03.920 actually set up as interest only. You can treat them 0:11:03.960 --> 0:11:05.760 like a principle and interest loan, which is what I 0:11:05.760 --> 0:11:09.120 did for the thousand dollars project I took out seven 0:11:09.200 --> 0:11:11.880 years ago. I took out a fifty thousand dollars margin 0:11:11.920 --> 0:11:13.679 loan and the portfolio was worth about one hundred and 0:11:13.720 --> 0:11:15.760 thirty at the time. And I put this on YouTube, 0:11:15.760 --> 0:11:18.040 and I had all these people like hammer Me saying 0:11:18.080 --> 0:11:21.479 this is so responsible. But my LVR was really conservative. 0:11:21.480 --> 0:11:23.640 It was less than fifty percent. It was like thirty 0:11:23.880 --> 0:11:26.200 three percent or something. Oh a little bit more than that, 0:11:26.240 --> 0:11:29.640 but it was very conservative. And I actually chipped away 0:11:29.800 --> 0:11:31.800 instead of putting one thousand dollars into more shares, I 0:11:31.840 --> 0:11:33.760 actually chipped away the margin loan. So I actually paid 0:11:33.800 --> 0:11:36.679 that margin loan off. And that portfolio is now worth 0:11:36.679 --> 0:11:40.080 three hundred and eighty something thousand dollars today. So yes, 0:11:40.160 --> 0:11:42.439 those dividends can be used to help pay down the loan, 0:11:42.960 --> 0:11:45.600 or if you're able to service that loan, you can 0:11:45.720 --> 0:11:47.559 service it out of your own cash phone and continue 0:11:47.559 --> 0:11:50.520 on reinvesting their dividends and build your mindful money number. 0:11:50.920 --> 0:11:53.360 So that's definitely an option there for you. But to 0:11:53.400 --> 0:11:56.120 answer your question about that loan, it's up to you. 0:11:56.120 --> 0:11:58.160 You can have that loan sit as an interest only 0:11:58.240 --> 0:12:01.000 loan and that it just sit there and always be 0:12:01.120 --> 0:12:03.440 there and you know, reap the tax benefits from it. 0:12:03.920 --> 0:12:06.760 Some people, which I never recommend, is they will actually 0:12:06.920 --> 0:12:11.720 have the loan capitalize, which not many loan providers allow anymore. 0:12:11.720 --> 0:12:13.640 Where he just gets all the interest gets out to 0:12:13.640 --> 0:12:16.480 the loan, the loan gets bigger and bigger. Oh boys, Yeah, 0:12:16.800 --> 0:12:21.040 that's just dangerous. And so yes, there are things you 0:12:21.080 --> 0:12:24.839 can definitely do to help manage this. And what I 0:12:24.880 --> 0:12:26.679 would say to anyone who's taking out a margin loan 0:12:26.760 --> 0:12:29.199 is you don't have to draw down the full amount immediately. 0:12:29.800 --> 0:12:31.520 You know, yes, you may have been approved for say 0:12:31.520 --> 0:12:36.640 one hundred thousand dollars, draw it down fifty ten thousand, 0:12:36.760 --> 0:12:40.520 five twenty thousand. But also at the same time, and 0:12:40.559 --> 0:12:43.160 this is something I discovered, you've got to be careful 0:12:43.160 --> 0:12:46.280 as to what the minimum level they'll charge interest on. 0:12:46.880 --> 0:12:49.439 So as I was paying down one thousand dollars, project 0:12:49.440 --> 0:12:52.480 marginal loan of fifty thousand dollars, when I got to 0:12:53.120 --> 0:12:55.559 the loan down to twenty thousand dollars, I received an 0:12:55.559 --> 0:13:00.280 email from them saying and they had the margin had 0:13:00.360 --> 0:13:02.520 changed providers over the course of the seven years, but 0:13:02.600 --> 0:13:04.520 he sent me an email saying, your loan is now 0:13:04.559 --> 0:13:07.360 down to twenty thousand. Please know that we regardless of 0:13:07.400 --> 0:13:10.040 your loan size below twenty, we will be charging you 0:13:10.200 --> 0:13:13.400 interest at twenty thousand. So as soon as my margin 0:13:13.440 --> 0:13:16.360 loan went to twenty thousand dollars in under that interest 0:13:16.400 --> 0:13:19.640 rate became increasingly expensive. Every time I was chipping away. 0:13:19.760 --> 0:13:21.679 Oh yeah, because otherwise you might only have one thousand 0:13:21.720 --> 0:13:23.960 dollars left to pay, but just still paying interest on 0:13:24.000 --> 0:13:25.079 twenty grand exactly. 0:13:25.080 --> 0:13:27.480 So it actually gave me huge motivation to really pay 0:13:27.520 --> 0:13:30.040 it off, racking it quickly, and I did like I 0:13:30.360 --> 0:13:32.840 like high tailed, but I wanted that was part of 0:13:32.840 --> 0:13:34.480 my strategy. I wanted to pay it down. I wasn't 0:13:34.480 --> 0:13:36.520 interested in letting it just sit there at twenty thousand. 0:13:37.080 --> 0:13:39.120 So obviously the devil is in the details. You've got 0:13:39.160 --> 0:13:41.679 to understand this, but you can. You can treat it 0:13:41.960 --> 0:13:44.120 like a principle and interest loan and pay it off, 0:13:44.120 --> 0:13:44.959 but be aware of. 0:13:44.920 --> 0:13:48.080 That catch Okay, all right, still a bit to cover. 0:13:48.200 --> 0:13:57.160 We'll take a quick break back in a moment. All right, Kenna, 0:13:57.280 --> 0:14:00.640 we have been talking about margin loans, and I set 0:14:00.640 --> 0:14:03.000 it up as this is going to answer the question 0:14:03.120 --> 0:14:06.760 powerful tool or dangerous trap. And I feel like the 0:14:06.760 --> 0:14:09.840 more I learned from you, the more I'm kind of 0:14:09.920 --> 0:14:14.559 heading towards the powerful tool part. But for the wrong person, 0:14:16.000 --> 0:14:18.880 a margin line could be a trap. They could find 0:14:18.920 --> 0:14:21.800 themselves over exposed, or they could find themselves in a 0:14:21.840 --> 0:14:26.120 bit of trouble. Who should avoid this strategy? 0:14:26.680 --> 0:14:30.040 I would say inexperienced investors. This is something This is 0:14:30.120 --> 0:14:34.200 quite a sophisticated financial tool. So if you are new 0:14:34.240 --> 0:14:37.520 to investing, you've only just started buying shares, maybe wait 0:14:37.600 --> 0:14:39.480 a little bit until you're a lot more comfortable and 0:14:39.560 --> 0:14:43.520 understand that latural market volatility and you understand like your 0:14:43.560 --> 0:14:45.960 cash flow and what it looks like. Also, anyone who's 0:14:45.960 --> 0:14:48.920 already got toxic debt in their life, like they've got 0:14:49.200 --> 0:14:53.240 credit card debt by now, pay later, outstanding payments, personal ones, 0:14:53.720 --> 0:14:55.480 don't go and take out this type of investment debt 0:14:55.520 --> 0:14:59.200 until you've built your financial foundation first, Because. 0:14:59.080 --> 0:15:01.960 Yeah, you are a essentially adding another big chunk of 0:15:02.000 --> 0:15:04.680 debt to your life, and you don't do it while 0:15:04.840 --> 0:15:07.200 your other debt is not under control exactly. Okay. 0:15:07.560 --> 0:15:10.640 Also, people who don't have the timeframe you know, you know, 0:15:10.680 --> 0:15:12.560 if you're building a share portfolio with the intention of 0:15:12.600 --> 0:15:15.040 selling it down to pay for a deposit. A margin 0:15:15.080 --> 0:15:17.160 loan is a long term financial product. It is not 0:15:17.200 --> 0:15:19.640 a quick fix. It's not there to make quick cash. 0:15:19.880 --> 0:15:22.000 So you wouldn't if you're looking at closing off the 0:15:22.000 --> 0:15:24.520 portfolio using that money, taking that money off the table. 0:15:24.920 --> 0:15:26.960 This is not the tool to be using right now. 0:15:27.680 --> 0:15:34.600 Okay. Misconceptions around borrowing to invest. Perhaps one of those 0:15:34.640 --> 0:15:37.880 misconceptions is that margin loans are a dangerous trap. But 0:15:38.080 --> 0:15:40.440 what is the biggest misconception I suppose that people have 0:15:40.480 --> 0:15:47.240 around this concept of borrowing money to invest when it's 0:15:47.280 --> 0:15:49.480 certainly not as tangible as theay borrowing to go and 0:15:50.240 --> 0:15:51.080 buy a property. 0:15:51.360 --> 0:15:55.200 Okay. I think there are actually two misconceptions, the first 0:15:55.240 --> 0:16:00.000 being that leverage creates wealth. It doesn't. It definitely helps, 0:16:00.800 --> 0:16:03.200 but at the end of the day, it's the underlying 0:16:03.320 --> 0:16:06.600 investments that help create wealth, and reviewing it on a 0:16:06.640 --> 0:16:10.120 regular basis and investing in a consistent way is what 0:16:10.240 --> 0:16:15.440 helps build sustainable wealth. You know, leverage simply amplifies whatever happens. 0:16:15.760 --> 0:16:18.640 The second misconception is assuming that you are going to 0:16:18.680 --> 0:16:24.440 be emotionally calm and rational during natural market downturns, like 0:16:24.600 --> 0:16:29.120 history shows that most investors are the most emotional, sorry, 0:16:29.160 --> 0:16:31.320 more emotional than they actually expect. And there's this thing 0:16:31.400 --> 0:16:34.280 called a loss of version, which is a cognitive bias. 0:16:34.920 --> 0:16:39.880 And what happens is we feel loss twice as deeper 0:16:39.920 --> 0:16:43.720 and more painful than an actual gain. So you can 0:16:43.760 --> 0:16:47.400 see your margin alone working for you, helping you build 0:16:47.400 --> 0:16:51.720 your portfolio, helping access more passive income streams, and things 0:16:51.760 --> 0:16:54.520 are swimming along nicely and you feel good. But then 0:16:54.600 --> 0:16:59.360 when a market correction happens, that pain is twice as 0:16:59.520 --> 0:17:01.920 more intense. Hence that in what you were feeling when 0:17:01.960 --> 0:17:04.080 you were feeling like everything's working nicely for you and 0:17:04.119 --> 0:17:05.399 swimming along okay. 0:17:05.520 --> 0:17:08.920 So to some extent, this is as much a psychological 0:17:08.960 --> 0:17:12.159 thing as it is a financial decision you need to 0:17:12.280 --> 0:17:15.919 be And this goes back to probably being a slightly 0:17:15.960 --> 0:17:20.679 more sophisticated investor that you understand how markets work, the flow, 0:17:21.200 --> 0:17:26.960 the volatility, the fluctuations, and how you react emotionally to 0:17:27.160 --> 0:17:32.479 that before you put yourself at greater exposure. I suppose 0:17:32.560 --> 0:17:39.119 to that volatility. Yeah, absolutely, all right. Finally, if someone 0:17:39.240 --> 0:17:44.040 is curious right about margin lending, what do they need 0:17:44.080 --> 0:17:49.000 to understand before they even consider it? If this has 0:17:49.040 --> 0:17:54.119 been a fantastic deep dive into it, but if someone's 0:17:54.119 --> 0:17:55.480 come out of this and going, you know what, I reckon? 0:17:55.520 --> 0:17:57.560 I reckon this could be something for me, what do 0:17:57.600 --> 0:17:58.639 they need to know right now? 0:17:58.800 --> 0:18:01.359 Okay, So I do a bit of a checklist, and 0:18:01.359 --> 0:18:05.160 I would ask yourself these five questions, the first one 0:18:05.280 --> 0:18:09.919 being can I comfortably afford the interest? And can I 0:18:09.960 --> 0:18:12.720 comfortably afford the interest even with say a three percent 0:18:12.840 --> 0:18:17.560 interest rate rise? Because yes, you can fix margin loans sometimes, 0:18:17.560 --> 0:18:19.679 but you can normally only fix them for a certain period. 0:18:20.200 --> 0:18:23.879 And within this question as well is can I actually 0:18:24.400 --> 0:18:26.000 chip away at the loan? Is there going to be 0:18:26.119 --> 0:18:28.240 enough cash flow left over for me to slowly pay 0:18:28.240 --> 0:18:30.160 it down like I did with a thousand dollars project? 0:18:30.720 --> 0:18:35.520 You know, having that buffer, that safety net is important 0:18:35.520 --> 0:18:38.240 to prioritize when you're looking at doing this. The second 0:18:38.359 --> 0:18:40.600 question I would ask myself is can I handle a 0:18:40.680 --> 0:18:44.400 margin call? Not just financially, but emotionally it's quite panicking. 0:18:44.560 --> 0:18:47.760 I've never personally received one, but I've watched people receive them, 0:18:47.800 --> 0:18:51.080 and it was quite debilitating, like what it did to 0:18:51.119 --> 0:18:54.840 them and their confidence, and you know, the mad panic 0:18:54.880 --> 0:18:57.480 to find money and to avoid having to sell, and 0:18:57.560 --> 0:19:01.720 you know, it's very distracting. You're trying to move through 0:19:01.720 --> 0:19:04.480 your everyday life and then have this massive financial risk 0:19:05.000 --> 0:19:07.280 land in your lap. So do I have the means 0:19:07.280 --> 0:19:10.240 to either come up with extra money to help reduce 0:19:10.280 --> 0:19:12.720 the LVR? Or do I have some share sitting in 0:19:12.800 --> 0:19:15.320 another online share trading account that I can transfer across 0:19:15.359 --> 0:19:18.199 into the portfolio to help rebalance it? You know, do 0:19:18.280 --> 0:19:21.120 I have the ability to actually sell some shares because 0:19:21.160 --> 0:19:22.600 I've already made lots of money on some of them 0:19:22.640 --> 0:19:25.359 to rebalance the LVR again? So you know, can I 0:19:25.359 --> 0:19:28.840 actually meet the margin call financially and emotionally? And of 0:19:28.920 --> 0:19:30.720 course you want to be your mindset would be very 0:19:30.800 --> 0:19:33.760 much about avoiding a margin call at all costs. The 0:19:33.800 --> 0:19:36.639 other third question I would say is would I sleep 0:19:36.880 --> 0:19:41.000 well at night even if markets fell thirty percent? And 0:19:41.040 --> 0:19:44.240 this is where you can sort of see hate saying 0:19:44.240 --> 0:19:45.800 that's anything that can come to me at the moment, 0:19:45.840 --> 0:19:47.080 but the men from the mice. You know, when it 0:19:47.080 --> 0:19:51.880 comes to a high risk strategy like this, will I 0:19:51.920 --> 0:19:55.639 actually get excited that this is the buying opportunity that 0:19:55.920 --> 0:19:59.040 I've been waiting for? Or is this going to make 0:19:59.080 --> 0:20:03.280 me panic, shrivel up into my shell and question everything 0:20:03.320 --> 0:20:08.159 I've done. If your answer is I would panic and 0:20:08.320 --> 0:20:11.400 feel anxious, that doesn't necessarily mean this is the wrong 0:20:11.480 --> 0:20:13.920 strategy for you or the wrong product. It just means 0:20:14.400 --> 0:20:17.159 a little bit more time, a little bit more experience, 0:20:17.320 --> 0:20:19.480 and just a little bit more information as to how 0:20:19.520 --> 0:20:21.919 this works and how to manage this proactively before you 0:20:22.000 --> 0:20:24.520 jump in the deep end of this. The fourth question 0:20:24.560 --> 0:20:27.879 would be is am I investing for at least ten years? 0:20:28.440 --> 0:20:30.960 Oh? Yeah? The timeframe this is really important. 0:20:31.000 --> 0:20:33.800 I think a lot of people don't realize margin landing. 0:20:33.880 --> 0:20:37.640 It's you know, you go in it going yep, that's fine, 0:20:37.640 --> 0:20:39.000 I can do this amount of time. But you've got 0:20:39.000 --> 0:20:41.560 also go keep in mind if you are playing and 0:20:41.640 --> 0:20:44.560 pulling this money out of the market, your time frame 0:20:44.640 --> 0:20:48.400 is not ten years. It's nine years, eight years, six years, 0:20:48.400 --> 0:20:51.119 seven years. As you're approaching that point where you're going 0:20:51.160 --> 0:20:52.560 to take the money out. You want to make sure 0:20:52.600 --> 0:20:55.080 that that margin loan is either coming down so you 0:20:55.119 --> 0:20:56.639 can actually take all the money off the table to 0:20:56.680 --> 0:20:59.960 achieve that particular goal, or your portfolio has grown an 0:21:00.080 --> 0:21:02.960 off to clearly wipe that loan out and pay it 0:21:03.000 --> 0:21:04.600 off when you go to sell the portfolio, so that 0:21:04.640 --> 0:21:06.560 you can take your money off the table and use 0:21:06.560 --> 0:21:09.119 it for whatever you want. And then the fifth one is, 0:21:09.400 --> 0:21:13.679