Insurance and Credit

Leverage is a term used in investment circles to explain a type of borrowing. Its investment jargon, so it may sound complex. Its simply describes the process of borrowing to invest, where there is some kind of security underpinning the borrowing. This could be a house in a property loan, or stocks in a margin loan.

If you have not borrowed to invest before, but are considering it, you really should discuss this with a licensed financial advisor before you do. The concepts provided in this article are general in nature and should not be taken as specific advice to be applied to your specific circumstances. A financial advisor will be able to tailor a borrowing structure which perfectly matches your goals.

When I started investing, my borrowing habits where the same as most peoples. I had a floating credit card debt which varied to my whims. I had a small personal loan for some household items and a bigger one which enabled me to buy my car.

There are 2 problems with this type of borrowing. Firstly, all the assets I bought with the borrowed money were depreciating assets. This means that as I paid off the debt, the value of the things I bought decreased. Secondly, as I purchased “consumables”, the interest I paid on these loans was not tax deductible. This makes for a very expensive borrowing.

My debt profile today is very different to the one I had when I started learning about money. Today I use my credit card merely as a float which I pay off each month and all my personal loans are paid off. Despite this I carry much more debt than I did back then. I have a massive debt on a rental property I purchased. I have a reasonable sized margin loan for stock trading and I have an ever growing FOREX trading account. Most of my debt now funds investments, practically no debt funds consumables.

So what are the benefits of borrowing to invest?

Firstly, when you borrow to invest, you are “using other people’s money” to earn more money in the investment markets. A great example of this is in our FX Trading strategy. If I invest $10,000.00 and leverage it out at 400:1 that means I have $4,000,000 invested. This above example describes very well the first benefit of leverage. By accessing more money to invest, you can earn way higher returns on your investments than you otherwise would have been able to.

The second benefit you can get from borrowing to invest is a possible tax benefit. In my situation where I have borrowed to purchase an investment property in Victoria, as I rent out that property and earn an income from it, the interest payments on that mortgage become a cost associated with that income. As such, in my circumstance, I can claim those interest payments as a tax deduction. This means that while my asset is making me money, the tax office is actually giving me a discount on my borrowing by making it tax deductible

Margin loans work similarly. Basically I buy a bunch of stocks, fund 50% of the purchases myself and borrow the other 50% in a margin loan. This means I can double the size of my share portfolio and hopefully make a lot more money. Because I borrowed money though to buy the stocks which will make me money, the interest accrued in the margin loan is tax deductible.

Those are some of the benefits you can gain by borrowing to invest. There are risks too though, so it is very important to get independent financial advice if you are thinking about leverage.

The first risk with borrowing to invest is the same with all loans. Loans come with obligations. You need to be able to fund the repayments, both the principle and the interest. So you need to do your sums properly and work out whether your income can cover these repayments. If you mess this up and over-extend yourself, typically your lender will come and seize your goods and assets and sell them to get their money back. This is never a good position to be in.

A margin loan is treated a little bit differently. If you borrow too much or the value of your investments drops suddenly, you will be at risk of paying margin calls. This means your lender will ask you to pay off a portion of the loan, so that the outstanding loan is in a reasonable level when compared to the reduced level of collateral. This can be quite a large issue if your investments drop by a long way. If you cannot meet the margin call obligations, your lender has the right to sell your investments.

There is alway also the possibility that your trading strategy loses money. If this happens, because you borrowed so you could invest more, you lose more money.

All risks with investing can be mitigated with strategy. That is why it is so important to speak to a licensed financial adviser before you invest and especially before you borrow to invest. So if you are considering leverage, speak to an adviser about risk mitigation. Leveraging your investments can definitely be financially rewarding, but only when you properly understand and manage your risk and when it is backed up by a consistently high performing investment strategy.

A Pullback to approximately 15.15/share during “after-hour” trading on 4/14/09 is quantitatively appealing in establishing a long position on Intel (INTC).

The close of 16.01 places INTC on a bullish stance, according to the following technical indicators:

A. Composite Indicator– Which is a Trend Spotter (TM)

B. Short term Indicators– The 10-8 Day Moving Average Hilo Channel, 20 Day Moving Average Versus Price, 20-50 Day MACD Oscillator, and 20 Day Bollinger Bands suggest a buy. The 20 Day Average Volume is 66859422.

C. Medium Term Indicators– The 50 Day Moving Average versus Price, 20-100 Day MACD Oscillator, and 50 Day Parabolic Time/Price suggest a buy. The 50-Day Average Volume 70653359.

D. Long Term Indicators– The 100 Day Moving Average versus Price, and 50-100 Day MACD Oscillator suggest a buy. 100-Day Average Volume – 68089414.

On 4/15/09, assuming the shares commence trading at 15.15, the May strike 15 calls would open the trade at approximately .76/contract. This would give the new shareholder .61/contract in intrinsic time value till option expiraton, assuming the calls are written. Moreover, the shareholder has a downside protection to 14.54/share which is the March 17 2009 pivatol (infliction) point. At 14.53/share, the May Strike 14 calls would probably trade between .97 to 1.00/contract, offering the accumulation of new shares a juicy .44 to .47/contract in intinsic time value and a downside protection to 13.56– which is a solid 5 month support level. At 13.56/share, the May Strike 13 would bid .88 to .90/contract giving the investor .32/contract in time value and a downside protection to 12.68.

The dollar-cost-average pyramid hedged with may calls stated above provide roughly a 72% downside protection against the underlying shares, but only 48% when hedged with put options with similar strikes.

A life without debt! Have you ever thought about what that would be like? Could you get by without credit cards, without a mortgage and imagine not owing money to any bank or anyone? How would you handle trying to rent a car, spend a night in a motel or buy theater tickets online?

When the financial worries of the global economy continues to be foremost on our TV news each day, it can become really worrying. The recession is continuously blamed for many jobs losses, family homes being foreclosed on, businesses crumbling and people are becoming more and more stressed. The share market has already claimed many victims and for those of you who lost money or life savings there, then you already know what it feels like.

Are you sick of thinking negatively? It only makes our stress greater and drains our energy. How about some positive energy. What can we do? How would it feel if you made a goal to start today living without debt? Would that give you something positive to get stuck into? Would you know how to begin? If not, I can help you with some good ideas

Get rid of the credit cards right now. Check out the banks to see what is the best and cheapest debit card you can find. Debit cards do not put you in debt. You are only able to draw on the money in your account. Bank account empty, debit card charge won’t go through. Yes you can use debit cards to pay for your rental car and to book your hotel and they also work at the shops too.

Yes I know you still owe lots of money on your credit cards, its time now to start paying them off. The quickest way to do that is, pay the minimum amount owing on all the cards except for the one with the lowest amount owing. That one you need to pay extra, as much as possible above the minimum. Do this until you have paid the credit card off. Now add the money you have been paying off this card to the minimum on the next lowest balance owing card and pay that one off. Keep doing this till all your credit cards are paid off completely.

Make a plan and stick to it. Have the whole family help to create a budget. When shopping pay only by cash or debit card. Start an emergency fund, and save for future purchases.

A life without debt will be amazing for you. Your life will have less stress and you will feel more secure knowing that you don’t owe anyone money. You will know that if the global economy is great or not doing too well it will not have any effect on you. You will be able to enjoy the most incredible lifestyle and sleep easily knowing that you are living a life without debt.