HAPPY NEW YEAR and welcome to a new decade!!
Margin Lending…..really?? Now????
ABC reporter David Taylor’s recent article titled:
“Margin Lending Could Help You Supercharge Your Savings, But It’s Not Without Risk” Grossly understates the problems in this and comes completely at the wrong time. Yet another example of why in my opinion some reporters simply shouldn’t report on financial matters. From a strategy point of view – yes! Investors can use margin lending as a method of leverage for increased exposure to a market, yes the strategy carries with it a higher level of investment risk but David, please…… if you intend discussing financial subjects with the broader public then do your research and explain it accurately. Additionally, as David correctly stated – the Australian stock market is breaking records at the moment with the ASX200 (XJO) breaking through 7,100 points. This is precisely NOT the time to be enticing the public with high risk investment strategies and is frankly irresponsible.
To begin with a margin loan is NOT a personal loan as stated in the article, it’s an investment loan. While investing via borrowed funds can be a hair raising experience, I’m not splitting hairs here. One loan carries with it an element of protection under the consumer credit code legislation whilst the other does not.
Next, borrowing from your home’s equity is not a margin loan.
The term “Margin Loan” is derived from the concept of using the equity “margin” (ie the difference between the total value of an investment portfolio and the loan value) created in an investment portfolio. A margin loan is essentially created when an investor takes out a loan on an investment, typically a share portfolio, and uses the additional funds to purchase additional shares (or similar assets) in the portfolio. This “margin loan” is secured by the portfolio itself. If the originating money to buy the original shares actually came from a loan on the family home as the article kind of implies then this is considered double gearing and is an EXTREMELY RISKY strategy. It’s also a strategy that we absolutely do not recommend and indeed, never have. One fact that David does accurately point out is that in the case of a margin loan, the lender can make a “margin call” if the value of the assets fall below a certain level which is essentially the Loan to Value Ratio LVR set by the lender. Investors (and David) also need to be critically aware that the lender who provided the margin loan has the capacity to lower the maximum LVR at any time, pretty much at their discretion. This can take investors by complete surprise in a market downturn, as it did in one of the most extreme example’s, throughout the GFC.
On the other hand, money borrowed from a bank against your home is a structured mortgage and not typically secured by a share portfolio, it’s secured by your home. This being the case, where there is a drop in market value on the share portfolio, you will not receive a margin call from the bank.
Sound confusing? I sincerely hope so! As financial planners and advisers our profession sees far too many instances where consumers/investors read an article one day then act on it the next without considering all of the factors involved. Unwinding such situations can be costly and in the worst case, financially devastating to families around the country. As an absolute minimum I implore all reporters that cover such topics to please, in the very least, place a footnote at the end of such articles strongly recommending the interested parties seek professional advice before implementing ANY strategy.