Houston 3

I'd tend to agree here.

The one thing that many people seem to dismiss is when borrowing against real estate equity - if you get into trouble, you may well lose the shares AND the property.

Naturally it isn't like a margin loan where the lender calls you to demand more money, but if we let ourselves get too carried away (the same way we can let ourselves get too carried away with our margin loan LVRs - and I'm personally guilty of that), then we can potentially lose far more than we readily acknowledge.

I'm with Alan here - it's not the product that's the problem, it's how we use it.

I borrowed money on margin to invest in highly volatile managed funds (some of them looked like they had low volatility, but they really didn't - which in hindsight should have been obvious ... eg. a small cap fund that "looks" like it has low volatility ... alarm bells should have gone off - small caps are never "not volatile"). But I did manage to see the volatility when it finally showed up, and so I sold out when it became clear to me that the trend had changed.

I was pretty down on myself at the time - but just the other day I looked back at the graphs at the point where I sold out and realised just how much further everything has fallen since then!! Even Navra has seen lower unit prices than where I sold out at (and I originally thought I'd mis-timed the bottom of the market and sold at the low point! )

High LVRs, volatile investments, capitalising interest ... all work really well when the times are good. But when times change - as they always do ... you had better have a plan for dealing with things quickly - or very very deep pockets.

That being said, I just paid down my margin loan - I had moved all my money to a cash fund (CFS W/S Cash), leveraged as high as I could - to get some benefit out of the interest I'd already pre-paid last year. I'm going to be waiting on the sidelines for now (mostly because I have to in the short term - I need to preserve what capital I have remaining for other financial obligations).

If the market settles down and I'm confident that I can get returns well above 13-14% (I'm not convinced we've seen the peak of interest rates yet), I'll get back in - at much lower LVRs than I previously had

PS. I'm actually not out of the market completely - my PPI1 funds are still there ... down 20% so far and I just paid the next 12 months of interest yesterday *ouch*. Cheaper to pay the interest for now than to pay out the loan. Big risk here is that I get to 100% protected mode and never actually get a return - but I'm a fair way away from that yet.

PPS. I'm not touching the existing investments my SMSF has - holding very long term. But we haven't yet invested the majority of the cash we rolled over to the fund - it's still sitting there earning far more than all the other investments at the moment!

I agree, there is no need to panic, all is ok.
Now where is that exit door?....

Now where is that exit door?....


For investors = Dec 14.2007 ~ Jan. 07.2008 ....IMHO.

Maybe I've just got it all wrong, but I'm still a bit surprised by some of the 'sky is falling' scenarios. Assets go through various cycles all the time. The reasons they go up and down are incredibly varied, but we do know they regularly go up and down.

IMHO, we need to know what type of investors we are and then stick to a game plan.

I know there are certain 'trading' type investors who 'stop loss' everything and sell if an asset falls anywhere near purchase price as this preserves their capital and they only buy anything if it's solidly on the rise. I appreciate this is one investment style that some like and that's fine and may work in a number of cases. Indeed the reduced negative cashlow implications of this style of investment has a number of advantages. It is however, ONE style of investment.

Others take a different approach...... they research an asset type, decide that although it's a good long term investment, it may well go up and down in value over the short to medium term, but they don't necessarily sell when an asset price drops. Indeed, depending on certain criteria, they may even buy more. This approach can also work well for many.

IMHO there's a BIG difference between the two though. If you come anywhere near the second type of investor, you have to be especially cognisent of CASHFLOW. Cashflow is the life blood that will allow you to hold your assets during the inevitable ups and downs that occur while holding quality assets over the long term. Too high a leveraged position and/or not enough cashflow and you line yourself up to crystalise losses at exactly the worst possible times.

Has Sydney property been a good investment over the last 30 years? It's been brillant! But in many areas, you probably haven't seen big rises since about 2003/04. Historically this isn't necessarily unusual, it's just part of the various investment cycles. I've had one property that probably hasn't moved much for 3 or 4 years but it went up about 50% very, very quickly just before that time.

In short, there are times when I may need to cashflow an asset through various cycles without necessarily seeing brilliant growth every six months. But if I'm of the opinion that it's a good quality asset, that will appreciate over time, my priority becomes how I best cashflow the holding of the asset.

What about the sharemarket? We've just had a reasonable fall at the beginning of the year of about 20-25%.

Is this unusual? How many times has the market fallen by this amount or more in the last 40 years? Plenty of times! Historically speaking, unless we have plenty of cash reserves, we should almost be anticipating the need to handle 25-35% falls in the stockmarket if need be without having to crystalise losses.

Was there any warning signs that the market was getting well and truly overheated? Have a look at any ASX Chart for 10 years or longer and you'd see 2003-2007 was very unusual.

In short, if we're going to Margin share purchases in a normal market, and we don't have big cash reserves sitting on the sidelines, then IMHO we should have our LVR's no more than 50-odd percent to allow for that 30% drop that may occur. If the market is showing signs of being very overheated and may result in an even bigger drop, LVR's probably should be below 50%.

As investors, we often take those first tentative steps getting a financial education, hopefully followed by some action that leads to us obtaining some more assets, but somhow in our wide-eyed optimism we forget many of the basics of how to KEEP some of these new assets.

Whatever tools we may choose to use, whether it be Stop losses, Cashflow or something else, learning to KEEP our assets after we've obtained them should be one of our highest priorities.

My 2 cents.......

I'm pretty much a buy and hold type of investor (with property & M/Fs).

My knowledge and experience with shares is very basic which is why I choose managed funds (hopefully, the fund mgr's know what they're doing). Whilst I expect share prices/markets to fluctuate, I sometimes question my decisions (on holding) when I hear/read talk of " oh, you should have sold out last month".

At the end of the day, I have held my mngd funds (main one being navra) and just hope that the worst of the market "drop" is behind us, but who knows.

If you hold Navra, then I assume you are after the income and are planning on holding long term.

So unless you are highly leveraged and facing margin calls, or are concerned about the cost of holding versus the income return you are receiving ... then you shouldn't be too concerned about what the markets do in the short term - indeed, you should be happy that the markets are more volatile now, since the Navra funds thrive on volatility! (you just need to wait for the market to begin to recover to realise the benefits).

If you listen to what other people say about your investments, you need to understand where they are coming from before you judge their advice. Eg. if you are a long term buy-and-hold person, don't listen to a trader (which is basically what Alan said)!

Hi Sim.

Yes, I intend holding on to Navra fund long term.

Not overly concerned re margin loan as I tend to pay margin loan down regardless of what market is doing so have a buffer up my sleeve there. Suppose I just get a bit disillusioned when I see the value of my holdings going south.

Yep, I realise Alans' post was in reference to traders (which I am definately not).

Thanks again, you have a way of putting things in perspective.

Excellent post by Alan a few up. The two funds I have (Navra and CFS geared share) I have because I think they are managed well, and long term they will perform well. I hold CFS for growth, and Navra for income. I dont have any interest in "trading" the funds, funds are too hard to time into and out of. When I have some small debts out of the way, and I've saved a buffer into ING direct I'll start paying regularly into the two funds. Buy and hold and dollar cost averaging is definitely my plan re shares and funds.

July 9 (Bloomberg) -- U.S. stocks tumbled, sending the Standard & Poor's 500 Index into its first bear market since 2002, on growing concern the biggest mortgage finance companies may not weather the housing slump.

Bloomberg.com: Investment Tools

Bloomberg.com: Worldwide

Current (weekly): DOW, SHANGHAI,NIKKEI, XJO.
Horizontal lines represent 50% and 61.8% retracement levels.

Attached Images

	DOW_in10jul02_to_26sep08.png (9.6 KB, 18 views)
	SHANGHAI_ix11jul02_to_23sep08.png (9.9 KB, 14 views)
	NIKKEI_ix10jul02_to_24sep08.png (10.7 KB, 15 views)
	XJO_ax10jul02_to_26sep08.png (9.3 KB, 24 views)