2. 2 Safe LVR Most managed funds have LVR of 75% or so Unlikely that share market will fall > 30% in any year If prior to crash: Value of managed fund = $100,000 Loan amount = $50,000 (LVR = 50%) Maximum LVR = 75% (margin call at 75% + 5% = 80%) After 30% crash: Value of managed fund = $70,000 Loan amount = $50,000 (LVR = 71%) Still 9% off receiving a margin call
3. 3 What if market falls by > 30%? If it is year 5 of your investment then you have had 4 years of growth and so LVR may be well below 50% If you have withdrawn funds from your margin loan to keep it at 50% to pay off your home loan then these funds will still be available on “redraw” If it happens in the first year then: Sell your managed fund units and take the pain! Use your “buffer” in home loan to meet the margin call Use your savings from high graduate income to cover margin call If market falls by > 60% then some natural disaster has happened to Australia or world and so best to default on margin loan (bankruptcy)
4. LVR robustness How much can the value of your share portfolio fall by based on a starting LVR and a margin call at 80%? 4
5. 5 Main issues to consider Positively gearing is much safer than negative gearing Cash flows will cover interest payments and outgoings. Consider costs of financial distress Lose job and paying two mortgages? Share prices decline and pay a “margin call” Take a long-term position Watch out for ATO crack-downs
6. Stop and read Now read: Chapter 5 Debt – foe and friend 6
