leveraging into equities?

[ChickenCoop]

Just thoughts at this stage...

I went to the bank last week to enquire about borrowing money now, to use maybe later when or if stocks continue to tumble.

The idea was to draw down the loan and have it all sitting in the offset acc against the loan, so that no interest would be paid.
If I decide not to use the loan I can pay it out at any time. I just thought that credit could dry up in a worst case scenario and by doing this I would already have access to it.

I already have about 40% of my NW in cash that would be used to buy equities before using this available credit. Using all of this available credit would double my equity exposure and bring the total share market exposure up to about 65% of my NW. The investments would be mostly LIC's and Index type funds. The rest of my Money is in RE and PM's

Any thoughts?

[2Birds1Stone]

Gamble with your own money.

[niemand]

I’d second 2B1S’ statement. In addition I think equities are by no means cheap, despite the recent dip.

As a personal example, I’ve been cost-averaging monthly into a few LICs (AFI, ARG, AUI) since August 2018 and I’m still up 2%, and that’s excluding dividends.

In my opinion it’s not the time to try anything yet. I might change my opinion and go in with a (non-leveraged) lump sum if the ASX drops much (much) further and we’ve got some indication that we’ve hit a turnaround rally (e.g. Coppock indicator turns to a buy or something similar).

It’s good to think about this now though, so you’re ready when the time is right.

[steveo73]

I'm not leveraging but I have some bonds and I'll sell them if I feel the market is at a nice low position. I also recommend against doing this. I'd probably not leverage into the market as well because it's risky but at some point someone is going to make a lot of money via leverage. I have my house paid off and I could leverage more into the market. I won't do this but I can see the appeal.

[Seppia]

You already have 40% cash, I’d start using that before thinking about borrowing money honestly.

[Nomad]

I would probably not get a loan to buy equities at this point. It is highly likely that they will drop more in the next few months and you've taken a double hit. The interest on the loan and the loss of equity value.
I could see a case for getting a low interest loan if equities were very cheap and we had reached the end of a crash.
However, this looks like the early days of a crash to me.

[ertyu]

Here's a risk of leveraging that hasn't been mentioned: the last couple of crashes have all been V-bottoms: the market drops precipitously, then climbs happily back up within a couple of years. If you assume a new market bottom soon, and if you assume that to be a V-bottom, your strategy makes sense. But what if we observe an L-bottom - the case where the market drops precipitously and remains pretty much flat? Just because it didn't happen in 2018, 2008, and 2001 doesn't mean it can't happen now. Consider demographics and climate change - two arguments why the long-term growth prospects aren't so bright.

That said, idk what I would recommend instead. Just sharing some thoughts

[Bankai]

If there's any time to leverage, it's the beginning of a new bull market when things are working great, everything is going up and the sentiment is very positive. However, we are not anywhere close to it. Currently, we are on the way down, no one knows when the market will bottom or how long before the recovery starts. Also, bear traps. I'd certainly not take any loans now or in near future, only maybe once a sustainable recovery is underway, and even then only put extra money in gradually and not all at once (in case of a bear trap). Any reason you want to take a loan instead of just using a leveraged brokerage account?

[Gilberto de Piento]

viewtopic.php?f=3&t=975&hilit=leverage+experiment

[Egg]

Fwiw, I am doing something similar to what you are suggesting, namely taking a mortgage on my currently-unencumbered home. If you like, not having had a mortgage previously has been similar to holding a large cash position, in as much as I had - and previously didn't exercise - the option to hold back cash when I bought the house, or later the opportunity to turn the home equity back into cash.

The loan I will be taking is a 5-year loan for well under 20% of the home value - and I am confident of being able to service it without ever selling equities.

What I won't be doing, though, is investing it straight into equities. Here in the UK, we have tax-sheltered accounts (ISAs) that can be funded with up to £20k per year. I'll use the loan to make sure this ISA is funded up to the cap this year and next year but hold it as cash for now (maybe drip in if the market starts to look properly juicy). The way I see it, I'm paying the loan interest in return for the possibility of being able to buy more heavily into a big dip should it materialise. If it doesn't, well, at 2% interest I still think it's not the end of the world - it is small beer compared to the risks and potential rewards.

To those who don't believe in market timing (most sensible people, as far as I can tell) this is all probably pointless, even if it doeasn't end in tears. But hey ho - we all have to make our own judgments.

[ChickenCoop]

Thank you everyone for your replies. I won't individually respond to you all because I don't know how to do the quote thing. so I will try cover things generally.

These borrowed funds would be a loan against RE, so there would be no risk of margin calls. I would ONLY use these funds after allocating most of my current cash position. I also have a recession proof job, but would keep 2 years of living expenses in cash as insurance.

I do believe there will be a credit crunch in this down turn and borrowing later will be difficult. This loan may never be used, but gives me an option to do so in the future if it's established now.

Looking at the last 9 Bear markets, the average duration was 15 months and the average fall was 33%. I won't be buying anything for at least 9 months. According to my financial guy, this looks like its more like the late 1920's scenario, than anything we have seen since.