Regrets - London property VS shares

GeordieGeorge

Thrugelmir said:

GeordieGeorge said:

Crashy_Time said:

...with laughter...LOL. Just ignore leverage, it doesn`t matter.

Yes it does. If you’ve £100k and invest it a 10% return makes you £10k. If it’s four times leveraged it makes you £50k.

Leverage is double edged. 

Absolutely, it multiplies both gains and losses, but those saying that it doesn’t affect returns are definitely wrong.

AdrianC

GeordieGeorge said:

Crashy_Time said:

...with laughter...LOL. Just ignore leverage, it doesn`t matter.

Yes it does. If you’ve £100k and invest it a 10% return makes you £10k. If it’s four times leveraged it makes you £50k.

Only if you pretend you're really only investing £100k, and ignore the minor detail you've actually invested £500k.

It's just that £400k of it isn't your money. And you're paying interest on it, as well as risking losing it.

GeordieGeorge

AdrianC said:

GeordieGeorge said:

Crashy_Time said:

...with laughter...LOL. Just ignore leverage, it doesn`t matter.

Yes it does. If you’ve £100k and invest it a 10% return makes you £10k. If it’s four times leveraged it makes you £50k.

Only if you pretend you're really only investing £100k, and ignore the minor detail you've actually invested £500k.

It's just that £400k of it isn't your money. And you're paying interest on it, as well as risking losing it.

I’m not really sure what point you are trying to make there. Leverage refers to having more exposure than us accounted for by your assets. You’re just reiterating the mechanism and trying to ignore the effect of it.

AdrianC

GeordieGeorge said:

AdrianC said:

GeordieGeorge said:

Crashy_Time said:

...with laughter...LOL. Just ignore leverage, it doesn`t matter.

Yes it does. If you’ve £100k and invest it a 10% return makes you £10k. If it’s four times leveraged it makes you £50k.

Only if you pretend you're really only investing £100k, and ignore the minor detail you've actually invested £500k.

It's just that £400k of it isn't your money. And you're paying interest on it, as well as risking losing it.

I’m not really sure what point you are trying to make there. Leverage refers to having more exposure than us accounted for by your assets. You’re just reiterating the mechanism and trying to ignore the effect of it.

If you put £100k cash into the purchase of a £500k house, and borrow £400k, do you have a £500k house or a £100k one?
If it becomes a £550k house, is that a 50% increase in value, or a 10% one?

If you put £100k cash into the purchase of a £500k investment, and borrow £400k, do you have a £500k investment or a £100k one?
If it becomes a £550k investment, is that a 50% increase in value, or a 10% one?

Your argument is that they're different, and that the second scenario is a 50% increase.
My argument is that they're the same, and both are a 10% increase.

If it becomes a £400k house or investment, is that a 100% loss in value, or a 20% one?

grumiofoundation

GeordieGeorge said:

AdrianC said:

GeordieGeorge said:

Crashy_Time said:

...with laughter...LOL. Just ignore leverage, it doesn`t matter.

Yes it does. If you’ve £100k and invest it a 10% return makes you £10k. If it’s four times leveraged it makes you £50k.

Only if you pretend you're really only investing £100k, and ignore the minor detail you've actually invested £500k.

It's just that £400k of it isn't your money. And you're paying interest on it, as well as risking losing it.

I’m not really sure what point you are trying to make there. Leverage refers to having more exposure than us accounted for by your assets. You’re just reiterating the mechanism and trying to ignore the effect of it.

The effect of leverage does not impact the return of the investment itself, but it will impact your own personal return (whether positive or negative). 

Similar to the examples given above

Scenario A - I invest £100 in A and it goes up by 20%. So I have made £20, a 20% return
Scenario B - I invest in B with £50 of my own money and borrow £50 that also rises by 20% over the same timescale. I have then made return of 40% (minus interest) after repaying the loan.

Although scenario B gave me a better % return on my money both investments have performed the same. 

Guess it depends on if you analyse investments on how they have performed versus the return you have made

The original statement made on the previous page was "My btl’s have far out performed my shares"*, which is a potentially misleading statement if you don't include the fact it is leveraged. (Although somewhat of a moot point as the (leveraged) BTL has barely, if at all, outperformed unleveraged stock and shares).



Another way to (try and) illustrate
Scenario C -  I pay £1000 into stocks and shares ISA and invest in C that goes up 50%. Now have £1500
Scenario D - I pay £1000 into my stocks and shares LISA and invest in D that goes up 30% in the same time period. Due to the 25% bonus on LISA I now have £1625 in my LISA.

Scenario D returned me more money but clearly C was a better investment than D.

GeordieGeorge

grumiofoundation said:

GeordieGeorge said:

AdrianC said:

GeordieGeorge said:

Crashy_Time said:

...with laughter...LOL. Just ignore leverage, it doesn`t matter.

Yes it does. If you’ve £100k and invest it a 10% return makes you £10k. If it’s four times leveraged it makes you £50k.

Only if you pretend you're really only investing £100k, and ignore the minor detail you've actually invested £500k.

It's just that £400k of it isn't your money. And you're paying interest on it, as well as risking losing it.

I’m not really sure what point you are trying to make there. Leverage refers to having more exposure than us accounted for by your assets. You’re just reiterating the mechanism and trying to ignore the effect of it.

The effect of leverage does not impact the return of the investment itself, but it will impact your own personal return (whether positive or negative). 

Similar to the examples given above

Scenario A - I invest £100 in A and it goes up by 20%. So I have made £20, a 20% return
Scenario B - I invest in B with £50 of my own money and borrow £50 that also rises by 20% over the same timescale. I have then made return of 40% (minus interest) after repaying the loan.

Although scenario B gave me a better % return on my money both investments have performed the same. 

Guess it depends on if you analyse investments on how they have performed versus the return you have made

The original statement made on the previous page was "My btl’s have far out performed my shares"*, which is a potentially misleading statement if you don't include the fact it is leveraged. (Although somewhat of a moot point as the (leveraged) BTL has barely, if at all, outperformed unleveraged stock and shares).



Another way to (try and) illustrate
Scenario C -  I pay £1000 into stocks and shares ISA and invest in C that goes up 50%. Now have £1500
Scenario D - I pay £1000 into my stocks and shares LISA and invest in D that goes up 30% in the same time period. Due to the 25% bonus on LISA I now have £1625 in my LISA.

Scenario D returned me more money but clearly C was a better investment than D.

You are using the terms in a non-standard way here, and then arguing that your definition is the one that should be used.

I work in finance, and am using the terms as they are used in investment banking. If a client invests £100 with us and we leverage it up four times then no-one says that he’s “really” invested £500k, as he hasn’t. His portfolio still shows a £100 starting value, and if the asset increases in value by 1% then his portfolio grows 5%, to £105.

I’m still not clear why you want to change the terminology here to obscure the very essence of what leverage achieves.

grumiofoundation

GeordieGeorge said:

grumiofoundation said:

GeordieGeorge said:

AdrianC said:

GeordieGeorge said:

Crashy_Time said:

...with laughter...LOL. Just ignore leverage, it doesn`t matter.

Yes it does. If you’ve £100k and invest it a 10% return makes you £10k. If it’s four times leveraged it makes you £50k.

Only if you pretend you're really only investing £100k, and ignore the minor detail you've actually invested £500k.

It's just that £400k of it isn't your money. And you're paying interest on it, as well as risking losing it.

I’m not really sure what point you are trying to make there. Leverage refers to having more exposure than us accounted for by your assets. You’re just reiterating the mechanism and trying to ignore the effect of it.

The effect of leverage does not impact the return of the investment itself, but it will impact your own personal return (whether positive or negative). 

Similar to the examples given above

Scenario A - I invest £100 in A and it goes up by 20%. So I have made £20, a 20% return
Scenario B - I invest in B with £50 of my own money and borrow £50 that also rises by 20% over the same timescale. I have then made return of 40% (minus interest) after repaying the loan.

Although scenario B gave me a better % return on my money both investments have performed the same. 

Guess it depends on if you analyse investments on how they have performed versus the return you have made

The original statement made on the previous page was "My btl’s have far out performed my shares"*, which is a potentially misleading statement if you don't include the fact it is leveraged. (Although somewhat of a moot point as the (leveraged) BTL has barely, if at all, outperformed unleveraged stock and shares).



Another way to (try and) illustrate
Scenario C -  I pay £1000 into stocks and shares ISA and invest in C that goes up 50%. Now have £1500
Scenario D - I pay £1000 into my stocks and shares LISA and invest in D that goes up 30% in the same time period. Due to the 25% bonus on LISA I now have £1625 in my LISA.

Scenario D returned me more money but clearly C was a better investment than D.

You are using the terms in a non-standard way here, and then arguing that your definition is the one that should be used.

I work in finance, and am using the terms as they are used in investment banking. If a client invests £100 with us and we leverage it up four times then no-one says that he’s “really” invested £500k, as he hasn’t. His portfolio still shows a £100 starting value, and if the asset increases in value by 1% then his portfolio grows 5%, to £105.

I’m still not clear why you want to change the terminology here to obscure the very essence of what leverage achieves.

I wan't trying to argue my definition 'should' be used or trying to 'change the terminology' (don't know where you got that from). 

I was just trying to rationalise where maybe the confusion in the previous posts may have come from. I would (as a layman) view (or define if you will) leverage as using debt to invest to magnify your returns. But leverage doesn't impact the underlying performance of a given investment e.g. an investment trust, an index tracker, a property. I think it is important to compare this underlying performance and your own returns/performance, which will obviously be impacted (positively or negatively) by leverage (or other factors eg ISA vs pension). Especially important if comparing leveraged and unleveraged investments (which is what poster did on previous page).

Would you not say that if your client simply stated "my investment has returned 5%" that was an incomplete/misleading statement? 

Since it could mean
- I invested in something that has gone up 5% or
- I invested in something that has gone up 1% but was leveraged up four times.
I am obviously not arguing that in both cases their original investment has gone up 5%, since it clearly has.  Basically think the issue comes from the fact that in the statement above one could take 'investment' to mean the amount originally invested or what they actually have invested in. 

You can tell your client they have only invested £100. And in one sense they have obviously only invested £100 since they have only paid that to you. But in another sense they have "really" invested £500 since they are affected by the price movement of £500, not of £100. (So it seems that the definition in question appears to be the definition of "really" -  and I can't believe the finance industry have cornered the market on the definition of "really").

There are many definitions that are defined within a given industry or academic discipline that may used differently in the outside world (for example if you have ever used the word significant without having actually tested for significance that was wrong from a statistics point of view). 

Crashy_Time

jimbog said:

Lover_of_Lycra said:

Crashy_Time said:

The great thing about shares is that you can dump them fast if things go South, you just can`t do that with property.

Sometimes it’s not worth dumping an investment when it goes south and crystallising a loss. Sometimes it’s better to weather the storm. What shares do have over property is liquidity for when you might need the money. 

When Covid hit some tried to liquidate their investments but had been blocked from doing so

It was mainly property funds that were locked.

Crashy_Time

GeordieGeorge said:

Crashy_Time said:

...with laughter...LOL. Just ignore leverage, it doesn`t matter.

Yes it does. If you’ve £100k and invest it a 10% return makes you £10k. If it’s four times leveraged it makes you £50k.

My point was that leveraged BTL gets wiped out in a proper property price crash.

GeordieGeorge

Crashy_Time said:

GeordieGeorge said:

Crashy_Time said:

...with laughter...LOL. Just ignore leverage, it doesn`t matter.

Yes it does. If you’ve £100k and invest it a 10% return makes you £10k. If it’s four times leveraged it makes you £50k.

My point was that leveraged BTL gets wiped out in a proper property price crash.

And makes far more if prices increase, which is the whole point of leverage.