Leverage Investments

valiant24

I have a discretionary managed investment run by an investment house owned by a large French bank, into which an IFA talked me into investing when I sold a business a few years ago.  Its performance has been steady, but unspectacular when compared to, say, Lifestrategy 60 whose strategy it is loosely supposed to follow.

Now I am building a new house and will need some cash.   The IFA is dead against taking this from the fund and instead wants me to take out a "Lombard loan" where I can borrow up to 50% of the current value of the discretionary fund.   Seems very like leverage to me, just to avoid a bit of CGT and reduced exposure to "the market".   I imagine he has one eye on his reduced fees too ...!

bostonerimus

I avoid gambling with other people's money, ie using leverage, to such an extent that I avoid ITs/closed end funds that are allowed to do just that. Leverage can amplify gains, but also losses and I've never seen the need to take on the extra risk.

Malthusian

valiant24 said:

Now I am building a new house and will need some cash.   The IFA is dead against taking this from the fund and instead wants me to take out a "Lombard loan" where I can borrow up to 50% of the current value of the discretionary fund.   Seems very like leverage to me, just to avoid a bit of CGT and reduced exposure to "the market".   I imagine he has one eye on his reduced fees too ...!

It most certainly is leverage. And a Lombard loan against a portfolio run along similar lines to Vanguard LifeStrategy 60% does not compute. If you've got the risk appetite for a Lombard loan, why only 60% equities?

If the portfolio fell by enough you could be forced to cash in at the bottom of the market. (Or put more money in. But if you had lots of spare cash floating around you wouldn't be borrowing money. Nor would a 60/40 investor be keen to put more money into the stockmarket when the sky is falling in and all the experts are predicting a decade-long recession.)

This is a very different risk to me investing rather than overpaying the mortgage.

Sure he's an IFA and not a restricted adviser? DFMs (in the absence of a specific reason for using one) are most commonly recommended by restricted advisers.

steampowered

Thrugelmir said: 

Rule No. 1: Never lose money.

Rule No. 2: Never forget rule No. 1.

This is only possible if you ignore inflation.

When you look at real values, money kept in savings accounts lost 4.9% last year (UK inflation ran at 5.4% - I'm assuming 0.5% interest on an average savings account). 

Thrugelmir

steampowered said:

Thrugelmir said: 

Rule No. 1: Never lose money.

Rule No. 2: Never forget rule No. 1.

This is only possible if you ignore inflation.

When you look at real values, money kept in savings accounts lost 4.9% last year (UK inflation ran at 5.4% - I'm assuming 0.5% interest on an average savings account). 

You cannot control inflation. However you can control your risk profile. Equities in the main have no direct correlation to inflation. Chasing returns is when people utilmately find themselves exposed and falling into deep holes. 

steampowered

Thrugelmir said:

You cannot control inflation. However you can control your risk profile. Equities in the main have no direct correlation to inflation. Chasing returns is when people utilmately find themselves exposed and falling into deep holes. 

You are conflating different types of risk.

Leaving money in a savings account for the long term is not "controlling your risk profile". That is exposing yourself to high levels of inflation risk which can decimate your capital. 

10 years of inflation at 4% per year would reduce the value of your capital by 50%. Over a 10 year time period that's higher risk than investing in the stock market, with none of the reward. 

Thrugelmir

steampowered said:

Thrugelmir said:

You cannot control inflation. However you can control your risk profile. Equities in the main have no direct correlation to inflation. Chasing returns is when people utilmately find themselves exposed and falling into deep holes. 

You are conflating different types of risk.

Leaving money in a savings account for the long term is not "controlling your risk profile". That is exposing yourself to high levels of inflation risk which can decimate your capital. 

10 years of inflation at 4% per year would reduce the value of your capital by 50%. Over a 10 year time period that's higher risk than investing in the stock market, with none of the reward. 

Anything substantive to support your assertion?  As not a view I would hold at the current time given the broad uncertainty that exists.  Equities are not a panacea. 

Malthusian

Thrugelmir said:

 

You cannot control inflation. However you can control your risk profile. Equities in the main have no direct correlation to inflation. Chasing returns is when people utilmately find themselves exposed and falling into deep holes. 

Equities represent the value of businesses which own assets and produce goods to sell for profits. All those things go up with inflation as that's what inflation is. The expected return of equities is inflation plus a risk premium plus or minus randomness.

Equities are not guaranteed to beat inflation (due to the randomness) but it is a reasonable hope/expectation, and it would be incorrect to say that equities and inflation aren't correlated.

Warren Buffet's rule no. 1 is not about inflation, it is about not doing stupid things that risk generating a permanent loss. If you permanently lose half your money over a 5 year period by making a bet that doesn't come off (e.g. borrowing money against your portfolio and then being forced to cash it in at the bottom of the market to repay the loan) and inflation averaged 2.5% over that time, then in real terms you have lost 56%.

Thrugelmir

Malthusian said:

Thrugelmir said:

 

You cannot control inflation. However you can control your risk profile. Equities in the main have no direct correlation to inflation. Chasing returns is when people utilmately find themselves exposed and falling into deep holes. 

Equities represent the value of businesses which own assets and produce goods to sell for profits. 

A share is traded at the amount an investor is prepared to pay for a stake in the business. This is driven by opinion based on macro and micro news events. 

Malthusian

Thrugelmir said:

This is driven by opinion based on macro and micro news events. 

Yep. That's the "randomness" I referred to. But the other two components of shares' value don't disappear just because the third is random. And one of those components is the price of goods, services and assets held and produced by publicly-listed businesses. Which isn't just correlated with inflation, a rise in those things is inflation.