What Is Your Attitude to Leverage?

aimon on 01/09/2021 - 20:14

Hey All,

Just wanted to ask what your relationship to leverage is? For a long time any kind of debt was sickening to me which served me for a period but my attitudes are changing.

Based upon the share and property market of the last few years one could feel like they should borrow as much money as they can get, but interested in your take on this?

I like these quotes from "The Psychology of Money" by Morgan Housel

  • "Manage your money in a way that helps you sleep at night"
  • "Some people won’t sleep well unless they’re earning the highest returns; others will only get a good rest if they’re conservatively invested"
Financial

Comments

  • mbck on 01/09/2021 - 20:16
    +9

    It's a tool. If you know how to use it, great. If not, well you'll hurt yourself.

    • aimon on 01/09/2021 - 20:18
      +1

      Wow. Quite Poetic :)

    • Mechz on 01/09/2021 - 22:28
      +3

      That's some father-son puberty talk right there.

  • [Deactivated] on 01/09/2021 - 20:18

    Market is irrational but they can remain irrational for longer than you can remain solvent so sometimes it pays a huge sum to be irrational.

  • Bafranz on 01/09/2021 - 20:18

    Takes money to make money.. but it’s very easy to spend when it’s not yours

  • netjock on 01/09/2021 - 20:23
    +1

    Borrow all you can. If things go bad Mr Tax Payer bails you out. We say that twice. The tax payers have bailed out housing market, stock market and the banks. Just borrow all you can attached to any one of these and you'll be just fine.

    • aimon on 01/09/2021 - 20:47

      I cant tell if you are joking or thats your real approach to the current state of things

      • netjock on 01/09/2021 - 20:52
        +1

        It is everyone else's approach. My approach is to borrow all I can and not be the first domino to fall before the bail outs kick in.

        Remember Lehman Brothers got sacrificed, then they pushed Bear Sterns into arms of JP Morgan, then Merrill Lynch into Bank of America which made BofA go bust. You want to be just behind that. Still get the full benefit of bail outs.

        Didn't make the most of that to plough everything I had in there.

        Did make the most of the Eurozone financial crisis and bought CSL at $34. Held until now.

        • aimon on 01/09/2021 - 23:32

          So is that shares or real estate as well?

          • netjock on 02/09/2021 - 09:36

            @aimon: As you have seen. All of it. Share market go bailed out and so did the property market.

  • Keplaffintech on 01/09/2021 - 20:47
    +1

    Most people seem very comfortable with the idea - many people buy a house that they can not afford outright by taking out a loan at 80-90% leverage.

    Even more of these retail 'investors' buy investment properties as soon as they have built up enough equity to fund a further loan, and continue this chain because property only goes up.

  • djones145 on 01/09/2021 - 22:14

    borrow as much as you can get
    interest rates are down down prices are down

    it will be negative soon, they will pay you to borrow money soon lol

    it's freee money

    everyone in Sydney are borrowing their eye balls in debt, house prices continue to rise
    lockdown is impacting the economy
    but people are still buying and at crazy prices

    rba can't raise interest rates and can only drop
    a small increase and we will have defaults like crazy.

    • aimon on 01/09/2021 - 23:34

      Not sure if its just me but parts of your reply seem to conflicting. Was that intentional?

      Borrow aa.kuxh as you can and things can get really bad?

      • netjock on 02/09/2021 - 09:43

        it will be negative soon, they will pay you to borrow money soon lol

        Not going to happen.

        Look at Sweden, Eurozone (as in countries that use the Euro which is not necessarily the EU), Denmark. None has gone really that negative and it does nothing. Money printing is the last move before going negative. If only tool was interest rates our rates would be negative already.

        So called money printing like QE. That is buying up bonds from financial institutions (realising their obligation to hold those assets) gives them more money but they still need to find credit worthy borrowers to lend to. Australian banks can't lend to big companies because they have direct access to global markets at low rates. They won't lend to SMEs because they are high risk. So what is left is housing. The problem is housing is not that productive and credit worthy borrowers are not unlimited.

        I agree with not being able to increase interest rates. We're pretty much going to end up like Japan. If you think about it. Zero interest rates, high debt, QE, no immigration. God help us if real estate goes bust and the share market too. Lucky we don't have a dodgy share market (Japan is dodgy due to all the dodgy conglomerates cross holdings to avoid take overs and keep their unhealthy habits of doing business). Real estate I am not so sure.

  • Almost Banned on 02/09/2021 - 00:25

    My view is that debt is to be avoided for anything except stuff that is both essential and safe (ie your PPR), and stuff that is guaranteed to pay more than the cost of the borrowing.

    • aimon on 02/09/2021 - 16:14

      Like real estate and shares (with capital growth) lol.

  • Brucegonemad on 02/09/2021 - 00:40
    +2

    I have a finance background and have been working in the banking industry for nearly 10 years.

    People who understand money and how it works know that leverage is one of the main ingredients to building wealth, especially in the western world.

    Debt is your friend if you know what you're doing and how to use it as a tool then you're halfway there. The problem is most have no idea and others think debt is 'evil' etc…it's unfortunate but the reality is that wealth is transferred from those who lack an understanding of money and how it works, to those who do.

    • watwatwat on 02/09/2021 - 01:13

      What interest rates do you think these people pay on their margin?

      • redfox1200 on 02/09/2021 - 07:43

        i pay about 1.6%

        • watwatwat on 02/09/2021 - 11:17

          Wholesale investor or using your mortgage or something?

          • redfox1200 on 02/09/2021 - 11:29

            @watwatwat: i use interactive brokers for shares / trading they have really low margin rates

            • watwatwat on 02/09/2021 - 17:58

              @redfox1200: And to get that rate you are a wholesale investor or a non-Australian investor, then.

            • OzFrugie on 02/09/2021 - 22:04

              @redfox1200: How does it work? Is it like margin loan with margin call?
              Do you have to put some deposit and limit to an LVR?

              • redfox1200 on 03/09/2021 - 07:25

                @OzFrugie: yeah its a margin loan that can have a margin call, retail investors can still get this rate.

      • Brucegonemad on 02/09/2021 - 21:19

        I don't put much into shares, as there's too much volatility for me and can't leverage as easily as property. I also have a lot more control over property than investing in companies. I have my own business that I invest in which gives much greater returns.

    • aimon on 02/09/2021 - 16:15

      Got it. But coming from your banking background, how much debt?

      Should you max out to whatever the bank will lend you even if its in safer things like ETF's and city housing?

      • Brucegonemad on 02/09/2021 - 21:26

        It's a dangerous question/answer which really depends on the individual's mindset and knowledge. If you know what you are doing and are educated and hard working enough I'd say max out your debt when it's so cheap as it is these days.

        If you don't manage money well, don't have a stable/increasing income and haven't educated yourself and thoroughly researched the local property market (whichever area you're looking into buying), then I'd strongly suggest not maxing out your debt.

        I'd say the vast majority of people fit into the latter category.

  • trapper on 02/09/2021 - 10:33
    +1

    Take risk while your young.

    It it goes bad you have time to start over.

  • negger on 03/09/2021 - 20:51

    Be indifferent to money and debt.Use both to your advantage. Avoid debt for depreciating assets as a rule of thumb.

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