Managing your margin loan in a volatile environment
While a margin loan increases your potential for gain when market conditions are favourable, it also increases the risk of loss should the sharemarket fall. In a volatile sharemarket environment there are a number of safety strategies that investors can employ to ensure their investments can continue to grow and the threat of a margin call will be reduced.
1. Be sure that your level of borrowing is appropriate for the current economic climate and predicted future. Check your monthly statement and speak with your broker or financial adviser to ensure you are achieving your investment goals.
2. Avoid borrowing up to the maximum loan to valuation ratio (LVR) permitted by your margin lender and ensure they apply at least a 5% buffer to the LVR before making a margin call;
3. Avoid being exposed to one or two stocks. Diversify your portfolio across a range of sectors, which will help limit the extent of fluctuations in your portfolio. Consider investing into managed funds to achieve greater portfolio diversification;
4. Pay off the interest on your margin loan rather than capitalising interest;
5. Reinvest your dividends to increase your portfolio or reduce your loan;
6. Have a defensive strategy. In uncertain market conditions (for example, now), either reduce your level of gearing, move to defensive stocks and / or consider gearing into conservative managed funds.
Additionally, always remember to budget to have available cashflow to meet margin calls and interest payments. It would also be helpful to perform some basic scenario analysis to see how far your stocks would need to fall in order for a margin call to be triggered.
You can compare margin loans and lenders at www.marginlendingchoice.com.au.
A qualified financial adviser will be able to assess your financial situation and investment goals and determine if a margin loan is right for you.