Reader says...
I have some money in bank and my Relationship Manager is pushing me to buy unit trusts with leveraged.
Recommend me to take 100% loan so the yield will be higher from 5% to 8%.
I could also take a 200% loan to get 10.5% yield.
Good or bad?
AK says...
Gear up 200%!?
Sack your Relationship Manager.
Of course, the bank he works for won't sack him.
You sack him!
I don't borrow money to invest with.
When you buy a unit trust, the only people guaranteed to make money are your Relationship Manager, the bank he works for and the fund managers.
You are the one bearing all the risk.
Do you want to increase that level of risk?
(It is a fact that if you leverage up, they will be guaranteed to make even more money from you while you are only guaranteed more risk.)
Someone I know bought into a REIT mutual fund before the Global Financial Crisis.
It lost about half of its value.
Imagine if he had financed that investment with 200% leverage!
His losses would have been hugely magnified!
Shudder...
Remember that no one cares more about our money than we do and don't ask barbers if we need a haircut.
Warren Buffett believes investors should avoid using borrowed money to buy stocks.
"It is crazy in my view to borrow money on securities," he told CNBC on Monday.
"It's insane to risk what you have and need for something you don't really need."
"My partner Charlie says there is only three ways a smart person can go broke: liquor, ladies and leverage," he said.
"Now the truth is — the first two he just added because they started with L — it's leverage."
He shared the data that revealed Berkshire Hathaway's stock declined by a range of 37 percent to 59 percent multiple times over the last five decades.
"There is simply no telling how far stocks can fall in a short period."
"Even if your borrowings are small and your positions aren't immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary." (Source: CNBC, 26 Feb 18)
AK agrees.
Peace of mind is priceless.
You might want to read these blogs:
1. A great crash is coming!
2. Lost life savings and now in debt.
And also this "e-book":
Survivability and opportunity in times of crisis.
In case you just joined us, another blog was published earlier today.
See: Make investing easy.
Raymond Ng says...
ReplyDeleteLeverage is a double edges sword.
Can get you richer fast but also can get your 'holland' fast as well.
Hengqi Toh says...
ReplyDeleteCredits/debt are bedrock of economy.
If we as banks dun create these facilities,or other sophisticated products,there wun be cycles and movements of funds.
If its calculated risk, and exposure with margin calls, leveraged can be a dual edge tool purpose to multiply returns or losses.
AK says...
The problem with RMs (or at least the ones who contacted me before) is that they just try to sell products by making them look more attractive.
In this case, there was no explanation on how the product generates a 5% yield and the RM just tried to tempt the customer with a 10.5% yield with leverage instead.
Imagine if the unit trust is holding investments which already have leveraged balance sheets.
It would then be leverage on leverage!
There is much that is opaque in such an offer and tempting clients by engineering a higher return is, to put it lightly, irresponsible.
Debt is necessary in some instances but not in all instances.
Debt is definitely unnecessary in this instance.
"It's insane to risk what you have and need for something you don't really need." WB
How well RMs are rewarded depends on how well they sell.
ReplyDeleteIt is understandable but it doesn't mean that it is acceptable.
Prasad Rnv says...
ReplyDeleteIf its a foreign currency instrument, the bank will cheat you on the final settlement and on the currency exchange in the end.
Your gain wont be so much after all. Leveraging is dangerous as you are borrowing money to invest.
Read Chapter 5:
ReplyDeleteSurvivability and opportunity in times of distress.
Reader says...
ReplyDeleteThank you for the reminder.
I read your blog on junk bonds and bond funds too.
When offered to improve the yield on a bond fund with borrowings, I told them what AK said. :-)
Swiber and hyfux are still hurting me. :-(
AK says...
Hurrah! :D
And ouch! :_(
(Er... did you misspell Hyflux on purpose?)
Koh Kai Xiang says...
ReplyDeleteI agree that credits and debt are bedrock of economy.
But I disagree the context and the usage of credit and debt in most people’s investing (or inflation fighting). Ask the RM to invest alongside the client with the leverage they recommend the client, and u ll instantly see a reduction of such bad and ill advised behavior.
There is a reason why people like warren buffett advises folks not to use leverage in investing
AK says...
It is about alignment of interest or the lack of.
All broking houses are doing the same thing with a slight difference...Margin Account. Its not all bad if one knows what he is doing though. My personal experience, made some money using this before. For me, its market timing. But hor, you must be very careful, don't just follow me. If you get it wrong, then don't blame me hor.
ReplyDeleteHi Henry,
ReplyDeleteYou are a brave soul. ;)
If in doubt, it is better to stay out. :)
Randy Go says...
ReplyDeleteI have a cousin who wants to start investing.
He just emailed me, he shows me email bank selling him 3x leverage bond fund😂 or structured products.
Hahahah told him read your blog too busy to structure a portfolio for him.