Managing volatility and your margin loan

There are numerous adages in investing reminding investors that’s it’s not always smooth sailing, from the perfunctory ‘past performance is not an indication of future performance’ to the more colourful ‘up by the stairs down by the elevator’ and the more realistic ‘the market doesn’t go up in a straight line’. These statements are timely reminders of the volatility that can present at any time and that investors should prepare for and at least consider the possibilities of falling valuations in their holdings, particularly over short time periods.

When investing, especially in shares, investors should consider how to manage volatility in their portfolio. Volatility, in the form of rapid movements in prices and in turn index levels (i.e. ASX200, S&P500) over short time periods is often brought about from external factors. These can include the release of economic data such as employment or inflation, the movements and forecasts of interest rates, exchange rate fluctuations and bond yields. External shocks in the global economy can also cause high levels of volatility. While other times it’s a confluence of events.

There are some strategies investors can use to manage volatility in a geared portfolio. These include:

• Moderate gearing. A moderately geared portfolio at 40% would need to drop 53% with a max LVR of 75% for a margin call to occur(inclusive of 10% buffer). This leaves borrowers with a sizeable gap before a margin call would be triggered if they are geared at 40%.
  
  
• Diversification. A common way to smooth out the volatility of a concentrated position or portfolio is diversification across holdings and asset classes. Often two asset classes might be negatively correlated, or in different industries which perform differently in times of volatility.
  
  
• Building a cash position separate to the margin loan. Hold a liquid cash position that is accessible in the event of a margin call (thereby not needing to sell any holdings), or to reduce the gearing level. Cash might also be used for buying opportunities of discounted assets.
  
  
• Consider reinvesting dividends or directing distributions automatically back to the loan account.
  
  
• Targeted gearing alerts. At Leveraged, we offer targeted gearing alerts* across our margin loan products. With a target gearing level set up on the loan, Leveraged will alert the borrower by email if the portfolio gearing goes over the nominated target gearing level. This is different from a margin call notice, as the borrower is not required to take any action to repay the loan when they receive an alert. However, they may choose to take their own action and reduce their gearing level, if they wish.

To discuss implementing a target gearing alert on an existing or new Margin Loan, Investment Funds Multiplier or Direct Investment Loan, call our customer service team today on 1300 307 807 or email customerservice@leveraged.com.au