There are no shortcuts to success

Turn off your inner caveman to switch on sound financial decisions.

Mental shortcuts help us quickly solve problems while letting our brains ruminate on other tasks. However, taking shortcuts with your financial wellbeing, can be a sure path to calamity.

Some commentators continue to suggest a margin loan is too risky because of the margin call process. Alternatively, some have suggested an investment loan is safer because it doesn't have a margin call.

Here are a few points to keep in mind before engaging those shortcuts.

Kenny Knows

Kenny Rogers’ song has it right. “Know when to hold 'em; know when to fold ‘em; Know when to walk away”. Picking an investment can be hard. It’s even harder to plan how you will respond to a diverse range of unknowable future market conditions – hope for the best, prepare for the worst. The hardest part is sticking to those plans should the black swan strike.

Irrespective of how you borrow, if an extreme fall in investment value occurs, prudent self-preservation may mean reducing the amount invested or the amount borrowed. That’s a margin call or ‘knowing when to fold’. The cry ‘I’ll hang on until the price recovers’ is often wishful thinking or unconscious ‘anchoring’ on the investment’s original price.

A margin loan gives you the tools and discipline to stick to your pre-prepared, sensible investment borrowing plan.

Bad Lingers Longer

The global financial crisis peaked over a decade ago. Since that time, share markets in Australia and the US are close to all-time highs*. However adverse events seem to linger in our memory longer than good ones. Research^ suggests our caveman ancestors evolved to find it safer to avoid bad situations rather than pursue indeterminate opportunities.

Unfortunately, those pre-historic ancestors didn’t need to make rational financial decisions.

Borrowing to invest in property, for example, may suit your financial circumstances and goals. Avoiding shares because you remember the global financial crisis may be a case of letting your inner caveman make decisions.

Conscious Preparations

Achieving a life-changing financial goal can take time, planning and patience. A big splash of discipline and rational thinking is also necessary.

A margin loan is flexible, has tools to measure progress against plans and can be quickly adjusted to changing circumstances; both up and down. As the saying goes - the best time to plant a tree is twenty years ago. The next best time is now.

If you have any questions about gearing or would like to discuss how a margin loan can help you achieve your financial goals, call the team at Leveraged on 1300 307 807.

This information is correct as at 18 January 2020.

<sub>Source
* ASX 200 Index, Dow Jones record high July19 as published by the relevant Securities Exchange</sub> 

_{^ Bad is stronger than good, Baumeister R.F. et al, Review of General Psychology 2001}