Question:
How should I set up my margin lending account to protect against losses while the markets are so volatile?
Response:
It is important to maintain a well diversified portfolio to weather any falls in the market , most importantly, the portfolio needs to be also diversified against different sectors in the market. This is important when a particular sector (retail , for example) experiences a dramatic fall due to unfavourable retail figures being released to the general market.
In this example , a fall in a particular sector can be absorbed by a rise in another sector , for example resource or telecommunications.
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In recent times we have had high volatility in the market and with uncertainty in the Macro Economic environment , regardless which sector you are in , a fall in the market can still impact your gearing position and the ability to absorb a sudden fall in the market.
To protect against this uncertainty , you can look at different options to help you absorb any falls in the market.
1. Gearing at a conservative level , a 50% gearing level on a 75% lending value portfolio requires a 33% fall in the market before a margin call triggers.
2. Instead of capitalising interest , have it paid from a bank account, this keeps you disciplined and in control of your Interest expenses. Capitalising interest in a falling market can increase the chances of a margin call.
3. Always have cash or shares available to lodge to the loan, so that when you are in margin call , you are prepared for the worst and , most importantly , you have the ability to buy in a lower market.
4. Investing in shares with a high yield can also help in repaying your interest expenses on your loan , in some cases , all of the interest can be paid from distributions, remember , though, this is dependent on the dividend yield of each security.
5. The last option available , and certainly , not least , is to hedge your portfolio using Index Options , this of , course is dependent on what shares are held on your portfolio and requires some thought behind the process.
