In terms of volatility 2016 has certainly started with a bang rather than a whimper, thanks in some part to the Chinese stock market performance and global sentiment. Nevertheless it should be remembered that investment is a long-term game and borrowers who manage investment margins conservatively can ride out the short-term volatility.
The ASX/Russell Investments 2015 Long-term Investing Report points out that over a 10 year period, which does encompass the GFC, most investment classes, including Australian shares, have performed respectably well on a before-tax basis.
As the report points out, gearing can enhance returns for Australian shares for investors – in a rising market, of course!
The report estimated that after-tax returns on Australian shares for investors on the lowest marginal tax rate would have increased from 7.40% to 7.70% if the portfolio was 50% geared, while the after-tax return for investors on the highest marginal tax rate would have increased from 5.30% to 5.80%.
But what’s the chance of a margin call?
No investor wants to receive a margin call. It signifies a dip in the value of your investments and a tight timeframe of 24 – 48 hours in which to correct the situation.
Bearing in mind that the only security the lender has over a margin loan is the investor’s portfolio of shares or managed funds, it’s easy to see how market fluctuations can reduce the portfolio’s value to a level where it no longer exceeds the minimum set by the lender. This will trigger a margin call.
Notwithstanding market volatility though, the chance of a margin call is slim if a portfolio is not heavily geared. The RBA advises that the average number of margin calls currently stands at 0.88 daily for every 1,000 clients. Compare this to the GFC days when in excess of 2,000 margin calls – or 8.6 per day per 1,000 clients – were being made on a daily basis to stressed investors back in December 2008.
Of course, your individual risk of a margin call will depend upon the specific shares you choose to buy combined with the level of gearing you elect. Be cautious, get great advice and research your options carefully.