have more than wiped you out.
However, there is another way to look at this. What about a much more modest gearing of say only 2x? This would be significantly easier to manage and while the interest charge would be the same, the much lower gearing would mean a much larger sell off (around 50%) would be required before your portfolio is wiped out.
The reduced gearing may not be offered by your CFD provider but you can, in a way, manage it yourself, although it would require a larger cash balance. If you had say R50 000, then rather than gearing up the full amount at 8x gearing and getting an effective R200 000 portfolio, you could only use R12 500 of the cash for margin. This would result in exposure of R100 000 ( R12 500 t i mes t he 8x gearing). The interest would then be about R6 000 for a full year but you would a l so receive i nterest on t he R37 500 cash in your account. Assume you get 5% on cash - that would add R1 875 so the net interest cost would be R4 125 and your portfolio would have a lot more ability to withstand any sell-off in the market.
For me personally, it’s simple, while I would love the gearing in the good years, you never know which years will be good and which will be bad and in order to manage the potential wipe-out, I simply don’t use gearing for my investing portfolios. However, if you want to gear an investment portfolio, keep the gearing to around 2x.
Simon Brown is a Finweek contributor and heads justonelap.com, a free resource of f inancial information and investment education.