Finweek English Edition - - INVESTMENT -

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 ju­s­, a free re­source of f inan­cial in­for­ma­tion and in­vest­ment ed­u­ca­tion.

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