Tom Scollon

Well that is the message from some advisers – the exact wording I cannot quote as otherwise I could be writing TTN from behind bars.

Cash rates remain at the very low rate of 2.5% which means you can pick up a mortgage for around 5%. Incredibly low. So it’s not surprising that house prices are going through the roof so to speak.

Real Estate agents would have it that property is the asset class of choice but brokers say that equities are. The argument does not matter. However we should just be aware of some of the issues in leveraging as that is a huge temptation today.

One basic difference is that ‘bricks and mortar’ tend to be less volatile in price movements – we can’t see the nano second bourse ticker showing how the price of your house is going up or down by the minute or day or week. Your own house is a life style choice – it is more a family, a social desire decision. Many people have no interest in what happens to the price – it is their little kingdom and that’s all that matters.

Equity prices on the other hand can show violent price moves and it can be a cold sweat experience watching the value of your shares plummet overnight. Most of us have experienced that - well at least until we worked out how to stop it happening.

What I notice at the moment is financial advisers increasingly suggesting that investors might use any unused loan capacity on their home to borrow money to put into shares. This should be done with great caution. Banks know this is potentially dangerous but yet condone it. It will be media headlines again when the next crash comes – but remember history repeats itself over and over again.

I have written many times about leveraging shares. A quick example. If you buy shares using 50% of your own money and 50% borrowed from say a leveraging broker. If in a year you shares go up by 50% - we wish – then your gain is 100%. But if they fall 50% - your loss is 100%

Now if you use the loan monies from your bank as a deposit into your leverage account with your broker – then the multiplier effects are magnified so much more. Very dangerous.

One of the single biggest cause of investment bubbles is leverage. Not just personal – but also business and government – everyone contributes.

Leverage is powerful and I have used it to a high degree over the years very effectively. But the trick is knowing when to get out. When to cash in your chips.

Enjoy the ride

Tom Scollon