Wednesday, July 9, 2014

Leveraging by Pledging My Existing Investment Portfolio

Over the past 2~3 years, I have built up a "sizeable" unit trust investment portfolio with a bank. The funds I invested are mostly of moderate risk. While the prices did not appreciate very much, I have collected good dividend amounting to 4~5% steadily.

Two weeks ago, my RM from the bank asked one of the financial consultant to run a "crisis simulation test" on my existing portfolio. The test was to see how my investment would have been affected by "Sub-prime crisis", "SARS crisis" and "Global Financial Crisis". It turned out that my portfolio was quite resilient and would have withstood the various crisis. In all 3 tests, the value would have dropped less than the benchmark, and recovered quickly after the crisis. In the worst case the portfolio dropped by 25% but soon recovered after 6 months.

My RM then told me that I could let my money work harder. Noticing that I am quite a "passive" investor and prefer to hold my investment in longer term, she suggested that I could "pledge" a portion of my portfolio to the bank and get a loan to buy more funds. The current interest rate for such a loan is 1.2~1.5% p.a. So if my investment can get my 4~5% dividend, I would have a net profit of 2.5~3.8%. There are no other admin or handling charges besides the interest.

The loan is a kind of flexible type which I only pay interest when I draw down the loan. And any time I could sell the unit trust and pay back the loan, without any penalty. To buffer the risk of price fluctuations, I should only pledge part of my portfolio and not drawdown the full sum. So there would be little risk of margin call.

Sounds good with most of the thinkable risk mitigated. Should I get into this?


Createwealth8888 said...

It just remind me of those pre-AFC days when it was quite common to pledge stocks for more funds to invest.

Finance companies and banks got nothing to lose.


Sanye ◎ 三页 said...

Hi Createwealth8888,

You are absolutely right. Finance Companies will always win in this game. Besides the interest, we lose the upfront charge when buying the UTs. The investor will see profit only if he holds the investment longer, provided nothing adverse happens in between.

I think leveraging itself is not necessary bad. For many companies, having certain loans is good in accounting. I think by using this tool an investor can have more fund to invest. However there are certain risks with leveraging. One important factor to consider is the "gearing ration". Investor should not over leverage or even get too close to the boundary limit to avoid any margin call in case of market collapse.

liewxun said...

Leveraging is fine, if you are only using a small portion and are able to meet the margin call.

The problem is that a market downturn leads to a double whammy of the value of your portfolio pledged decreasing (which may lead to a margin call) and the unit trusts you bought also falling in value.

Createwealth8888 said...

Sometime, I wonder why the bankers don't invest themselves and pocket the differences; but choose to lend the fund to us to invest more and for us to pocket the differences.

The bankers are really nice guys.

LOL! said...

Agreed with Createwealth8888

Bankers are always nice to us by teaching us to be greedy.

Greed kills many in history brother.

Ultimately, the choice is yours. :-)

Lizardo said...

Too good to be true. All the risks would be on you. The bank carries no risks.

What happens in the event of a drop in market? You may become over-leveraged then and the bank will ask you to top up the difference. Where would you find the cash to top up?

Sanye ◎ 三页 said...

Hi Guys,

Thanks for your comments. I think they are all valid. I concluded the issue as follows:

1. Bankers want us to invest more so they can earn more on commissions.

2. There is no risk on them. They bear no risk, except when the investor goes bankrupt. Even in this case their risk is min. as they would have limited your credit line right from the beginning.

3. Biggest risk for investor is market downturn which may lead to margin call from the bank.

For investors who wish to leverage on their portfolio, consider the followings:

a. Your portfolio is now enlarge, your risk is higher. For example, if your original portfolio is 100K, and you take a 100K loan, your port is now 200K, with a 100K capital. If the market drops 10%, yours drops 20%. Is this still within your risk appetite?

b. If market collapses, there is a risk of margin call if you over leverage. So do not over leverage or use it for risky investment. Have (a substantial) buffer when you plan on how much you want to leverage. Don't be too greedy.

c. If after leveraging, your investment cause you to have sleepless night, don't do it.

Wealth Journey said...

Prudent Leverage is alright.
This is what most HNWs have been doing since 2009.

mike tyson said...

Hi all,

I am a beginner but as far as I know, my broker UOB KH's interest rate for margin accounts is 5% p.a. and is one of the lowest among SG brokers.

How can one obtain 1%+ interest rates to leverage his investments? Would appreciate some guidance from the more experienced.

Thank you

Sanye ◎ 三页 said...


The rate was quoted to me by my Citibank RM. She said the interest was Sibo + 1.2% because I would be qualified as a private banking client if I took up the loan.

I can't comment on the rate quoted by UOB KH.

David said...
This comment has been removed by the author.
David said...


Did you pick it up and how does the leverage approach turn out?