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Is a margin loan too risky?

 I’m retired – is a margin loan too risky?

Can you give me the tips for buying shares using margin loans? I am retired, so do you think the market is too dangerous for borrowing to buy shares?

Let’s clean up the latter questions first. Do I think it is too dangerous for margin loans now? The answer is it is not too dangerous but it could be a little risky if you can’t stomach short-term losses. The market could tank on some surprise bad news.

If my son asked me what companies, then I would say reliable, blue chip companies – big banks, Woolworths, AMP, etc. The focus should be on the top 20-type stocks but be warned we could still see some challenging moments.

I would advise dollar-cost averaging, which means you buy on the market dips of every month or quarter. (This is not personal advice for everyone as I don’t know everyone’s circumstances, but this has been a strategy that has worked for lots of wealth-builders over time.)

Some retirees have to try margin loans to make their money last, especially if they are in terrific health, but I think advice from an honest financial planner is crucial.

Now for the second part of your question: how to do margin loans the safe way. The ASIC website or FIDO actually has fantastic information about the pros and cons of margin loans.

You want to be able to stand a 20 per cent fall in the market before they bring in margin calls. This is pretty easily achievable, but ask your loan provider all of the ‘what if this happens?’ questions before you sign up.

Also make sure you know what you are being charged if you use a financial adviser. Ask to see all charges to you and how the adviser will be rewarded by you and the financial institution.

Finally, see what you can get into by going direct but make sure you understand what can go wrong.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Monday, January 11, 2010

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