A Bad idea with a new twist

[selkirk]

if we hit a time machine and went back 10 years ago, in some ways does not feel all that long ago...
came across an idea that was sold to many clients in the brokerage/mutual fund industry.

some background: my brother 7 years older and sister in law are both in the education field. they work very hard and care very much about their students, they do a great job.

my brother has won numrous awards, he saved a man life when he went to shock, in a bank lineup. when he started teaching he moved to a small community and won citizen of the year, after six months...(okay they only had 800 people...still). anyways he wins at most things and is very humble.

one time won a trip to vegas, first time and played a 10 team parlay before I left...for $10 a gamble, and the prize amount was great, even if it hit 9/10 would have won large amount. some promotion. so win the first six college footbal games on sat against the spread easily (barely new the teams). show him the ticket of the remaining four games and he agreed with the two had correct and told me would picked the other teams in the other gamew. he was correct and picked a 8 point dog to win the game.... I won a small amount as hedge my bets slightly...a big 500. he does not gamble another good trait.

on with the story, while visiting in a small community what teachers have to do to get a start, he met an investors rep. and started up an account.

Investors group is one of the largest mutual fund dealers in Canada, and are part of the Power Financial group of companies ( Great West Life, London Life, Investors, Mackenzie,ect.).

the rep was very good and gave decent practical advice and was not to pushy....he sadly died in his late 30s due to cancer.

so my brother was assigned another rep for his account, and he was very different. He quickly pitched an idea to put a 2nd mortgage, on their home they finally bought.

it goes like this you borrow at 7-8% and (his rate was 7.5%) and you invest in equity funds. the stock market will give you an average return of 10%.....sure the market goes up and down but you are a long term investor and you can average 10% from the markets.

also the interest is tax deductible. that was the pitch borrow at 7-8% and make 10%.

thanks
selkirk

 

[selkirk]

my brother brought it up many times to me in 1999, and my advice was always the same...

though I like the markets, it was the wrong time to use leverage in the markets, as they were expensive compared to historical norms, especially some sectors.

be invested but be carefull.
also do it on a smaller scale, the min in most of these funds were 1000, so I not start with 10,000-or 20,000 at the most, why do you need to see if it works with over six figures. start off small.

I am not against leveraged investing however people get carried away....also you have to be able to watch you portfolio....something in this could not be done.

-shop for the best rates, the best mutual fund (or stocks) and then do it in a small amount, if you still want to.....

so in the fall of 1999 one morning he calls me, and tells me he and my sister in law, are in the investors rep office and if I could give him some suggestions of their funds...call back in 15 mins.

so instead of smashing the phone, give a call to a friend who also trades, and we talk stocks, only to find he is in diabetic coma (type one you are born with) and is in critical....he made it though has almost died twice this year....diabetes is a very serious and dangerous diesease.

so quickly get some funds and tell him it this is not a good idea. in a week see the portfolio not bad, but nothing special, many investors funds, with loads (most were waived) and higher mer...2.50%-3% avg.
and average performance.


so everytime I see him that year bring up and describe in a few minutes about a brutal bear market, where the 10% return did not apply.
after the market rises and then fallls, and after months, of talking of the great bear markets, he phones.

he has a hard time sleeping and his early gains all but dissappeared, told him to sell if it was causing him stress.

he does and avoids a sharp sell off in late 2000-2001 in the cdn. markets....my brother never loses. he made either or lost a small amount $500-1000.

thanks
selkirk

 

[selkirk]

part three

part three

after the 2001 correction many people in my shareclub knew someone or many people who tried this a lost large sums of money.

mutual fund dealers/ brokerges tried to convince people to use leverage in one of the hottest bull markets. they made money on the loan and the funds, which charged high management fees.

most people did not sell or trusted to much and got burned...people should pay more attention to their invesments and be more carefull.

Today the ptich has changed still does not work.

So a good friend went to another investors presentation...at the end of it the rep had a great idea.

no one bring up equity markets, in fact the meeting was bearish for the first part of the year.

instead here is the new plan you borrow 100K at 3%-4% ( not sure if they would give him 3% they said 3-3.5%) and invest in a bond portfolio that last year would have made him 7%.


not sure how since XBB the scotia cdn. bond index made just under 5%, and the bond funds like to charge in cdn. an mer of 1 1.50%.

anyways this is anther bad idea however instead of equities we use bonds.

they make money off of the loans and management fees off of the bond funds.

and again if everything works you make 2-3% on your money, in this case that would be best case scenario.

Leverage investing

1.is not a terrible idea, however you should be carefull and not use large amount espeically at first.

2. ask yourself if you last 20-50% of that amount how would it effect, and be honest.

3. if it causes any stress, avoid.

4. look at the worse bear markets and know the dangers.....

5. look for good rate and terms.

6. construct a porftolio that throws off cash to pay down interest and debt, and protects on the downside.

7. finally only conisder it, if you can moniter the portfolio you self. no one care more about your money than you do......


end of novel......by the way next rebound, they will drop the bond fund idea and start pitching equity funds....higher fees....


end of novel....lol.

thanks
selkirk

 

[DOGS THAT BARK]

Always enjoy these personal stories Kirk--thanks for sharing.