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Wednesday, 16 January 2008

Shuffling deck chairs on the Titanic

The Australian stock market was down for the eighth straight day today -- the most consecutive down days for seven years. After today's 2.5% drop the market is now down around 15% from it's all time high, which was set in early November. I decided to sell 20,000 of the 127,000 ING Private Equity (IPE) shares I'd paid around $1.04 for just a couple of months ago. I sold them for $0.865, realising a capital loss of around $3,500. At least this loss can be offset against the capital gain I made dabbling in Centro Properties shares, and any gains I might make if I sold some of my long term stock holdings this financial year.

I don't really want to be selling off stocks when the market is down 15%, but the tax office takes a dim view of "bed and breakfast" trades (where you sell a stock and then immediately buy it back again in order to crystallise a tax loss), so instead I bought a listed Index Fund stock to replace the IPE shares I sold. I bought 10,000 Commonwealth Diversified Share Fund (CDF) for $1.75 each. Each trade cost $29.95 via my Comsec online broker margin loan account, so the net cost of switching from IPE to CDF was $259.90, which will be added to the balance of my margin loan. IPE and CDF are both invested in a diversified mix of stocks (although IPE consists of unlisted, micro-cap companies rather than the broader Australian stock market), so my overall allocation to the Australian stock market is largely unchanged by today's trades.

Aside from eliminating the need to pay any capital gains tax on the profits from my CNP trade, today's trades actually reduced the margin utilisation of my Comsec margin loan account. This was because IPE shares have been allocated 0% margin value by Comsec, whereas CDF shares have a margin value of 70%. This change is largely academic, but it does mean that I could borrow more to fund stock purchases, and it also means that the market would have to drop considerably more before I would get a margin call.

Copyright Enough Wealth 2007

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