My equity in my stock portfolios had increased from around $100,000 four years ago to around $400,000 a year ago. It's now plunged down to roughly $0 - that is, the overall value of my stock portfolio is now roughly equal to the amount I borrowed to invest in the stock market! The reason that my equity has reached zero while the gearing of my margin loan accounts is still less than 70% is that I last year I borrowed around $240,000 to invest in stocks (mostly ING Private Equity) using a HELOC (a property-secured "Portfolio loan" from St George bank). The stocks I bought using the HELOC are part of my margin loan portfolios.
I made some truly stupid investment decisions (or indecision) in the past 12-18 months:
1. Despite realising that the market was getting overpriced after a lengthy bull run, I decided to not sell some of my stock holding to reduce my gearing levels. For tax reasons I decided to maintain my tax-deductible borrowings and avoid realising capital gains. I'd often read that you shouldn't let tax considerations govern your investment decisions, but I'd now go even further and say that you should try to ignore tax when making financial strategic decisions, and then only consider tax effective ways to implement the intended strategy.
2. Instead of selling stocks, I chose to "insure" my portfolio buy purchasing Index Put Options with a 9-month expiry period early in 2007. However, I then didn't ensure that I replaced them with a new set of Options when they expired in December 2007. I did make a token move to buy replacement put options during December, but when I couldn't easily find a suitable listed option (with the desired expiration date and index value) I gave up. Having decided to use options to protect my gains rather than sell some stocks, I should have followed through on this plan - even if it meant taking a day off work to implement the plan.
3. I was tempted to invest all investible funds immediately they were available, rather than wait for a buying opportunity:
When we opened our self-managed superannuation fund in March last year we started "rolling over" our existing retirement account funds into the SMSF bank account. This meant that almost 100% of our retirement savings were in cash last July. Despite feeling that the market was possibly due for a significant correction, or even an overdue 20%-30% bear market decline, I still decided to reinvest our retirement savings into our long-term asset allocation (100% Australian and International Equities) immediately. My token effort at dollar-cost-averaging only meant that we invested 5% each week. Spreading out the DCA period for 1-2 years would have been much better in hindsight.
When we changed our home loan to "interest only" I setup a portfolio loan facility to let me borrow against the "unused" equity we had built up in our property portfolio. Again, I invested the available funds almost immediately, rather than having the patience to wait until there was an obvious buying opportunity.
On days like last Thursday, when the market has dropped more than 6% in a single day, I can't help day-dreaming about how much better off we would be financially if I had replaced my Index Put Options when they expired, and had delayed investing my $240,000 HELOC until now, when the market is 40%+ below it's high point.
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