in the calculations, people usually forget to i) compound the dividends, and ii) add back the principal (after all, you repay the loan, not just the interest portion right? so the principal after you finish your term is yours).

usually they find that after adjusting this the difference is hugely positive.

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Added on February 15, 2012, 2:03 amlike this.

after you repay the loan (20 or 25 years), do you give back the 50k in the account you loaned, or you keep it? of course you keep it. you add this amount to your dividends.

if you dont add it back, it's like as if you finish paying off your housing loan after how many years then you have to give the house to the bank. dont confuse the loan repayment and the interest portion.

This post has been edited by empyreal: Feb 15 2012, 02:03 AM

it depends. if by taking a shorter repayment period you reduce the amount of loan you take then you earn less simply just so that the banks earn less. that's not a wise move.

if you can just about afford the max loan amount by using the max repayment period, you benefit in total as in every scenario div returns > interest payment. if you already have money to put into asb, then you wouldnt need a loan in the first place.

the objective of the whole thing is to maximise your own returns, not to minimise what the banks get.

not really, im looking at it from the pov of a borrower. the assumption is that a person who needs to borrow is someone without a lot of money, and cashflow is a concern and a constraint.

now, given that a person with cashflow constrints can only afford an investment (or loan repaymnet) of say 1k per month, he can either borrow (example) 200k and repay for 25 years, or 100k for 12 years (examples).

since div rate is always higher than interest repayment, the more you borrow the more you gain, without exception. in essence, banks 'earning more' is totally immaterial because you will also be earning more (for the given amount of investment - here, its the 1k per month) over the same period.

given the above contraints, shorter repayments = smaller amount of loan you can afford = smaller loan = smaller gain by banks, but = smaller gains by yourself, for the same amount of monthly repayment.

hope i made it clear lol, im hungry.

of course, but if you want to go on that basis, the 'safe' option is to not borrow at all. borrowing to invest (leveraging) already implies a risk in and of itself. taking that into account, and given the parameters set into the argument i laid down, the best option is to borrow as much as you can safely afford. the best result is to not touch any future dividends - which you can use as a buffer against any increases in the interest rate, while allowing it to compound.

you only 'lose money' when the interest payment > dividend + the principal you get back after paying down the loan.

plus, if you want to consider scenarios where interest > div yield (and ignore the principal you get back), then no matter whther the loan is long or short, you still 'lose money' so the argument is moot.

and i think you're getting my points wrong. i didnt say the banks wont let you get a large loan for a given period - the banks dont set that parameter down. i set that parameter down based on how much YOU (as the borrower) are willing to put down each month for investment purposes, either directly putting it into the asb account, or to repay a loan you take out to put into asb. it's money you can consider as 'burnt' once it goes into your asb account or repaying your loan.

so, lets say you have 1k for this purpose. now if you set the repayment period as short, you cant borrow the full 200k not because the banks wont let you, but because you cant afford the repayment (which is about 2k per month if its like 10 years iinm). because of this, for the first 10 years your returns will be lower than for someone who (for the same outlay) got the 200k loan.

due to the compounding effect, especially if the div remains untouched, the subsequent divs will be larger for the one who borrowed.

this assumption is better than saying "you should repay your loan fast" since that statement totally ignores the constraints of the avergae borrower who do not have unlimited amounts of cash monthly to repay an indeterminate amount of repayment.

anyway, i never said that the banks need you to make a profit for them to make a profit. in the scenario i gave, i didnt give two hoots about what the banks will do - just what the best course of action you can take given the parameters. i'm saying that you SHOULDNT stop yourself from making a larger profit just because the banks will have higher profits too. that's like cutting your nose to spite your face - a lose-lose proposition.

This post has been edited by empyreal: Feb 7 2013, 12:31 PM

errr... what? i think youre seriously misreading a lot of my points by putting in words i never said.

i did not say 'too much debt is bad' at all. i said most companies have debt and debt is a great way to get money that you shouldnt have gotten.

i cant understand your last few sentences, but i'm guessing you're trying to say that asb is different from any other sort of investment because you have no control. this lack of control over circumtances is called risk (whether counterparty risk, risk or fire, theft, non-delivery etc).

in that matter, ALL businesses (even your own) you'll face risk. your insurance firm can go belly up. your stocks can go up in smoke. you cant control technology obsolescence or that your customers (if you have a business) suddenly stop coming.

if you want to compare them with stocks, unless you are a significant shareholder you dont 'control the company' either.

lol, i like how you assumed that i'm actually hurt. also, chill out.

look, firstly this is a civil conversation, at least on my part, but i do take a small measure of satisfaction annoying people who are not above resorting to borderline personal attacks when they think they're 'losing' even when i dont even see it as a competition.

in any case, as gordon gekko said, greed is good - although i have to append 'as long as you consider all due risks and make provisions for it'. i've already done so, using the reserves of divs built-up to counter against any negative effects of an interest rate increase (which is why i also look at the bnm's mpc who most analysts predict will maintain the opr constant at 3% for the rest of the year, btw). everything has risks, its just that if you've provisioned for it, its fine.

so i dont understand how you say that im both 'greedy' and blinded against the risks. i not only noted it, but taken steps to safeguard against it. meh.

asb is a fund - even 'without the companies' as you mention, of course it has a value. the value is however much they've gotten when they divested those companies. it's like saying a property developer is nothing without his properties. in any case, unlike a developer who can have his entire property stock go up in flames, there's a much smaller likelihood that suddenly the value all the stocks in bursa became a big fat 0. the only time asb as a fund will be 'without the companies' is the time when it liquidates ALL its investments - after which it would be be very liquid with cash.

also, when i said the net position thing, i wasnt even referring to the asb. i was referring to the loan itself.

basically, i dont need to wait to get 200k in 25 years' time. i can get it NOW if i prepay (but that would mean that i'd pay up the outstanding loan amount). leaving it in for 25 years (assuming i dont touch whatevers going there and assuming current div rates), i'd be having 1.2 mil by the time the loans mature not 200k.

if i want to prepay the loan, what i will get is the amount of principle. if i borrowed 200k, then if i settle the loan early (lets say there is a sudden increase in interest rate), i'll settle the outstanding amount, get the 200k cert then cash that in minus whatever costs incurred. my net position would be clear, you see. i wouldve offset'd my liability (loan to whatever bank) with my asset (the 200k principle). there's two counterparty risks here, me with the bank and me with asb. i can settle with the bank (prepay) and i can settle with asb (unless the aforementioned scenario where all stocks become 0). so, on the risk standpoint, im okay.

the thing is, i dont even need the asb to give me the same returns in the future. ive said this multiple times, but you seem to ignore it. i can actually have the interest rate be slightly above the div rate (up to about 0.5% over, dpending on principle and at what point of the tenure) and i'd still be ok because of the time value of money menas that when you bring forward that large amount for you to benefit from you have this excess which you offsets the costs - all those npv blabla (again, another thing i've mentioned, but you refuse to address. you're very much invited to work it out on an excel sheet if you want to).

of course i have an 'answer in my mind'. its called an opinion, which i am sharing. maybe i am silly in that i dont understand the concept that to 'act intelligently' means i have to agree with every word you say lol.

i myself have maxed out my loan for several years already, so you dont really need to tell me to 'go ahead'. i sat down years back and said, i was gonna put down such and such amount into investing into asb (whether deposit directly, or loan), decide which path gets the most long term returns and THEN choose the amount to borrow, if thats the right answer.

you dont borrow first and hope that the returns hit a certain amount - i'm gonna assume that's how you framed the process. by doing the former, you kinda dont need to care how much the returns are (or even how much the interest rate is, if its fixed) - you're kinda going to get (more or less) money. you bring forward the largest sum you can afford (by taking the longest tenure) and because the compounding affect takes place on both the principle and the divs you didnt touch, by the end of say, 25 years, the amount of interest payment is a very very small percentage of the divs on your principle + the div on your 25th year over your accumulated dividends of the past 24 years.

if i keep the divs instead of spending them, i dont even need the div on the 25th year to be anywhere near the blr to make the final repayment.

the interest from the accumulated dividends alone (not even considering the 200k principle) is already going a long way to pay the interest. add that to the interest on the principle, and i'm just saying that it kinda works. do i worry if i cant repay? no, because the repayment amount will be about the same as what i've committed to contribute to savings how ever many years ago.

i personally dont really mind if no one wants to do the same, since it doesnt affect my returns, or even challenge the calculations. a good economist bounces formulas with people, challenging formulas make them more robust in my experience and you get better results. well, in any case it has been fun talking to you. i sure do hope that i'm not someone who 'dont even understand the basics of investments' because otherwise i'd be in the wrong industry.

that's a long post lol.