17
March
2014

Accelerating Wealth Creation

Through Gearing

After a period of conservative investment based around term deposits and cash based investments, confidence is returning and investors mindsets are starting to switch to more aggressive asset classes and more aggressive strategies, one of these strategies is gearing.

Gearing is essentially borrowing to invest; this enhances exposure to the investment and magnifies both gains and losses. The most common gearing strategy is through an investment property, but it is also possible to gear into the share markets with products such as Margin loans and other geared products.

Gearing presents the opportunity to accelerate the wealth creation process but as an aggressive strategy, also carries a high level of risk. To be effective it is necessary to invest into growth assets usually property or shares, these assets have the highest average returns, but also on average carry the highest level of volatility.  Borrowing to increase exposure to these assets presents the opportunities to have profits greatly enhanced, but volatility is also enhanced. It is necessary to have an extremely long investment horizon and investors need a high tolerance to risk. It is even more important than normal not to be forced to sell at the bottom of the market.

Furthermore it is necessary to have surplus income to meet ongoing borrowing costs and this income needs to be secure to ensure the commitment to the geared investment can be maintained long term.

All borrowing costs are tax deductible, and the nature of growth assets see that the bulk of return in in capital gain and usually the assets are maintained for more than 12 months, this means that usually gearing is a tax effective wealth creation strategy.

This example demonstrates the power of gearing, illustrating that by borrowing funds and increasing exposure to an investment dramatically increases the return on investment.

  Non- Geared Geared
Investors contribution  $         20,000.00  $         20,000.00
Borrowed funds  $              -    $      80,000.00
Total Investment  $         20,000.00  $    100,000.00
Return 10%  $           2,000.00  $      10,000.00
Borrowing costs  $              -    $         4,800.00
Profit  $           2,000.00  $         5,200.00
Return on Investment 10% 26%

Geared strategies are aggressive strategies and often fast track the wealth creation process, however they carry increased risk compared to most other strategies and are not suitable for all investors.

If anyone is interested in finding out more about investment strategies contact Future Financial Services on  Phone: 02 47276588 or via our contact page.

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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