Gearing (borrowing to invest) has been a popular wealth creation strategy. By enabling you to invest more money, gearing has the potential to improve your overall financial wealth.
Investment gearing is simply borrowing to invest. Gearing allows you to use your existing investments to borrow additional funds and expand your portfolio. By doing this, you will have more money working for you and be able to generate greater wealth for your retirement.
Gearing can also be a tax effective strategy as the interest on borrowings for investment is usually tax deductible.
Gearing is ideally suited to assets such as shares and property. As they grow in value over the long term, you can slowly repay your loan and enjoy a return on your investment.
There are three ways you can borrow to invest:
Margin Lending
Margin lending is borrowing to invest in shares or managed funds using your existing cash, shares or managed funds as security. This increases the amount you have invested, which in turn increases your potential returns. Borrowing to invest with margin loans can be a simple, tax effective way to build wealth.
Negative Gearing
This is when your borrowing costs (interest and fees) are greater than the income you receive from your investment. If you are on a higher tax bracket, this can provide valuable tax advantages.
Instalment Gearing
Instalment gearing is simply a way of investing in managed funds over a period of time with small, regular investments, instead of a lump sum invested all at once.
While gearing has the potential to "boost" your returns by increasing the size of your investment portfolio and provide greater returns when markets are rising, it also increases the impact of losses when markets fall and interest rates rise.
Before deciding to use investment gearing, it is important to understand that this strategy involves a greater degree of risk. However, there are a number of things you can do to minimise the risk of this strategy:
- Do not over commit. Only borrow as much as you can comfortably afford to repay.
- Diversify your investment so that you are not relying on just one or two investments.
- Invest only in quality growth assets which have proven track records of reliable income streams and capital growth.
- Invest for the long term to give your investments sufficient time to generate adequate capital growth.
- Insure your salary so that you will not have to sell your investments due to unexpected life events.
- Fix your loan interest rate to protect your cashflow should interest rates rise.
At Apex Partners we welcome the opportunity to talk to you about ways we can assist you and your finanical situation. Call us on 1300 856 338 to arrange a free, no obligation appointment.