Prime Time Financial Counsellors Pty Ltd: Where to from here

Where to from here

Is gearing for me?

You should think seriously about gearing if you have a long-term outlook towards investment, and the need or desire to accumulate wealth more quickly than you can by conventional means. The minimum time that you should contemplate for a geared investment into shares is 7 to 10 years. Property investment needs an even longer timeframe - preferably 15 years.

Gearing has great potential tax advantages, but they are of secondary importance compared with the ability gearing can give you to own a larger, more diversified and better quality portfolio than you could otherwise afford. Never gear purely for the tax advantages.

Many gearing arrangements rely on you continuing to earn income to pay interest on the borrowed funds. If your income is not completely secure, make sure you can protect yourself by taking out insurance. Your financial adviser can assist you here. Apply the same caution if you are thinking of using your home as security - borrow conservatively.

Whatever type of loan facility you are looking at, make sure you understand how it works and that you are aware of, and comfortable with, any risks involved.

Recognise your own tolerance of risk, and take steps to manage your risks to a level which you find comfortable. If the idea of margin lending leaves you uncomfortable, consider a low-risk alternative such as an index fund package which has no possibility of margin calls.

Gearing into shares is not a 'set and forget' strategy. You will need to monitor your investments regularly, so it helps if you have a real interest in shares and/or a working knowledge of how the sharemarket works. You should be prepared to research what you are actually investing in, as well as take professional advice.

If sharemarket investing is new to you, consider starting with a low-risk approach, such as gearing into a managed share fund. From there you can progress towards an individual share portfolio when you have built up your knowledge and experience.

Reproduced with the kind permission of Macquarie Margin Lending