Double Gearing

By Jason Fittler

I often wonder if the founders of Storm Financial really thought about the negative side of naming their business Storm, given the now destruction it has caused. One of the fall outs of the collapse of the Storm Group is the new legislation on gearing.

First you need to understand the model,

1.    borrow as much as you can against the equity in your home.
2.    invest these funds into index funds and then borrow as much as you can against this investment.
3.    if you have any capital growth, borrow against this equity as well.

This is called double gearing. 

The government has taken steps to make sure that this structure is never used again. It is obvious that this is a high risk strategy, in positive markets you have great gains and in negative markets you risk being wiped out.

In turn, gearing is now considered a bad strategy; this could not be further from the truth.

Gearing is a genuine strategy to improve your overall return if used correctly. The issue with Storm was not the strategy it was the adminstration and products used to execute the strategy.

In the current market we are currently coming off a very low cost base, those of us who have used a gearing strategy over the past 6 months have done very well for themselves. But how do you gear up your portfolio while limiting your down side?

Warrants – in this market my favourite product is the self funding instalment warrant over an index fund. This product gives you the protection of a stop loss, a low interest rate the same as a margin loan, the benefit of better up side in a rising market and the benefit of lower fees.

We will be releasing a video on our web site in the coming weeks to talk about gearing through self funding instalment warrants, specifically in relation to index funds. If you would like to take advantage of this product make sure you take the time to watch. It will only take around 10 minutes, but I guarantee it will be the most productive 10 minutes you will spend that day.

PS. If you would like a jump start on warrants, give us a call (07) 4771 4577.