I was surprised to learn how much gearing or borrowing was in the market prior to the GFC, in a Bull market you expect that investors will fall to the allure of quick money to be made through gearing. What is more surprising is the number of investors still actively undertaking a gearing strategy.
We are now in a period of flat growth in the share market and in the property market.
As such borrowing will simply reduce the return on your investment.
Paying down debt should be number one priority for any serious investor in this market. Let take a look at some of the issues;
1. Negative Gearing – this is where you make a loss from the investment and then use this to reduce your tax bill. It is called negative for a reason; it simply does not make sense. You lose money to save tax, paying tax means you’re making money. DO not be afraid of paying tax. In the current economy with high interest rates this loss will be larger but there is no capital gain to offset it. If paying less tax is a prime motivation of choosing an investment then the only person making money is your realtor.
2. Gearing should only be used in periods of high capital growth (Bull markets), in Bear or Flat markets which we are in now gearing compounds the losses you will make year to year. Bear markets can last 10 years; as such you should look to reduce your gearing at the start of the Bear market.
3. Fees – your adviser will make fees on the value of your investments and on your loan. As such selling part of your investments to pay down the gearing level will also reduce the fees you pay.
4. Interest Rates – for margin lending the current interest rate is 9.5%, the average income for a diversified portfolio is around 6.5% per annum. As such you would get a better return on your money by paying down your loan. Remember we are not expecting any capital growth.
At present I expect that we will see little growth in the Australian Share market for at least the next 3-5 years and the housing market for the next 8-10 years.
As such to improve your overall return look to pay down your loans.
For more information please call me on (07) 4771 4577.