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Investment Leverage

Whilst the benefits of investing for the long term are commonly known, it is more than often the case that investors have hundreds of thousands or even millions in the stock market by their late 50's, and 60's but only a few thousand in their 20's through to 40's. This is where a long term leverage strategy can really be beneficial.

Creating wealth with borrowed money

Generally investors are cash poor early in life, when they can afford to invest more aggressively. By borrowing money to invest appropriately, investors can grow their portfolio to a larger size by retirement. Leverage does come with added risk which is discussed below in "What are the risks?"

Boost effective returns

Leveraging can magnify your return both on the upside and the downside. Which is beneficial when an investor has a large time horizon and can afford to ride through multiple market cycles.

Diversification

When investing with limited funds, an investor may be unable to diversify appropriately across asset classes. By borrowing money to spread investment risk across various exposures, investors can potentially increase returns.

Repay loan automatically

Positively geared investments can repay their principle loan over time. When the dividends or investment income is greater than the cost of debt, borrowing money to invest can allow you to control a much larger investment while it effectively repays the loan over time.

Guidelines for adding leverage to a portfolio

20+ Years to Retirement

Markets typically move in 7 – 10 year cycles. Borrowing to invest requires a long term investment horizon to be able to hold through a full market cycle and avoid the need to sell at the low point.

Consistent Income

All borrowing comes with an interest cost. Although we aim for a positively geared portfolio, a consistent income stream is essential to ensure you are in a position to cover costs if the investment becomes negatively geared.

Comfortable with Volatility

We target a high level of diversification to reduce volatility, however to invest with leverage you should be comfortable with the fact that markets move in cycles and not be overly bothered by short term corrections.

How long does a loan take to pay off?

Deposit LVR Loan Initial Portfolio Interest Rate Yield Average Annual Growth Monthly Contribution

Show calculations

This is a model not a prediction. Results are only estimates, the actual amounts may be higher or lower. We cannot predict things that will affect your decision such as movements in investment markets. This calculator is not intended to be your sole source of information when making a financial decision. You should consider whether you should get advice from a licensed financial adviser.

Year	Interest	Income	Positive	Equity	Loan	Value	No Loan

How we create smart leverage

Whilst we have access to traditional forms of debt like margin loans, lines of credit and contracts for difference, we generally find the interest costs are too high to create a positively geared investment in the ASX. We typically utilise what is called a box spread as our preferred financing tool due to its low cost structure.

Low Interest Cost

Access interest rates similar to those available to financial institutions who then add on a profit margin before offering it to retail investors.
Safeguards

Since they are booked with ASX Clear neither the borrower or lender are exposed to the credit risk of the counter party and are protected by the financial safeguards of the Australian centralised counter party (CCP) clearing mechanism.
Duration

The ideal time frame to create a loan is around 12 months to allow for re-financing at potentially lower rates, however loans can be created over longer or shorter time periods if desired.
No lock-ins

You are able to exit your loan by repaying the owed amount at any time during market trading hours.

Speak to an adviser who will be able to handle identifying opportunities, implementation and ongoing management.

What is Positive Gearing?

Positive gearing requires the return on an investment to be greater than the cost of debt. The result is an investment which costs nothing to maintain and will actually repay the funds borrowed over time. An increase in interest costs or lower than expected income can mean your investment becomes negatively geared. We aim to avoid negative gearing by increasing yield or decreasing costs.

Increase Yield

To increase yield past their interest rate, an investor might target specific high income generating investments such as Telstra & Commonwealth Bank which can carry additional risk over a diversified portfolio.

Decrease Costs

The second way an investor might attempt to create a positively geared loan is by paying a lower interest rate which unfortunately most investors have little control over.

So, if we assume we cannot increase the income of investments without increasing the risk, positive gearing requires very low cost gearing to be successful. Speak to an adviser to discuss how we solve the above issues and create fully diversified positively geared portfolios with extremely low borrowing costs.

What are the risks?

Investment Risk

Like any investment strategy, leverage does not prevent you from making a bad investment decision, although diversification can reduce this risk.

Magnification of Losses

Market movements both up and down will be amplified through the use of leverage creating a more volatile portfolio. Investments may fall and may result in the value of your portfolio being insufficient to repay your loan. A long time horizon is essential. Returns will also be affected by any potential tax effect from your investments, including interest deductions or franking credits.

Interest Rate Risk

An increase in interest rates will general increase the cost of an investment loan. Increased rates may not be factored into current loans but will affect future ones.

Cash Flow Risk

Rising interest rates has a ripple effect on your cash flow if investments are negatively geared as you may be required to contribute cash to service the loan.

Margin Call Risk

If the value of your investments fall below the maximum allowable loan to value ratio, an investor will be required to add additional funds to reduce the loan to value ratio. Please be aware that a leverage exposes you to unfavourable movements in the value of investments, and possibly to margin calls. Investors are personally liable for any shortfall that occurs should their entire portfolio have to be sold to answer a margin call where there have been falls in the market value of investments. Only investors who fully understand the risks associated with gearing into investments should apply.

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