| Gearing for dummies: Your chance of making money from gearing is less than one in four, says Paul Resnik |
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I have read earlier reports from Paul he makes a valid statement for investors to proceed with caution when gearing and investing. We all know gearing magnifies both the upside and downside in whatever borrowed and invested into.
And while any direction of returns are outside of investors control investors can choose to reduce the risk of capital loass by having borrowings capital protected. This significantly reduces the risk for the investor to one of serviceability on the borrowings (less tax deductibility on borrowings).
Long term history shares and property indexes show an increase in value (as inflation is priced into these asset classes). Hence with a long term view of investing, and paying a slightly higher premium for peace of mind with a capital protection facility in place investors can enter asset classes with more certainty about down side risks and have potential to have upside too.
Additionally capital protected products can also give access for investors to invest without needing to contribute lump sums of money or provide additional security (as is required with margin lending or direct property when using borrowings).
People may argue that the additional cost of capital protection erodes investors returns, pointing to long term charts showing 98% of times after 5 years or more of investing returns have been higher when investing in shares. So why pay a premium for capital protection?.
The question then comes back to one of risk appetite and willingness to pay a premium for protection.
My guess is that Storm Financial investors and other investors who geared with (unprotected) margin loans in hindsight wish they had now chosen capital protected loans when making their borrowing and investing decission.
If you would like to find out more about how you can invest with capital protection, email to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Peter Horsfield is CFP and Managing Director of FMW Financial Planning Pty Ltd
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