Tag Archives: Investments

Should I borrow to invest in shares?

By Robert Wright /September 02,2019/

Borrowing, or gearing, can help you accelerate your wealth creation. It can allow you to buy assets such as an investment property, or shares that you may not be able to afford outright. However, borrowing to invest is considered a high risk strategy and can result in you losing more than your invested capital.

Before taking out a share investment loan, you should ensure that you can service the costs associated with the loan, including repayment of the loan principal. You should also seek professional financial and tax advice regarding the potential risks and benefits of geared investing.

How do I borrow to invest in shares?

You can take out a margin loan to invest in shares. A margin loan allows you to buy shares by paying only a fraction of the cost of the shares upfront, and the lender uses your shares as security for the loan.

The prices of shares move frequently and you risk losses if they fall in value. Lenders often express your level of gearing using a loan-to-value ratio (LVR) or gearing ratio. The LVR is the amount of your loan divided by the total value of your shares.

If the value of your shares falls to where LVR exceeds an approved maximum, you may be required to top-up your loan collateral or repay some of the loan. This is known as a margin call. If a margin call is not met within a timeframe set by the lender, your shares may be sold by the lender to satisfy your margin obligations. This may result in you suffering a loss.

How do I manage the risks associated with a margin loan?

There are a few strategies that can help you manage the risks associated with a margin loan:

• set a borrowing limit you are able to comfortably repay and stick to it
• make regular interest repayments on your loan to keep your loan balance within a manageable limit
• check your LVR regularly, because the value of your investments can change quickly
• have funds available to deposit if your lender makes a margin call and you do not wish to sell your shares

What are the benefits and risks of borrowing?

Benefits

• You can build a larger portfolio than if you were using just your own funds.
• Some lenders allow you to borrow using an existing share portfolio as collateral. This allows you to increase the size of your investment without having to deposit additional cash.
• Manage concentration risk by diversifying your portfolio. For example, if your share portfolio is overweight in a certain sector and you do not want to sell the shares, you could use the equity in your current portfolio to borrow and invest in companies in other sectors.
• Potential tax efficiencies associated with borrowing.

Risks

• While a share investment loan can help accelerate the growth of your portfolio, it can also magnify losses if prices move against you and you can lose more than your invested capital
• Interest costs associated with your loan may reduce your profits. Interest rates are also subject to change, and can result in an increase in the cost of servicing your loan.
• LVRs, or margin rates, are subject to change at the lender’s discretion. This can lead to a requirement for you to deposit additional cash at short notice. In some cases, your shares can be sold by the lender to satisfy your margin obligations. This can result in your shares being sold at a loss and you will still be required to repay the outstanding balance of the loan.

To find out whether gearing may be a suitable strategy for you, please contact us.

Source: Macquarie Group Limited

How do Managed Funds work?

By Robert Wright /September 02,2019/

If you want to diversify your investment portfolio to spread your risk across different asset classes, sectors or geographic markets, you may be limited by the amount of money you have available to invest.

Managed funds are popular with investors looking to build their wealth over the long-term. By pooling your money with a group of investors, you can tap into much wider opportunities (such as infrastructure or overseas markets) that would be out of reach as an individual investor.

Want to invest in Brazil’s economy, or agribusiness ventures? You’re likely to find a managed fund that will give you access to that investment opportunity.

What is a managed fund?

A managed fund pools multiple investors’ money into a fund, which is professionally managed by specialist investment managers. You can buy into the fund by purchasing units, or ‘shares’. The unit’s value is calculated daily, and changes as the market value of the assets in the fund rises and falls.

Each managed fund has a specific investment objective, typically focused on different asset classes and a specific investment management philosophy to provide a defined risk/return outcome.

For example, the investment objective of a fixed interest managed fund may be to provide income returns that exceed the return available from other cash investments over the medium term.

Why invest in a managed fund?

There are three key advantages a managed fund brings to your investment portfolio:

1. Diversify to reduce risk

By investing across different assets classes – and within different types of shares within asset classes – you can spread the risk of your investments falling due to market volatility. You can also balance different investment timeframes and income returns.

For example, investing $1,000 in a managed fund could give you exposure to 50 different company shares in an Australian equities managed fund. But to invest that amount in 50 companies as an individual would limit you to companies with low share prices (and cost a significant amount in brokerage fees).

2. Expert fund managers

Selecting individual stocks is also time consuming, and requires a certain level of market knowledge. Professional fund managers have access to information and research, and have the processes and platform access to manage your money effectively.

3. Reinvesting brings compound benefits

You can invest regular amounts into your fund, just like a savings account. And by reinvesting your fund’s distributions you could ‘compound’ your investment returns. Effectively, any future interest payments will be a percentage of a growing amount.

Are managed funds good for income or growth?

You usually get two types of returns from a managed fund:

• Income is paid to you as a ‘distribution’, which you can easily reinvest back into the fund
• Capital growth if the unit price of your investment grows over time

If you’re more interested in capital growth, you’ll need a longer timeframe for investing – and these funds usually carry a higher risk.

Types of managed funds

When you’re comparing managed funds, look at the asset allocation to understand its risk profile and potential performance.

• Income funds – low risk of capital loss, focus on defensive, income generating investments such as cash and fixed interest.
• Growth funds – longer-term (5+ years) investments, focused on capital growth rather than income and weighted towards securities and equities.
• Single sector funds – specialise in just one asset class, and sometimes a sector within that class (such as Australian small companies).
• Multi-sector funds – diversified across a range of asset classes, with varied risk levels.
• Index funds – aim to achieve performance returns in line with a market index, such as the ASX 200. Also known as exchange traded funds (ETFs) or passive funds.
• Active funds – an actively managed index fund that aims to outperform that index.

There are also multi-manager funds, which invest in a selection of other managed funds to spread your investments across different fund managers.

Who should I talk to about managed funds?

To find out more about managed funds, please contact us.

Source: Colonial First State

11 steps to financial independence for Australian women

By Robert Wright /July 01,2019/

Being financially independent is a mindset that many women are aspiring to, particularly those in relationships.

While your job, or your partner’s career is secure today, tomorrow it could be a different story, and often that can lead to a complete switch when it comes to who’s bringing in the money.

Equally, divorce rates still tell a story where almost 50,000 Australian marriages broke up in 2017, and quite often this means that assets are split and the need for both parties to work becomes a reality.

Research from Canstar suggests that we are seeing a rise in the number of women who are their household’s main breadwinner.

With this shift comes the need for women to be financially savvy and have equal control of the family finances.

To achieve financial independence and importantly have the right mindset, here are 11 things that every woman should be aware of.

1. Earn your own money.

Unless you are very wealthy in your own right, it is very difficult to achieve financial independence if you aren’t earning any income.

2. Don’t drop out of the workforce.

Many women will take time off to care for children and loved ones, but keeping a foot in the door, even if only part-time, can greatly enhance your income earning potential, not to mention help your skills stay relevant and grow your network.

3. Know your financial situation and be in control of how you spend.

That includes understanding how much money is coming in such as your weekly/monthly expenses, and how much is going out.

4. Know your good from your bad debts.

Good debt is often used to help build long-term wealth and bad debt can erode that financial security. For example, taking out a loan to study a course that will eventually lead to a career and provide you with a decent income is a good debt, but a credit card or personal loan with a high interest rate that applies to a depreciating asset such as a car, is considered a bad debt.

5. Have plans in place to be actively paying off your debts.

This could include your credit card, which could have an interest rate of up to 20%, and your home mortgage—even if it is considered a good debt with a lower interest rate.

6. Understand that renting is okay but owning a home could be better.

If you don’t own a home, there’s nothing wrong with renting. But be aware that paying for any accommodation, whether it’s rent or a mortgage once you reach retirement age and are no longer working, can be very expensive and drain your savings.

7. Have a plan for investing.

You might consider holding other assets like a share portfolio that can provide you with income via dividends.

8. Ensure you have an equal say in relationship/family money decisions.

Be realistic about periods of financial dependence but don’t undervalue your voice. When you are in a relationship, there may come times when you need to rely on a partner for financial support. This can happen at various life stages and even unexpectedly if you are unable to work for medical reasons.

9. Engage with your superannuation.

Log into your account and get to know how much you have and what your fees are, as well as your insurances, investment options, returns and nominated beneficiaries. If you’re not happy with what you see, take control to change it.

10. Take control of your finances by researching your options or seeking help.

In this day and age it is almost too easy to do your own research on financial products such as finding the super fund or cash saving account that meets your needs. And if you can’t find the answers yourself, then seek professional advice.

11. Don’t ignore your rights.

Never sign yourself up to a payment plan or a contract without reading the fine print and fully understanding how your financial security may be impacted—for better or worse.

Source: AMP, May 2019

Buy, sell or hold: How to deal with market movements

By Robert Wright /May 31,2019/

When share markets fall, every investor has a different emotional response. Some investors get anxious and sell up at the first drop in value, whereas others are happy to ride out short term fluctuations to realise the long-term benefits of their investments down the track.

One of the reasons for these different reactions is that all investments carry some level of risk, and we all have different perspectives on how much risk we’re willing to accept. This is because many personal factors can impact our investing style – from our financial situation and investment timeframe to our lifestyle goals and even our personality.

But when markets are in flux, how do you know if it’s time to change your strategy? Here are some things to keep in mind.

How do you react to market fluctuations?

A study by Colonial First State Global Asset Management (GAM) examined how a recent period of market movements impacted people’s investment decisions.

The results showed that as confidence declined, portfolio activity increased as more investors moved away from the stock market. In fact, the group most likely to switch out of shares were investors aged 50 and over. This is perhaps because they were seeking to preserve their capital and minimise their risk exposure as they headed towards retirement.

While investors of all ages often respond to uncertainty in the market by taking a more active approach to their investments, this may not always work in their best interests. Not only is switching costly, but it can also mean missing out on opportunities when the market recovers.

What happens if you sell?

Before you withdraw from an investment, it’s important to make sure you understand all the implications, including the risks and costs involved. For one thing, if you sell your asset you may be liable for capital gains tax (CGT), which can reduce the profit you stand to make.

What’s more, even if you’re only planning to sell off part of an investment, it’s not just the face value you’ll be giving up. You’ll also miss out on the benefits of compounding, which means you won’t be able to earn further returns on the shares you sell.

But that’s not all: if the value of your investment is falling, this is only a hypothetical or ‘on paper’ loss. If share prices begin to rise again, your investment could soon return to profit without you doing anything. However, if you sell your investment while its value is down, you essentially crystallise your losses – making them real and irreversible.

Are there alternative options?

When tailoring your investment mix, it’s important to focus on the big picture and think long term. That way, you’ll be able to ride out short-term fluctuations and take advantage of growth opportunities.

If you’re investing for the long term – for instance, with your superannuation – it’s important to have a diversified portfolio. This means investing in a variety of different asset classes. GAM’s research revealed that Australian investors tend to react to uncertainty overseas by reducing their exposure to international shares. But while this may seem like a sensible move in theory, it also means your overall portfolio will become dependent on a smaller pool of asset classes.

On the other hand, a diverse portfolio allows you to spread your risk exposure across different asset classes and markets, rather than putting all your eggs in one basket. This provides a financial buffer whenever an individual asset class declines in value.

If you’re thinking about changing your investment strategy, your financial adviser should be your first port of call. They can review your portfolio to make sure you have the right investment mix, taking into account your financial goals, investment timeframe and risk appetite.

Source: Colonial First State