Strategies

Gearing strategies can be quite diverse in their complexity and risk – from simple and conservative to intricate and aggressive. Whatever your risk profile or goals, you and your adviser will be able to develop a gearing strategy to suit your needs. The case studies below provide an overview of some of these strategies:

Starting out

Even with the best intentions and a good income, building wealth can be a slow process - especially if you want to enjoy a little bit of life at the same time. But with some savings, a budget and the right financial advice,  you can create an investment portfolio and reach your goals sooner.
CGI Case Study - Starting Out.pdf (625Kb)

A helping hand when starting out

For many Australians in their late teens and early twenties the thought of investing rarely comes to mind. Some would like to start investing, however with little to no savings it is often difficult to get started. But with a helping hand, a little income and the right advice, it is possible to start investing and accumulating wealth now.
CGI Case Study - A Helping Hand.pdf (700Kb)

Using your business to accumulate wealth

Owning a business can be a challenging yet rewarding experience. Aside from the day-to-day issues of managing the business, it's also important to plan for the future and invest any profits wisely. Should you pay off debt, expand the business, or diversify into other income producing assets? With the right advice you can develop a strategy that will maximise your wealth and generate additional income.
CGI Case Study - Using business to accumulate wealth.pdf (767Kb)

Using investment income to build a larger portfolio

For many Australians the idea of borrowing money to create a larger investment portfolio seems out of reach. With income allocated to rent ot a mortgage, living expenses and the occasional holiday, finding the extra cash to meet interest costs seems almost impossible. But with the right financial advice many Australians can build a larger investment portfolio, by using investment income to meet interest costs.
CGI Case Study - Using investment income.pdf (654Kb)

Using your shares to build wealth

Most sucessful investors would agree that the hardest part was getting started. Having a goal in mind, setting a budget and picking what to invest in are all parts of the typical plan ... but is it possible to start investing sooner rather than later and achieve your goals even earlier?
CGI Case Study - Using your shares to build wealth.pdf (779Kb)

Optimising debt to build your family’s wealth (CALIA+)

For many Australians owning a family home is only possible with the financial challenge of a large home loan. With a focus on reducing it as quickly as possible, wealth creation plans are often left until later in life, leaving little time to benefit from the compounding nature of investing. But with the right advice you can continue to focus on repaying your home loan while also investing to build wealth.
CGI Case Study - Optimising debt to build your familys wealth.pdf (1.1Mb)

Gearing versus Non-gearing – A breakeven analysis

It is generally known that borrowing to invest (often referred to as gearing) offers the potential to grow wealth at a faster rate when compared to not gearing. However, many investors who are familiar with the benefits of gearing believe that borrowing to invest is only appropriate in a strong bull market. Interestingly, the required rate of return that will result in an investor being better off gearing over not gearing is lower than many think.

While an investor would only undertake a geared investment strategy if they believed it would outperform a non-geared strategy, it is often difficult to determine at what point one strategy outperforms the other. Establishing the point where the profit from gearing versus non-gearing is the same will depend on a combination of variables including the interest rate on the borrowed money, the expected capital growth rate and income yield from the portfolio, and the investor’s marginal tax rate.

In the example below we have assumed an income yield of 3.50% pa and an average franking level of 50%. It is also assumed the investment is held for 12 months so a 50% discount is applied to taxable capital gains.

Based on these assumptions the graph below shows the combination of the annual capital growth and interest rates required for a geared and non-geared portfolio to produce an identical after-tax investment return. The space above the blue line shows the conditions required for a geared portfolio to outperform a non-geared portfolio. The space below the blue line shows the conditions required for a non-geared portfolio to outperform a geared portfolio.

Capital growth rate required to break even

Assumptions: 50% gearing level, 3.50% pa income yield, 50% franking level, 39.5% marginal tax rate (including Medicare levy), 30% company tax rate.

Our analysis shows that if the current margin loan interest rate is 9.24%, a modest capital growth rate of 3.76% pa will result in a geared and non-geared portfolio producing an identical after-tax return over the next 12 months. An investor who expects to see a higher capital growth rate may be better off using a geared investment strategy.

At times of modest capital growth, gearing may still provide greater returns than a non-geared portfolio, provided the assumptions hold true.

To find out more about gearing and whether it’s suitable for you, please speak to your financial adviser.

Important Information
This information was prepared by Colonial Geared Investments, a brand of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945, administered by its wholly owned but non-guaranteed subsidiary Commonwealth Securities Limited ABN 80 067 254 399 AFSL 238614, a Participant of the ASX Group. This information (including the statements on taxation which are of a general nature only and based on current laws, rulings and their interpretation) has been prepared without taking account your objectives, financial situation or needs. Because of that, before acting on this information you should consider the appropriateness of it, having regard to your objectives, financial situation and needs. You should also speak to your financial/tax adviser. This example is for illustrative purposes only. Past performance is not a reliable indicator of future performance. Only investors who fully understand the risks associated with gearing into investments should apply. Applications are subject to credit approval. Fees and charges apply. Please consider the full terms and conditions are available on application.