Does GEARING still make CENTS?
Gearing or borrowing money to invest has recently come under the spotlight as a genuine wealth 'accumulator strategy'. Whilst gearing allows you to magnify your gains using somebody else's money, you may also stand to lose more than just your own money. Falling asset prices, a lower interest rate environment and economic uncertainty mean that for most people it is time to take a closer look at gearing to understand if borrowing money is still right for you in achieving your long term goals.
The sharp decline in share prices resulting in 4 to 5 year market lows initially due to the effects of the sub prime mortgage crisis in the United States of America, has caused a sell off of most listed companies around the world. Even those very profitable companies not directly linked to the sub prime mortgage failures have been affected as the availability of credit worldwide has become more difficult to obtain and more expensive to service. As some of the following measures take effect the market will likely re-value these more profitable companies favourably.
Central banks around the world have acted swiftly to stabilise financial markets utilising monetary policy to lower interest rates by several percentage points. On the whole, these interest rate reductions have been passed on readily by the major banks that offer both deposit and lending products. Whilst the effects will take some time to flow through to the economy, reputable companies who have acceptable debt levels are still open for business and should emerge in good shape.
The flight to term deposits over recent months should begin to unwind as these better businesses are identified and the dividend income they provide also compares favourably to declining term deposit rates.
Government intervention, is now firmly focussed on stimulatory fiscal policy to ensure household spending underpins demand for goods and services. Industry concessions, big business bail outs and acquisitions are all designed to maintain employment and underpin demand. Bank deposit guarantees provide banking stability and the availability of finance for further economic growth. Importantly, the lion's share of these combined funding initiatives will be reflected in better company earnings over time.
Whilst sentiment and investor psychology impacts market valuations at any time, the decision to gear or not to gear depends on an understanding of investment fundamentals and your personal circumstances. Whether gearing is an appropriate strategy will depend on your personal circumstances, needs and objectives. It is highly recommended you 'don't try this at home. Seek independent financial advice to ensure you understand how borrowing money to invest fits into your overall financial plans and lifestyle goals.
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This article is provided by Medfin Pty Ltd. It is intended to provide general advice only, and has been prepared without taking into account any particular person's objectives, financial situation, or needs. Before acting on the advice, you should consider its appropriateness for your own circumstances. This is best done with the assistance of a financial adviser. Medfin Finance Australia Pty Limited ABN 89 070 811 148. A wholly owned subsidiary of National Australia Bank Limited, and part of the NAB Health specialist business.
