Make your money work smarter

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Make your money work smarter

• ltAdvisers Namegt

ltAdviser namegt is an Authorised Representative of
RI Advice Group Pty Ltd
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Make your money work smarter

• ltAdvisers Namegt

ltAdviser namegt is an Authorised Representative of
RI Advice Group Pty Ltd
3
Make your money work smarter

• ltAdvisers Namegt

ltAdviser namegt is an Authorised Representative of
RI Advice Group Pty Ltd
4
Make your money work smarter

• ltAdvisers Namegt

My Name Financial
ltAdviser namegt is an Authorised Representative of
RI Advice Group Pty Ltd
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Make your money work smarter

• ltAdvisers Namegt

JV logo
ltAdviser namegt is an Authorised Representative of
RI Advice Group Pty Ltd
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Disclaimer

• Important Notice

RI Advice Group Pty Ltd, ABN 23 001 774 125,
holds Australian Financial Services Licence
Number 238429 and is licensed to provide
financial product advice and deal in financial
products such as deposit and payment products,
derivatives, life products, managed investment
schemes including investor directed portfolio
services, securities, superannuation, Retirement
Savings Accounts. The information presented in
this seminar is of a general nature only and
neither represents nor is intended to be specific
advice on any particular matter. RI Advice Group
strongly suggests that no person should act
specifically on the basis of the information
contained herein but should obtain appropriate
professional advice based on their own
circumstances.
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RetireInvest credentials

• More than 80,000 clients and 10 billion under
  advice
• Professional personal financial planning advice
• Backed by quality research and technical teams
• Over 110 offices nationwide

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Greater potential

• With most things in life,
• the more you put into them,
• the more youre likely to get in return

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What is gearing?

• Borrowing to invest
• A long-term investment strategy
• Means of creating wealth by increasing your
  investment balance to give the potential for
  higher returns
• BUT, if the investments decline in value the
  losses you make will be magnified

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Types of gearing
Gearing
Positive gearing Income greater than Expenses
Neutral gearing Income equals Expenses
Negative gearing Income less than Expenses
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Negative gearing

• Your expenses (mainly interest) are more than the
  income you will receive back
• This can increase returns, but also increases
  risk.
• Manage risks
• Make sure you have other income (eg salary) to
  cover the shortfall
• Have a long-term view
• Consider your personal insurance needs
• Invest in growth investments that have the
  potential to increase value

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Three main gearing options

• Home equity loan
• Borrow against your home
• Interest rates may be lower
• Any purpose

• Internally geared funds
• Money borrowed by fund manager
• You dont borrow
• No repayments just amount you want to invest
• Low minimum to start
• Can help to boost your super
• Less paperwork and no credit checks
• Limited to that fund

• Margin lending
• Borrow against purchased investments (up to
  approved limit called loan value ratio LVR)
• Limited to approved shares and managed funds
• Margin calls may arise

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Margin calls

• Applies to margin lending
• If loan exceeds LVR threshold you will be asked
  to (quickly) pay a margin call
• Example
• Investment value is 100,000. Loan amount is
  60,000
• LVR is 60 and is the maximum permitted
• Investment drops to 92,300. LVR now 65
• Margin call required to restore LVR to 60
• Option 1 use other money to repay 4,620 of
  the loan
• Option 2 sell 11,400 of investment to reduce
  debt

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Margin calls

• Dealing with margin calls usually need to
  respond with 24 hours have other cash or
  additional security on hand if you sell off
  underlying assets, be aware of real cost
• Strategies to reduce the potential for a margin
  call borrow less than the maximum ratio pay
  interest regularly and reinvest any income
  diversify across and within sectors

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Gearing sources comparison
Home equity Internally geared share funds Margin loan
Underlying investments shares /managed funds / property managed funds shares /managed funds
Margin call n/a n/a yes
Potential capital losses yes yes yes
Invest through super? no yes no
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Case study Cassie Value of gearing (margin loan)

• Cassie has 40,000 in savings and earns a 60,000
  salary
• Wants to build wealth over the next seven years
• Wants her money to work hard for her
• Strategy
• Her adviser recommends she take out a margin loan
  for 40,000
• Combine it with her 40,000 savings to invest
  80,000 in high growth managed funds
• Assumptions
• Investment return 8.3, income is reinvested
• Average margin loan interest rate 9.5 pa paid
  from salary income
• Expenses are 30,000 per annum.

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Case study Cassie Potential result of gearing
(margin loan)
After 7 years
If geared 80,000 investment valued at
139,794 Net return 25,622
If not geared 40,000 investment valued at
69,897 Net return 21,522
Calculations show the returns of each strategy
after the loan, own investment and tax have been
deducted. It assumes investments in a growth
strategy with an average annual return of 8.3.
This return is composed of 3.65 income and 4.65
growth and includes 75 franking. Returns assume
income is reinvested, a marginal tax rate of
34.5 (including Medicare levy), and average
annual margin loan interest rate of 9.50
excludes brokerage and any other fees. This
example is for illustrative purposes only. It
does not represent the past or expected
performance of any fund, portfolio or investment.
Any changes to taxation, loan interest rates,
investment returns, the regular savings amount
and other assumptions will affect the outcome.
The assumptions do not include the earnings on
any excess cash flow that may be invested.
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The underlying investment
Shares Property
Advantages Advantages
Liquid Tangible - you can see it
Portion can be sold Regular income (?)
Can diversify with large amounts The great Australian dream
Can start with small amount or contribute regularly
Disadvantages Disadvantages
Intangible Not liquid/diversified
Dividend amounts may vary Potential problems with tenants
Brokerage costs Large sums needed to invest
High level of expertise/time No regular savings
Possibility of margin call (margin loans) No partial redemption
Possibility of capital losses Ongoing costs
Possibility of capital losses
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Managed funds another option

• Advantages
• Professionally managed
• Diversification can be achieved with smaller
  investments
• Liquid investments and can sell small portions
• Regular savings plans
• Can start with smaller amounts
• Disadvantages
• Intangible
• Income payments can be irregular amounts
• Professional management is at a cost
• No direct control over underlying assets
• Possibility of capital losses

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Case study Jason and Lorraine Regular gearing
(managed funds)

• Jason and Lorraine are in a strong financial
  position, earning good salaries
• Small amount left to pay on their mortgage
• Investment horizon of seven years and
  growth-orientated risk profile
• Strategy
• Adviser recommends establishing a regular gearing
  plan for 1000/month
• And put another 1000/month into the investment
  from regular saving
• Investment in joint names.
• Assumptions
• Investment return of 8.3 pa, income reinvested
• Regular total investment of 2,000/month
• Average margin loan interest rate of 9.5 pa paid
  from salary income
• Expenses are 50,000 per annum.

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Case Study Jason and Lorraine Potential result
of regular gearing
After 7 years
If geared 168,000 investment valued at
225,772 Net return 23,051
If not geared 84,000 investment valued at
112,861 Net return 20,776
Calculations show the returns of each strategy
after the loan, own investment and tax have been
deducted. It assumes investments in a growth
strategy with an average annual return of 8.3.
This return is composed of 3.65 income and 4.65
growth and includes 75 franking. Returns income
is reinvested. Mark earns 79,000 and Sharon
earns 75,000. Average annual margin loan
interest rate of 9.5 excludes brokerage and any
other fees. This example is for illustrative
purposes only and does not capture any tax
implications while the investment is held. It
does not represent the past or expected
performance of any fund, portfolio or investment.
Any changes to taxation, loan interest rates,
investment returns, the regular savings amount
and other assumptions will affect the outcome.
The assumptions do not include the earnings on
any excess cash flow that may be invested.
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Gearing potential advantages

• Could increase returns (but at risk of greater
  losses)
• May reduce your tax liability claim deduction
  for borrowing costs more invested in
  Australian shares could mean greater franking
  credits
• Diversification access investments you wouldnt
  otherwise have access to
• spread your portfolio across a greater range
  of assets
• Eligibility for tax deductions in based on
  individual circumstances and specific tax advice
  should be obtained.

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Gearing potential risks

• Gearing can magnify both potential investment
  gains and losses
• If you are subject to a margin call, you will be
  required to contribute additional funds or sell
  down investments
• Interest rates may rise and you could have to pay
  more interest than you anticipated

Value change Asset value Loan Net Investment
100,000 50,000 50,000
? by 10 110,000 50,000 60,000
? by 10 90,000 50,000 40,000
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Taking cover
Insurance should form a part of your gearing
strategy

• With responsibility for a debt (which is what
  gearing is), what would happen if you became
  sick, injured or died?
• Insurance cover against death and disability
• - pay off loan should something happen to
  you
• - can provide peace of mind
• Income protection
• - allows you to continue servicing debt in
  event of injury

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Is gearing right for you?

• Gearing is best suited to people who

Question Yes No
1. Are looking to achieve strong capital growth over the long-term
2. Can cope with potentially large fluctuations (both up and down) in the value of their investments
3. Expect returns from their portfolio to exceed their borrowing costs
4. Can afford any shortfall between borrowing costs and investment earnings
5. Have adequate insurance in place
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Principles to consider

• Never make a decision based on tax advantages
  alone
• the investment must be appropriate even if tax
  advantages were not available
• Underlying investment must suit your needs and
  objectives
• basic principles of investing still apply
• diversification, protection against inflation
• Look for potential to provide capital growth
• shares
• property
• Seek professional financial advice

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Where to from here?

• Used wisely, over a long-term, gearing can
  accelerate wealth
• Geared investments generally involve much higher
  risk than similar non-geared investments
• If you feel gearing is an appropriate strategy
  for you, seek professional financial advice
  before commencing a gearing strategy
• If you dont think gearing is for you, there are
  other wealth creation opportunities just ask
  your financial adviser

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ltAdviser namegt is an Authorised Representative of
RI Advice Group Pty Ltd