Many pundits are tipping double digit returns for Australian equities in 2011. We consider ways in which you can take advantage of a rising market through the use of leverage.
Gearing (borrowing to invest)
If you think the markets are going to bounce back this year, then borrowing to invest is almost certainly going to give you the best returns. There are now a number of different ways to do this, from margin lending, structured products, self funded instalment warrants and internally geared managed funds.
If you’re not familiar with this term, a Margin Loan allows you to borrow money to purchase shares or managed funds with a deposit in the region of 20-50% of the purchase price. The maximum Loan to Value Ratio (LVR) varies on the individual share or managed fund (higher risk stocks require a larger deposit).
The premise of margin lending is that by only having to pay for 50% of the cost, investors can double their returns (or losses). Dividends/distributions are often used to cover the cost of interest accrued on the loan.
The downside of having just come through the GFC is that the underlying cost of borrowing has gone up significantly whilst dividends have fallen somewhat.
Investors would therefore do well to shop around as rates can vary significantly and larger loan sizes (> $500,000) can negotiate a better rate. Last year saw us negotiate a 1 year fixed rate of 7.4% for all our clients with one of the industry’s largest margin lenders.
We provide a comparison table of current margin loan rates on our website www.fundsfocus.com.au/margin-lending/ and regularly negotiate rates for clients.
Margin Lending Comparison Tables (Click image to view)