December 2002 Volume 83 Number 12 "serving the protectors"

Smart investors don’t just make their money work for them. They make other people’s money work for them. Brandt Piercy from PCU Investment Services explains how it’s done.

Gearing – when you use borrowed funds to increase the amount you can invest – is a classic investment technique.

The more you can invest, the greater your potential gains. For example, a $10,000 investment portfolio has to rise by 10 per cent to give you a $1,000 profit. A $20,000 portfolio only has to increase by five per cent to give you the same profit. Of course, this works both ways – the bigger the portfolio, the bigger the possible loss. And, if you’ve used borrowed funds to invest, and the investment is losing money, you have to keep paying off the loan regardless. But if you spread the risk across a wide range of investments – for example, by investing in managed funds – and if you can afford to take a five- to 10-year view of your portfolio, borrowing to invest can make a lot of sense.

Brandt Piercy, a financial planner with PCU Investment Services, says the minimum timeframe for gearing is about five years. “If the income you get from the investment is less than you are paying in interest (on the loan), you are making a loss – but the loss can be set against your income tax. That’s negative gearing,” he explains.

“In effect, it reduces the real cost of your loan and, in the meantime, the capital value of your investment, and the income it produces, can continue to grow.” He says that the best idea is to get a larger sum together to invest, and then pick up a certain amount of tax advantage on the way.

“Negative gearing can be a good thing but there is also a downside to it; and in all our reports to clients we have a section on risk,” he says.

“We have two strict rules. One, that people have to be of what we call a certain investor profile; that is, they have to be fairly aggressive in attitude towards investment. So we do a profile to assist in determining what kind of investors they are, and what their comfort levels are.

“The second rule that we have is that they have to have their own available money to make the repayments on any loan that is taken. We don’t want our clients to be relying on the income from the investment to cover the interest bill or cover the repayments. So we may be more conservative than some other advisers in that regard.”

Brandt says PCU Investment Services offers an investment option where three fund managers are used. “…We use three selected fund mangers to invest, say, $30,000, in Australian share funds, of which $10,000 goes with each fund manager. The fund managers have their own style and way they do things, so we gain diversification in manager style by doing this.”

He adds that, as everyone is an individual when it comes to financial planning, it’s important to find an adviser who understands your goals. “An authorized representative of PCU Investment Services is able to tailor a plan to suit your needs,” Brandt says.

Get started in gearing

If you want to find out more about negative gearing, contact PCU Investment Services today. Not only can they work out a negative gearing strategy that suits you, your PCU Investment Services adviser can help with a range of other financial planning issues including superannuation, retirement planning, pensions, redundancies, and more. To make an appointment, call PCU Investment Services on (08) 8231 5533.

Free consultation

As a PCU member, you are entitled to a free, no-obligation initial consultation with PCU Investment Services. Make a time for your free consultation by calling (08) 8231 5533.

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