REV UP
YOUR
RETURNSThere are several
advancements on this
strategy that you could
introduce here if you
wish to increase the
amount of risk you are
prepared to take. For
example, you could use
your savings budget
to meet the net cost
of borrowing to invest.
Typically this is called
home equity investing.
If you do not have a
home, the major banks
and financial institutions
offer investment loans at
a slightly higher interest
rate than mortgages.
To determine how
much you can afford,
calculate what your
monthly savings budget
would equate to as
an after-tax cost on
an investment loan.
An annual budget of
$10,400 ($200pw) will
allow you to borrow in
excess of $1 million. In
the name of conserv-
atism, a home equity
investment strategy
would cost about $3000
after tax, allowing you
to put the balance of
your savings into the
same investment.
This strategy carries
much higher risk of
financial loss and
volatility, so you should
consult a professional.
For comparison
purposes, this type of
strategy of investing
borrowed funds of
$500,000 and saving
regularly could result in
a net profit after tax in
excess of $150,000 at
a capital growth return
of as little as 5%pa.pu rcha se (pa rcel) a mou nts. A n i ncrea se i n t he ava i labi l-
ity and popularity of exchange traded funds (ETFs) has
allowed small investors to access desired investments
easily. A plan whereby you save your weekly amount into
cash before regularly buying ETFs on the stockmarket
at the end of each month allows access to investments
that can generate profits through both income and capital
growth. Other benefits of this strategy include the ability
to gain access to broad market performance at a low cost,
liquidity and reducing timing risk through the staggering
of your purchase prices (dollar cost averaging). The risks
include greater volatility and a potential reduction in
the value of your capital, possibly when you need it the
most. However, this form of investing has been proven
to provide greater returns over the long term.
My advice depends greatly on your personal cir-
cumstances, stage in life and risk tolerance. I suggest a
savings plan whereby you undertake to invest regularly
into a portfolio of ETFs that would focus on generating
capital growth over the medium to longer term. ETFs
to consider include:- Vanguard Australian Shares Index (ASX: VAS).
- Vanguard Australian Property Securities Index (VAP).
- iShares S&P 500 (IVV) for exposure to the broad
US market. - iShares Global 100 (IOO).
- Magellan Global Equities (MGE) for active global
exposure.
T here is a t wea k to t h is st rateg y i f you have a n i nvest-
ment loan as well as a home loan. Instead of attributing
the savings each week directly into the savings and
investment strategy from your pay packet, you could
make an additional home loan repayment first, before
w it hd raw i ng from t he i nvest ment loa n side of you r loa n
structure and using this to fund the borrowing-to-invest
strategy. A further extension on this concept is to pay
any dividends and profits you receive from the portfolio
into the non-deductible home loan. Once again, any
costs incurred in generating income are tax deductible
so you can in turn borrow the costs of meeting interest
payments, effectively capitalising interest costs. Just
ensure you comply with the tax laws and guidelines.
This step would have the additional benefit of accel-
erating the repayment of your home loan (non-tax
deductible) while increasing the investment loan bal-
ance proportionally. Over time this will have the added
ancillary benefit in that it will change the loan profiles
to be more tax effective. With a carefully managed cash
flow program you could significantly accelerate the
repayment of your non-tax deductible debt.
A projected estimate of the strategy is that after five
years of saving $200 a week an investor
would have around $64,000 in capital
after tax. This equates to a net profit of
around $10,000.
Chris Smith is a founding partner at VISIS
Private Wealth.an offset account, where you earn a return equivalent to
your mortgage interest rate because you are reducing the
loan principal, on which interest is calculated each month.
In addition to saving you interest on your mortgage, you
will still have access to the funds without being subject
to market, timing or liquidity risk. An added benefit is
that the earnings (loan interest savings) are not taxable.
SHARE FUNDS
A small amount of regular savings does not warrant a
direct share investment because you do not have sufficient
amounts to diversify appropriately or to meet minimum