REV UP
YOUR
RETURNS
If you love risk and
have a longer-term
framework, you might
be interested in an inter-
nally geared fund. By
that we mean the fund
borrows a proportion
of itself so it magni-
fies returns (but also
losses!). One example
(in super) is MLC’s
Horizon 7 Accelerated
Growth Portfolio, which
borrows up to 30%
of its value. Over the
past seven years it has
earned 10.5%pa versus
8.9% from its non-lev-
eraged brother, Horizon
6 Share Portfolio.
However, the 10-year
returns (which include
the GFC) are reversed
- 4.1%pa and 4.7%
respectively. Still feel-
ing frisky?
- Smaller companies over larger companies.
- Value over growth companies.
- More profitable companies.
This has led to excellent returns over time, in both
shares and bonds. DFA doesn’t pick stocks per se,
though – if shares meet its criteria, it will simply pick
the cheapest one on the day or wait until a stock that
meets its needs becomes available at a better price.
To invest with DFA you will need to find a DFA adviser
- DFA understands the benefits that good advice can
add for an investor. By the same token, it is picky about
the advisers it works with. For example, it has never
worked with advisers who charge commissions on
their investments. Advisers need to be trained at DFA
seminars before they are allowed to use DFA products.
If you have a “balanced” risk profile you might be
invested in the World Allocation 70/30 Trust (70%
in growth assets and 30% in defensive assets). At the
end of February, it had an average return of 10.57%pa
(before tax) over five years.
However, we will use a more conservative assumption
of 7.63% because that is the return we would assume
for a balanced investment over time and the five-year
return doesn’t include the GFC. Assuming this return
was replicated in the next five years (we would be more
conservative with an actual client about the future
return), this would mean that your $200 could accrue
to $63,055 (assuming an average return of 7.63% and
no tax. There are 260 periods in my graph – 52 weeks
for five years).
Super alternatives
From July 1 there will be new limits on how much you
can add to super. And there will be a $1.6 million cap
on how much you can have in an income stream. So
where can you invest for retirement if you are in excess
of this cap?
One possibility is using an investment bond. These
instruments are taxed normally at the company rate
(currently 30%) but the effective rate can be lower
thanks to things such as franking credits.
Franking or imputation credits (where the govern-
ment gives you a credit for the Australian income tax a
company has paid) can make a big difference to a retired
investor, so have your adviser look at that option too.
The only problem is you will be limited to Australian
shares and our market is dominated by the banks, BHP
and Telstra. No exposure to Facebook or Apple there.
I f you decide to sel l a n i nvest ment proper t y, con sider
doing it in your first full financial year of retirement.
This will limit your taxable income and you may be
able to offset the capital gains tax liability with an
unsupported contribution to super.
As always seek advice from qualified tax and financial
advisers before acting – they’ll save you
money in many cases. M
Steve Greatrex, CFP, is the founder of
Wealth On Track (wealthontrack.com.au),
Adelaide’s only five-star rated financial
planning business.
