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Investment strategies
Gearing
Gearing involves investing in shares, managed funds or property with borrowed money. It comes in two forms – positive and negative gearing:
- Positive gearing is where the interest you pay on the borrowed funds is less than the income you earn on your investment.
- Negative gearing is where you pay a greater rate of interest on your borrowed funds than the income you earn from your investment. In this instance, you may claim a tax deduction.
There are a range of additional gearing options, for example:
- increase your existing home loan;
- take out a separate conventional loan, secured against your home; and/or
- take a separate home equity loan, or what is often known as a line of credit.
A word of caution - managing risk should be a much higher priority when using gearing due to the fact a large part of the investment is someone else’s money!
Dollar Cost Averaging
This involves the regular purchase of units in a managed fund or shares over a period of time. By investing a consistent amount regularly, more units are purchased when prices are low and less units when prices increase again.
Dollar Cost Averaging can be done automatically via an investment plan.
By using this technique you may reduce the risk associated with market fluctuations while giving your portfolio the best chance of long term profitability.
Superannuation
Superannuation is a vehicle for investing in major asset types such as shares or property. Unlike standard investing, there are a range of tax concessions offered to superannuation investors, such as tax breaks on contributions and investment earnings.
By offering a concessional tax rate, your super fund keeps more of its earnings, so it grows and compounds more quickly than an investment outside the superannuation system.
Spouse contributions
By making super contributions on behalf of your low income or non-working spouse, you may be entitled to a rebate of up to $540 on your personal income tax. This rebate is based on your spouse’s assessable income plus reportable fringe benefits, which must be less than $13,800 in the year of contribution.
Spouse contributions don’t attract tax on withdrawal, and together with the concessional tax rates offered through superannuation, offers a tax-effective way for a couple to generate a retirement nest egg.
Distribution reinvestment
If you hold investments in shares you will be fortunate to receive regular dividend payments from those companies in which your money is invested.
Rather than take the dividend payments in cash, you have the option of reinvesting dividend distributions back into your investment.
By doing so, the effects of compounding interest – where interest is earned on interest – can be significant.
When dividends from an investment are high, this results in additional capital contributions without any upfront capital outlay.
For example - you invest $10,000. You receive 10% annual return and reinvest all investment distributions. The effects of compounding interest can be best illustrated by examining the final investment value achieved by different age groups:
 | 20 year old | 30 year old | 40 year old | 50 year old |
| At age 65 | $728,905 | $281,024 | $108,347 | $41,772 |
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Further Information |
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