Strategic Investment Advice
Wealth creation will assist you in achieving your life goals
There are many reasons why we all choose to invest in something or another. However, the main reason to start any form of investing - be it in property, shares, bonds or any other instrument - is to grow your money.
There're different ways to invest and different things to invest in. However, each and every different way carries its own benefits and disadvantages. To start understanding what Investing is, lets consider the basics first.
Understanding Investments Basics
Using cash to Invest
You can invest using cash or you can borrow to invest. Using cash to invest relies on your personal cashflow to ensure you're contributing every cash surplus you have towards investing. Because cash is a limited resource for most people, your investment will depend on how quickly and how much you can put in.
You can also borrow to invest. Borrowing to invest - mostly termed as gearing - is a way to amplify your investment opportunities. You instantly get more money to invest. Because you've borrowed money to invest, there're costs associated to the debt owed and repayments must be paid to ensure the debt is repaid. Any profits made after repaying the debt is yours to keep. Borrowing money to invest should only be considered if the overall return - once all the debts have been paid off and all associated costs cleared- provide a positive outcome more than the cost of the investment
Benefits of borrowing to Invest
You will have access to higher capital base to invest. This can increase your chances for a greater growth potential
You may be able to offset the cost of the debt against your income. This could be beneficial for people in a higher tax bracket to assist in managing their taxes
Risks of borrowing to Invest
You will have a higher cost associated with your borrowed funds. If the investment income does not exceed the cost of borrowing, then you'll have a shortfall which will require you having to top up each time to cover your debts. This could lead to serious cashflow deficit issues if not properly managed.
If investment markets under perform and crash, there's the potential to suffer greater losses due to the higher amounts invested.
If interest rates go up, then there's a risk of having to carry a larger debt on a larger interest repayment. If this is unsustainable, if could lead to losing the asset altogether.
Because you're reliant on your income in repaying the debt, if you lose that income due to sickness, injury, job loss, then you'll not be able to sustain the investment and may have to sell quickly to redeem the debt. This could lead to a fire sale of your asset which may not yield the best return.
Types of Gearing
There're 3 main types of gearing. Positive, Neutral and Negative gearing positions.
Positive gearing - When the income received from the investments exceed the interest and costs associated with the investments, the investment is now said to be a positively geared investments.
Neutral gearing - When the income received from the investments equals the interests and costs associated with the investments, you have a neutral position.
Negative gearing - occurs should the interests and costs associated with the investments exceed your income. In a negative gearing situation, you're making a loss in the life of the investment hoping that you can sell your investments for a higher capital gain potential in the future. This can be a very risky strategy as market forces may not necessarily be in line with your investment horizon.
Managing Investment Risk
There's always going to be risk with any investment strategy. In fact, there's risk just having cash in a bank account. Inflation tends to erode the value of your money and this is a risk to savings.
Volatility - Investment markets tend to rise and fall and move in cycles. Some asset classes may experience a high degree of rapid changes than others. This is what we term volatility. Volatility could lead to market risks. Asset values may drop as a result of this. As different asset classes experience different degrees of volatility at any given point, mixing these assets up could reduce the stress volatility could cause on your overall investments. This will reduce your risk in the investments. This is what diversification is all about.
Interest rate risk - As discussed, when you borrow money to invest, there's a cost associated to it. Interest rates tend to rise and fall too. Generally, when interest rates fall, most people are comfortable with that and tend to increase borrowings or use the extra capacity to pay down the debt. However, if interest rates rise, there's a strain on cashflow and without proper cashflow planning, you may find yourself to be stressed. You can fix interest rates if you think interest rates are going up. Much as this doesn't stop rates from rising, it sure helps with your cashflow management to know your expense throughout.
Risk to income - We discussed what could potentially happen to your income in the event of sickness, injury or loss or job even. You may be able to have a cash buffer for these unplanned events or in some cases buy insurance to cover these events. Without the income coming in, you may not be able to maintain your loan repayments which may lead to having to sell your investments when you're not ready to do so.
Investment success will not happen by chance. We can help you design and monitor your personalised strategic plan to ensure you can reach your intended life goals.
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