(03) 9020 2905Bruce Brammall, The West Australian, 31 March 2025
Let’s shine a fresh light on an investing strategy that has been about as popular in recent times as my DebtBoy’s latest haircut.
Geared share investing. It has been on the nose since Reserve Bank rate increases reached really unpopular and uncomfortable levels in early 2023.
And my son’s #3 buzz cut – done on a dare to support a mate who was doing it to actually support a worthy cause – is also really unpopular, making him feel uncomfortable. His sister, DebtGirl, claims to have been “severely traumatised”. Thoughts? A tad dramatic?
I did something similarly stupid with my hair at about his age. And I think I reacted with similar disdain to my dad’s well meaning “it’ll grow out”.
Time heals wounds
Everything eventually “grows” out. Bad haircuts for teenagers. The time not being right for geared share investing.
On that … I’m not saying that the last two years, when interest rates reached above-average levels, were not a good time to be a geared share investor. Because they were good times. Market returns (that is, hindsight), show that.
But for many, high interest rates made it difficult to justify gearing. Paying more than 6 per cent interest on an asset class you hope averages around 9 per cent long term, is a lot different to borrowing at 2-3 per cent for the same expectations.
That interest rate assumes borrowing equity against your home. Margin loan interest rates generally went above 10 per cent. And other options were also more expensive than home loan rates.
When it works
Gearing increases risks. And when it comes to shares, which are inherently volatile, it’s not a game many are prepared to play. And the vast majority should avoid it.
Why? Let’s say you borrow $100,000 and invest in the share market. We have a Covid-crash or GFC-style event and your investments are quickly worth just $60,000. You’ve lost $40,000 and you might need to repay that.
Compare that with investing $100,000 of your own money. Well, you’ve lost $40,000 of your own money. You don’t need to repay anyone.
Sure, time will probably heal that balance and the psychological wound that it caused. But only people who are comfortable taking fairly high risk are going to not go into cardiac arrest when that happens.
Gearing is obviously a strategy designed to multiply returns in rising markets. And, importantly, for those who have time. Anyone gearing into shares (and property too) needs to have a long time frame being considered, to be able to ride out a few storms, including the one we’ve been in since mid-February, related to US president Donald Trump’s news cycle.
Interest-rate environment
We’ve had a first cut. We don’t know yet if it’s going to be an only child or will have some brothers and sisters.
Falling and low interest rates tend to be good for other investment markets. Why? If cash is earning less, investors will search for other opportunities to increase their returns. So the theory goes.
Gearing is only appropriate into growth assets – shares and property.
It’s the growth that makes sense when it comes to geared investing.
Who dares, wins
To reiterate, gearing into investments is not for everyone. My guess? Less than 20 per cent of the population should consider gearing for investment in any form. And they should be, necessarily, high-risk takers.
When it comes to the difference in gearing into shares and property … there are some people who love property and some people who are scared witless by the debt that comes with it, and dealing with tenants.
Property does, however, get preferential treatment from banks. Banks are comfortable that the underlying value of residential property is underpinned by the land it sits on. And they are far more comfortable lending against property than shares as a result.
Companies can go bust, worthless. If the worst happens with property, such as the dwelling burns to the ground, the land has an intrinsic value that is much harder to destroy.
That’s the base reason banks are happier lending against property than shares.
Property gearing never really goes off the boil. (An obvious exception at the moment is Victoria, as investors react to massive land tax hikes and are selling in waves.)
But when it comes to gearing into shares, timing requires careful consideration.
Some decisions don’t grow out very quickly.
Thankfully, #3 buzz cuts are only a few weeks. And daughters traumatised by their brother’s immature actions sometimes just need some quality ice-cream.
Bruce Brammall is the author of Mortgages Made Easy and is both a financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au.