What is gearing?

Gearing is borrow money to invest.

Gearing may be used to accelerate the process of wealth creation by allowing an investor to make a larger investment than would otherwise be possible. The borrowed money can be invested in many ways, including shares, property and managed investments.

Gearing can help build wealth faster. It can be tax-effective and you can repay the loan by using income from your investments. The downside, of course, is that it can enhance your losses if your investments fall in value.

For gearing to be successful in the long term, your investments need to generate a total return (income and capital growth) that exceeds the after-tax costs of financing your investment (including interest on the loan).

Gearing is considered to be an effective long term strategy because experience has shown that over the long term, growth based investments can deliver the higher potential returns required. However, investments suitable for gearing are generally more volatile than others, and can also lose value.

Therefore, you need to be able to retain the investment during protenial short-term market declines, in order to obtain the benefits of long term growth.

Benefits of gearing

Some benefits of gearing include:

1. Potential for increased capital gains and diversification.
Gearing increases the size of investor's portfolio by allow them to purchase additional investments with borrowed funds.

2. Taxation.
There are some additional tax benefits associated with gearing, under current legislation, interest payments on money borrowed to invest, together with ongoing expenses, can be claimed as deductions against your taxable income.