Investment planning

When to invest? One of the key rules of investing over the long term is: the length of time in the market is far more important than trying to pick the best time to invest. For example, if by trying to pick the 'best times', you missed out on the 10 best performing months from 1978 to 1998, your investment would be worth as little as a third of what it would be worth if you were invested for the full 20 years. In other words, stay in through the ups and downs, because you never know when the highs will be. 

A key thing to remember is that your investment portfolio matches your risk profile, and this is where CA assists you! There is a trade-off between risk and return. Generally, the greater level of risk you are prepared to accept, the higher the potential returns. One way to consider risk is by understanding the volatility of returns associated with different investment types. For example, shares are generally more volatile than bonds and the greater the volatility, the higher the fluctuations in returns from year to year. 

Through diversification you can tailor your investment to match your "risk comfort level". 

Are your investment strategies tax effective?

Different types of investments are taxed in different ways and you need to be aware how this can affect your returns. Shares and property investments enjoy tax benefits, while there are no tax advantages for cash. 

Dollar Cost Averaging 

The investment principle, Dollar Cost Averaging, shows that sticking to a long-term philosophy is in an investor's best interest. Simply, Dollar Cost Averaging says that in both good and bad economic times, you should religiously keep regular and yearly contributions going into unit linked investments. Don't be discouraged by short-term drops in unit prices. Remember, when the market is up, units are worth more and when the market is down, units are again cheap to buy. So, when the market is down, investors benefit from buying units at a cheap price. What the above clearly demonstrates to investors, whether they have a lump sum of money to invest or wish to make regular savings is that:

There is no sense in waiting until you feel the time "right" to invest because the chances are you could miss the best time, and;
If you invest regularly over the longer term it doesn't matter if the market moves up or down. In fact, you could benefit from downward movements.

Investment gearing strategies 

Gearing simply means borrowing to invest. By adding borrowed funds to the investor's own funds, a greater amount is available to invest. Gearing also involves a higher risk, especially since the borrowing accelerates the potential gains or losses.

Negative gearing arises when interest on funds borrowed exceeds the net income obtained from the investments, ie: you will need to have excess income available to meet the shortfall. This shortfall can be used to offset income from other sources for tax purposes, thus reducing your tax liability.

While many people are familiar with the benefits of negatively gearing an investment property, not as many people are aware that you can apply the same principles when investing in the Australian sharemarket.

Many thousands of investors have now recognised the benefits of borrowing to invest in the sharemarket and are using Margin Lending facilities to assist in creating greater wealth for their future.
The objective of gearing is that over time the rise in capital value of the underlying investments will (after payment of any capital gains tax upon redemption), replace the accumulated funding losses you have incurred over the years and generate a greater capital gain than would be the case if you have invested only your saved capital.

As a result gearing can be an effective long term strategy for an investor who can bear the additional risk involved. The investment term of a geared portfolio should be for a minimum term of 6 -7 years.

Risks Associated with Gearing 

Gearing will increase a portfolio's risk profile. By increasing the total capital invested and incurring funding costs, gearing accelerates the potential for capital gains and for capital losses. Gearing is generally inappropriate for individuals who do not have sufficient cash to meet borrowing costs. Only investors who have the financial ability to absorb the effect of potential falls in investment values, as well as increased cost of interest payments, should gear their investments.

An investor needs to have a taxable income to claim interest deductions against and the ability to service the debt. This requires security of employment. Loss of employment could cause cash flow problems which might necessitate liquidation of the whole or part of the portfolio at a time when the market has depreciated in value.

You would then crystallise a loss on your investment.
Gearing requires appropriate insurance cover for loss of income due to sickness, accident or death.

If your interest rate is not fixed for the whole term of the investment, interest rates may increase which will increase funding costs and place a further burden on your cash flow.
 

Taxation 

In the process of borrowing to finance your investments, you may be unable to deduct the hole of the interest expense incurred (section 79D of the Tax Act.)