Investors fail gearing test
Investors have failed to grasp the concept of gearing, even though the majority of wealthier clients gear into their own homes, according to former FPA president Russell McKimm.
Investors have failed to grasp the concept of gearing, even though the majority of wealthier clients gear into their own homes, according to former FPA president Russell McKimm.
The D&D Tolhurst director told the Gearing and Investments Conference in Sydney yesterday that people treat their property investment differently to their other investments.
“It is an investment that the owners don’t usually sell when the market is down. But the same investor will readily do that with shares and other non-property style investments,” McKimm says.
McKimm says there is a need to get people to understand the risks associated with geared investing outside the residential home.
He says the best shares for gearing are the best ones for the investor and while this may sound simplistic, the focus should be on picking those shares which sit most comfortably with an investor.
“The selection should be no different in a geared portfolio than in any other portfolio, so it is a matter of determining a client’s needs and risk profile before heading down that path,” McKimm says.
“Many people do not understand volatility until they have money in the market and something goes wrong. Risk profiling is about jolting people into seeing what may go wrong and preparing them for those days.”
At the same time, margin loans also provide extra benefits since other securities are not tied into the loan, investors are focussed on the real value of the investments and poor investments are easily highlighted.
However McKimm says margin lending requires a significant input of stock or cash and interest rates are generally higher.
“The biggest issue though is that of time in versus timing with long term records showing that time in the market is better spent than compared to constantly trying to pick the trends,” McKimm says.
AUTHOR
Jason Spits
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