1 post tagged “shares”

Marky writes - What is the ideal gearing ratio?

The right gearing is one that provides the best balance between ROI effectiveness and risk. It's particular to the particular asset class, quality of the assets and the comfort level of the investor.

Stock, being of higher liquidity, is more volatile than property. Shares will rise and fall daily. They can rise or fall steadily over time. They can be frozen out of the market, and they can rise or fall dramatically in a matter of minutes. The risk on them is pretty severe and margin lenders will place a margin call ratio of between 70% on good stock and 0% for dodgy stock (meaning they wont consider them as security at all). This means once you owe more 70% of the stock they'll sell it from underneath you, pay out your loan and charge you for the privilege. So the appropriate level of gearing against a stock portfolio depends on the types of stock you want to purchase. Personally, I had only good shares in my portfolio and I geared to 60%.

Property is a different fish. It's highly illiquid. It's value is stable and generally assumed to increase over time. (Of course recent trends in Sydney have proved this wrong). Lenders are happy to place a higher level of gearing against such a stable asset class. Around 80% is the figure lenders are happy with. Of course, this too is tempered with the quality of the property. Crap houses in bad suburbs will afford less lending leverage. Big mansions in fancy la-di-da suburbs can be geared to the teeth (if you can afford it). The great thing about property is that you can borrow against particular properties, not just your portfolio overall. You can gear against as much or as little of the property portfolio as you wish.

The question of investor age often comes into the equation. The idea is that the younger the investor, the more risk they should acquire. If the risk pays off then the early capital growth will contribute favourably to the portfolio over the coming decades of the investor's life. If it fails, then there's plenty of time to try again. Every investor should be aware of this in order to find the level of risk they're comfortable with. However, I don't think this outlook should prescribe a gearing level for anyone based on their age. I think younger investors will naturally feel more comfortable with a riskier approach.

Let me know what you think. And while you're at it let Marky know too. :)