Smooth investing for rough times
The current volatile sharemarket climate, a lack of savings to invest, the complexities of borrowing to invest; these are all working against the average investor trying to take steps to build an investment portfolio at the moment.
However, by combining a few sound investing principles, some new investment products and discount broking opportunities, investors can be on the road to a substantial investment portfolio without undue risk.
Two key methods of reducing risk in the current volatile sharemarket environment are dollar cost averaging and portfolio diversification. The easiest way for investors to combine these two strategies is by contributing to a managed fund on a monthly basis with a margin lender making an approximate equal contribution to your investment. The investment is spread across different asset classes and the investment is averaged in over the period in which the investments are made ie the investor is not risking mistiming the market with their entire investment commitment. Both methods also reduce the risk of a margin call.
The investment approach that allows you to achieve this is ‘instalment gearing', currently offered by Colonial, HSBC and Macquarie. The Colonial option requires building up to a loan of at least $20,000, has minimum initial and monthly drawdowns and restrictions on the number of managed funds you can invest in. The HSBC and Macquarie products have fewer restrictions in terms of drawdown limits and the number of funds in which you can invest. Many other margin lenders are considering introducing this product.
Instalment gearing can generally be started with as little as $1,000 from the investor and $2,000 from the lender. Monthly contributions can be from $250 from the investor and $500 from the lender with interest being paid upon the outstanding loan balance monthly in arrears. These amounts will vary depending upon the lender you sign up with. Depending upon your circumstances, interest paid on the loan balance may be tax deductible, however please consult your accountant or adviser.
There are an increasing number of brokers rebating entry fees (up to 4%) on entry into managed funds. Investors can request managed fund prospectuses from the likes of Neville Ward Direct, Comsec, E*Trade, Merrill Lynch HSBC, Tradingroom.com.au, InvestorWeb, TD Waterhouse and YourProsperity and send these off to Colonial, HSBC or Macquarie to begin building a diversified geared portfolio at reduced entry fees.
While this represents an excellent cost-effective strategy to kick start an investment portfolio, investors need to be aware that gearing can accelerate returns as well as losses. Additionally, investors need to have available cashflow to meet interest payments and possible margin calls.