Investment strategies

Now that you know the essentials of investing, it’s time to look at some advanced investment strategies. These strategies – when used the right way – can really give your investments a head start.

We recommend you speak to a qualified financial planner before implementing any of these strategies.

Dollar cost averaging

Put simply, dollar cost averaging is where you continue to buy something, whether the market value of that “something” is at its highest or lowest cost. You don’t wait for the “right time”. The idea is that as you continue to invest regularly over time, this will tend to “average” the cost of your investment. 

An example: Alex is a single 27 year old who would like to start a managed fund.
Let’s assume Alex invests $1,000 into an Australian equities managed fund where the prices have been fluctuating. If she invests $1,000 immediately, she will purchase units at $8 per unit. This will provide her with 125 units. However if she invests $200 a year over 5 years in a fluctuating market she will receive 141.51 units (at an average price of $7.07 per unit) over the period.

So you can see by regular investing during the market fluctuations not only has she bought more units, the average cost of her units have dropped from $8.00 to $7.06.

Please note: This does not take into account any distributions paid during this period. This is a general illustration of possible strategies. You should seek advice from a professional financial planner on your own personal circumstances before making any investment decision.

Income splitting

This is a technique commonly used to reduce income tax. It is a simple arrangement whereby income is diverted to the partner with the lower marginal tax rate. Obviously, you can’t do this with your work income, but you can split the income from investments.

Before you do, it’s important that you set up the investment in the name of the person with the lower marginal tax rate (usually on a lower income). If this is not done at the start and you transfer the investment later, then you may trigger capital gains tax.

An example: Richard & Vicky are able to save income tax by splitting income from their investment by placing the investment in Vicky’s name.

*2006/2007 tax rates - includes Medicare levy but any entitlement to a dependent spouse rebate is ignored.
**To minimise risk of capital gains tax, the investment should start out in the name of the person on the lowest income.
 
In scenario 1, Richard and Vicky as a couple pay $12,045 in tax. When the investment is in Vicky's name, her total income increases but due to the Low Income Earner Tax Offset, her tax is $0. However, as a couple, their total tax is reduced by $2,520 (including Medicare).

Gearing

There are several types of gearing (borrowing to invest) and these include:

• Negative gearing – your investment income is less than your interest costs
• Neutral gearing  – your investment income is equal to your interest costs
• Positive gearing – your investment income is greater than your interest costs.

Positive or neutral gearing may not reduce your tax bill, but adopting it might put you in a better financial position.  Even after you've paid tax, you could be in a better position than if you had negatively geared the investment and received the tax deduction.

There are risks associated with gearing and it is not a strategy for everyone. It is usually used by moderately aggressive to aggressive investors. It is recommended you talk to a financial planner.

Margin lending

Margin lending allows you to borrow money to invest in securities and financial products. Depending on the product and the provider, these might include listed shares, fixed interest securities and units in managed funds. The money that you borrow is secured by the underlying investments.
 
Like most other loans, you have to pay interest on the amount borrowed under a margin loan. However, you may also be required to meet a “margin call” if the market value of the underlying investments falls below an agreed level. This might happen if there is a fall in the value of your investments, or if there is a significant fall in the market generally.
 
A margin call is essentially a demand that you increase the level of assets securing the loan. As a guide, you can typically borrow between 30% to 70% of the market value of your investments.  We recommend you talk to a financial planner and other experts such as accountants before adopting this strategy.

Mortgage & debt consolidation

This strategy looks at approaches that can potentially:

• help you manage your cash flow
• reduce your interest costs
• reduce the length of your loan
• allow you to invest to grow your assets.

You may be able to achieve one or more of the above by looking at the debts you have and working out:

• Are these debts deductible or non-deductible?

• Are the assets purchased with these borrowings appreciating or depreciating and can this be changed?

We recommend that you speak to a financial planner to identify how you can best achieve these goals.