When it comes to building your wealth through investments, understanding the nuances of geared and non-geared investments is essential. Each option comes with its own risks, rewards, and suitability for different types of investors. This article explores the key differences, associated risks, and potential returns for both strategies, helping you make informed decisions based on your financial goals.

 

What is a Geared Investment?

A geared investment involves borrowing money to invest, often amplifying both the potential returns and associated risks. This strategy is common in areas like real estate and stock market trading, where the borrowed capital (leverage) is used to increase the scale of investments. There are also investment options available where the gearing occurs within the fund itself, meaning the borrowing is undertaken by the fund rather than by you personally.

For example, imagine you take out a loan to invest in a property. If property values rise, you can produce returns not just on your initial deposit but also on the borrowed funds. However, if property prices fall, your losses are magnified.

 

Advantages of Geared Investments

• Higher Potential Returns: By leveraging borrowed capital, you can potentially earn a greater return on investment than with your own capital alone.

• Tax Benefits: Interest paid on investment loans can often be tax-deductible, reducing the overall cost of borrowing.

• Asset Accumulation: Gearing allows you to accumulate larger assets than you might manage with non-geared alternatives.

 

Risks of Geared Investments

• Amplified Losses: While gearing enhances your gains during market upswings, it also magnifies your losses during downturns.

• Debt Obligation: Borrowers are obligated to repay loans regardless of how the investment performs, adding pressure during periods of poor returns.

• Dependence on Market Timing: Success in geared investments often relies heavily on accurate market timing to buy and sell assets.

 

What is a Non-Geared Investment?

A non-geared investment involves using your own capital to invest without relying on borrowed funds. Common examples include directly purchasing shares or investing in managed funds using existing savings.

Non-geared investments are typically perceived as a more conservative approach compared to gearing. They provide growth opportunities while limiting exposure to borrowing-related risks.

 

Advantages of Non-Geared Investments

• Lower Risk Exposure: Since no borrowed capital is involved, you’re only risking your own money, which limits potential losses.

• Stress-Free Investing: Without the commitment of loan repayments, you can focus on long-term growth rather than short-term market fluctuations.

• Ease of Management: Non-geared investments are often simpler to manage, making them suitable for new or risk-averse investors.

 

Risks of Non-Geared Investments

• Limited Returns: Without leverage, your returns will solely depend on the capital you invest, which might slow down your wealth-building process.

• Missed Opportunities: During booming markets, you might not capitalise as much compared to geared investors.

 

How to Decide Between Geared and Non-Geared Investments

The choice between geared and non-geared investments depends on several personal factors, including your risk tolerance, financial goals, investment experience, and current market conditions.

 

Consider Geared Investments If

• You have a high risk tolerance and can endure market volatility.

• You’re looking for accelerated growth and can handle potential amplified losses.

• You have a stable income to comfortably meet loan repayments, even during downturns.

 

Consider Non-Geared Investments If

• You prefer a conservative approach to investing and want to minimise risk.

• You are working towards long-term financial goals and value steady growth.

• You’re new to investing and want to build your portfolio systematically without the complexities of leveraging.

 

Balancing Risk and Return with Diversification

Whether you choose a geared or non-geared strategy, diversification remains a key principle for mitigating risk. By spreading your investments across asset classes, industries, and geographies, you can cushion the impact of market fluctuations and reduce your overall exposure to risk.

For instance, a mix of property investments, shares, and managed funds can create a balanced portfolio that aligns with your preferences and goals.

 

Final Thoughts

Geared and non-geared investments offer unique pathways toward financial growth, each with its own set of risks and rewards. While geared investments present opportunities for significant returns, they require a higher appetite for risk and careful planning. On the other hand, non-geared investments offer a more stable and predictable approach, ideal for those prioritising financial security over rapid growth.

Remember, whether you’re leveraging borrowed funds or investing your own, the key to successful investing lies in informed decisions and a clear strategy. Be proactive, stay informed, and watch your portfolio grow.

If you would like to improve your current investment strategies or are looking to start your investment journey, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.

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