For sophisticated investors looking to enhance long-term portfolio growth, conventional diversification is only part of the equation. A more advanced strategy, known as internal gearing, offers a powerful way to amplify investment returns. By strategically using leverage within managed funds or Exchange Traded Funds (ETFs), you can potentially achieve accelerated wealth accumulation.
This article explores the concept of internal gearing, focusing on how geared index funds can be used to maximize returns. We’ll cover the inherent risks and the importance of aligning this strategy with your personal risk profile. For many investors, incorporating a component of internal gearing within a broader, tailored portfolio—like those designed by EPG Wealth—can provide a meaningful boost to overall performance while remaining prudent.
What is Internal Gearing?
Gearing, or leverage, is the practice of borrowing money to invest, aiming to generate investment returns greater than the cost of borrowing. Unlike direct gearing, where you might take out a personal loan or margin loan, internal gearing involves the borrowing occurring within the investment product itself—managed by the fund provider. You are not personally liable for the debt, and there are no margin calls.
Typically, a geared fund maintains a moderate Loan to Value Ratio (LVR) such as 30%-40%, providing extra market exposure and the possibility of higher investment returns than available from investing without gearing. This structure enables investors to benefit from leverage in a more contained, accessible way.
Maximizing Returns with Geared Index Funds
Geared index funds combine the diversification of broad market exposure with the amplifying effects of leverage. This means if markets move upward over time, the fund aims to deliver heightened returns compared to a traditional ungeared index fund. When integrated thoughtfully, this approach can contribute to greater long-term wealth accumulation.
Understanding the Risks of Gearing
While gearing can increase potential returns, it also amplifies potential losses if markets fall. This risk means internal gearing is not suitable for everyone. It’s essential to have a long-term investment horizon and a risk profile comfortable with higher levels of portfolio volatility. Selling a geared investment in a market downturn can result in locking in losses.
Matching the Strategy to Your Risk Profile
The decision to use internal gearing should be guided by a clear understanding of your personal financial situation, investment goals, and risk tolerance.
Key considerations include:
- Investment Horizon: Gearing is designed for long-term investors who can withstand periodic downturns and remain committed to the strategy over time.
- Portfolio Diversification: Internal gearing is most effective when it’s one element of a diversified portfolio, not the sole strategy.
- Understanding Volatility: Be prepared for larger swings in your portfolio’s value, as the effects of gearing magnify both gains and losses.
The EPG Wealth Approach: Gearing as a Portfolio Booster
At EPG Wealth, we see internal gearing as one tool within a wider set of portfolio strategies. Instead of relying entirely on gearing, we advocate for its use as a strategic allocation tailored to your risk tolerance and financial goals. This means keeping the geared portion limited—often as a smaller allocation—while the remainder of your portfolio maintains stability through diversified, less volatile assets.
This approach allows you to balance risk and reward, with the geared component boosting long-term growth potential without compromising your overall financial security.
The Final Word on Internal Gearing
Internal gearing offers a sophisticated way to tap into the long-term growth of equity markets. Used wisely—within a tailored portfolio and with an understanding of its risks—it can help accelerate your wealth accumulation journey.
Ultimately, internal gearing isn’t right for everyone. But as part of a diversified portfolio managed by EPG Wealth, it can be a powerful element that elevates overall performance and helps you work toward your long-term financial goals.