MLC does the numbers on gearing - 21 July 2005

Thursday, 21 July 2005

SYDNEY: With gearing commonly being used by Australians to leverage their wealth accumulation strategies, MLC has done the numbers on gearing to test if this strategy really does help investors grow their wealth.

Using Australian sharemarket data since 1910, MLC modelled lump sum gearing strategies over various rolling time periods.

The results found that:

  • Gearing added value to an investor's portfolio in the majority of occasions
  • The longer the time period gearing was used, the greater the likelihood of success
  • The longer the time period gearing was used, the greater the potential upside.

"Gearing an investment portfolio requires a client to take additional risks and we wanted to test whether or not gearing into sharemarkets is beneficial enough to justify these additional risks," said Andrew Lawless, MLC's Technical Services Manager.

"To do this we compared the performance of a 50% gearing strategy* with a non-geared investment.  We found that over a 10 year time period gearing added value in 81% of occasions and over a 20 year time period, gearing strategies added value 90% of the time."

Mr Lawless said that once it had been established that gearing added value to an investor's portfolio, they then calculated how often the geared portfolio outperformed a non-geared portfolio by 20% or more.

"The results showed that a 50% gearing strategy over 20 years not only beat no gearing on 90% of occasions, it also beat no gearing by 20% or more on 72% of occasions."

"These results are favourable and we believe they provide sufficient evidence that gearing justifies the risks when used by investors with a suitable time horizon and risk profile.

"If investors are interested in gearing their investment portfolio, they should seek professional advice from a qualified financial planner," said Mr Lawless.

*Assumes an individual invested $100,000 of their own money, plus $100,000 of borrowed money.


Further information:
Stacey Mitchell
Corporate Affairs Manager
02 9966 3035
0400 305 446


Who is MLC
MLC is the wealth management division of the National Australia Bank. It is comprised of a group of companies, all of which are subsidiaries of the National Australia Bank.  MLC provides funds, platforms and services that support the provision of quality financial advice and help people realise and protect their lifestyle goals.  Through a vast network of financial advisers, MLC provides quality financial planning services, wealth creation (investments, private banking), wealth protection (insurance) and superannuation solutions to individual investors and corporate customers.  MLC also provides corporate and institutional customers with out-sourced investment, superannuation and employee benefit solutions. MLC manages more than $78 billion on behalf of individual investors and corporate customers in Australia (as at Dec 2004).

 

* The information contained in this media release is for media advice purposes only. The contents are true and correct at time of publishing/issuing, however may change over time. For further information about NAB products or rates, please go to Interest Rates, Fees & Charges