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Ambitious young investors turn to shares

12 July 2017 |Investor insights
Discover how gearing can be applied to the right client's investment strategy to support their financial goals on a chart background.

Ambitious young investors turn to shares

12 July 2017 |Investor insights

A recent report from the ASX has shown that the number of young investors using shares is on the rise. In fact the report has shown that the number of investors aged 18 to 24 has doubled since 2012.

According to the report, young investors are turning to equity investments to reach three primary goals:

1. Accumulating wealth
2. Saving for a home deposit
3. Saving for travel

Source: http://www.asx.com.au/education/2017-asx-investor-study.htm

This trend may be caused by the fact that many young investors feel that they are being squeezed out of the property market. This means that shares are the preferred method for wealth accumulation considering they have a much lower initial outlay to get started when compared to property. Others are using shares as a tool to help save for a home deposit or for their next trip. Another contributing factor is low interest rates, which makes saving through a traditional cash account less effective and gearing into shares through a margin loan more attractive.

The success of property investing can be attributed to the effects of gearing into a growth asset. Investors generally put down a 20% deposit and borrow the remaining 80%. For example an investor may put down $100,000 and borrow $400,000 to purchase a $500,000 property. If the property grows on average at 10%pa the client makes an average profit of $50,000 per year on their original $100,000 investment. For an investment property, the owners can use the rent to help cover the interest expense and the interest may be tax deductable.

Young investors are pleasantly surprised to find that they can take a similar approach when investing into shares with a margin loan. Similarly, investors receive dividends instead of rental returns to help cover the interest expense and the interest is also potentially tax deductable given that the loan is used for investment purposes. Shares have a similar long term growth rate to property (11.3%pa vs 11%pa) Gearing into a growth asset such property or shares makes a lot of sense for a lot of the same reasons.

Long term asset class returns graph.jpg

With shares, investors can start with as little as $500 and look to invest regularly through a gearing plan. This is where investors make a contribution each month and use a margin loan to match that contribution and average into the market. New tools like the use of ETF’s also help, these allow investors to be diversified with ease and take out a lot of the complexity around equity investments. For younger investors, flexibility, low maintenance and low commitment has been the most attractive components to this trend.

Growing financial advice

This is also good news for advisers who are looking to grow their business by reaching millennials as well as children or grandchildren of their existing clients. Gearing into shares may offer a practical solution for younger investors looking to accumulate wealth, save for a home deposit or their next trip overseas.

In a digital age, millennials have been raised with an abundance of quick information. They prefer the flexibility to move their money around or have the flexibility to travel without being tied down to a long term financial commitment. Shares act as a great alternative given the lower transaction costs and higher liquidity.

According to the ASX report, the top 3 reasons for using financial advice are:

Obtain advice tailored to their personal circumstances
Get investment ideas
Help them diversify their portfolios and minimise risk

Financial advisers can look at margin lending for suitable clients as it may help them reach personal goals such as saving for a home or their next trip. It allows advisers to apply an investment strategy rather than just stock selection to stand out from their peers.

Gearing also allows investors to add diversification to a portfolio, meaning they can use funds to buy a broader range of shares to spread their exposure.

Just like investing to borrow in property, borrowing to invest in shares also offers investors potential access to tax efficiencies.

Most importantly it allows them to leverage into a growth asset.

To discuss how your clients can make the most of gearing, call us on 1300 307 807.

This information is correct as at 12 July 2017.

Gearing involves risk. It can magnify your returns, however it may also magnify your losses.

Leveraged Equities Limited (ABN 26 051 629 282 AFSL 360118) is a subsidiary of Bendigo and Adelaide Bank Limited (ABN 11 068 049 178 AFSL 237879).

Information is general advice only and doesn't take into account your personal objectives, financial situation, or needs. The views of the author may not represent the views of the broader Bendigo and Adelaide Bank Group of companies (“the Group”). This information must not be relied upon as a substitute for financial planning, legal, tax or other professional advice. You should consider whether or not the product is appropriate for you, read the relevant PDS and product guide available at www.leveraged.com.au, and consider seeking professional investment advice. Not suitable for a self-managed superannuation fund.

Examples are for illustration only and are not intended as recommendations and may not reflect actual outcomes. Past performance is not an indication of future performance. The information provided in this document has not been verified and may be subject to change. It is given in good faith and has been derived from sources believed to be accurate. Accordingly no representation or warranty, express or implied is made as to the fairness, accuracy, completeness or correction of the information and opinions contained in this article. To the maximum extent permitted by law, no entity in the Group, its agents or officers shall be liable for any loss or damage arising from the reliance upon, or use of the information contained in this article.

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