History shows gearing works
Gearing is successful in a “majority of occasions” as an investor strategy to add value to a portfolio, according to new research by MLC.
MLC’s research also found that the longer the time period of a gearing strategy the greater the likelihood of the gearing’s success.
The research methodology involved modelling lump sum gearing strategies over various rolling time periods, using Australian sharemarket data since 1910.
The performance of a 50 per cent gearing strategy was compared with a non-geared investment, assuming an individual invested $100,000 of their own money plus $100,000 of borrowed money.
MLC technical services manager Andrew Lawless said the research “provides sufficient evidence that gearing justifies the risks when used by investors with a suitable time horizon and risk profile”.
Lawless said gearing was found to add value in 81 per cent of occasions over a 10 year time period, and 90 per cent of occasions over a 20 year time period.
Calculations on how often a geared portfolio outperformed a non-geared portfolio by 20 per cent or more also worked out favourably for investors, he said.
These results revealed that a 50 per cent gearing strategy over 20 years not only beat no gearing on 90 per cent of occasions, it also beat no gearing by 20 per cent or more on 72 per cent of occasions.
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