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Case studies

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What the right strategy can achieve

There are a number of investment strategies that can help you achieve your goals. The following case studies provide just two examples.

Case study 1: Funding a child's education 
Case study 2: Borrowing to invest (gearing)

Case study 1: Funding a child’s education 

Dean and Jenny are in their 30s and have a four-month-old baby, Alice. To ensure they’ll be able to afford Alice’s education, Dean and Jenny decide to start a dedicated savings plan. They estimate that by the time Alice is 11 they will need to have saved $84,000 (in today’s dollars) to meet her annual private high school fees of around $14,000 for six years.

Dean and Jenny choose a managed fund with a regular savings plan option. They kick off their savings with a lump sum of $5,000 and decide to invest a further $460 every month. Based on projected earnings of 7.7% pa and taking inflation of 3.0% pa into consideration, this means they should accumulate around $86,000 in 11 years.

If Dean and Jenny keep the savings plan going for the entire 11 years, they will be well placed to fund Alice’s private high school education when the time comes.

By maintaining the discipline of making monthly investments without touching these savings, Dean and Jenny will reap a great reward from compounding interest. This occurs when you leave the interest you earn in the account, so that you begin earning interest on your interest. The effect may be small at first, but if you leave the interest to accumulate in the account it can gradually snowball over time and significantly boost your savings.

Notes
  1. The estimated balance required and estimated school fees are in today’s dollars.
  2. The projected earnings of 7.7% are after fees and before taxes have been taken into account. No allowance has been made for taxation, including capital gains tax on investment earnings. Please remember fees and taxes have an impact on long-term returns.

Case Study 2:  Borrowing to invest (gearing)

Sarah wants to save for a deposit on her first home. She already has savings of $40,000 and decides to take out a margin loan of a further $40,000. With double the money to invest, she has the potential to earn a greater return than if she just invested her own money. However, Sarah understands that borrowing to invest (a strategy known as gearing) also means she has the potential to lose a lot more – and if her chosen investments don’t perform well, she will have to repay the loan regardless.

Sarah chooses to invest her money in a managed fund. As you can see in the table below, based on an annual return of 9%, at the end of seven years her investment would be worth around $71,500. If she’d not borrowed any funds, she’d have around $64,500 using the same investments.

Strategy 1:
Savings only ($)
Strategy 2:
Savings and loan ($)
Sarah's savings

40,000

40,000

Loan amount

0

40,000

Total Invested start Year 1

40,000

80,000

Investment balance end Year 7*

64,547

111,610

Less balance of loan to be repaid

0

40,000

Net investment balance**

64,547

71,610



Notes
* Figures shown after tax and loan interest costs have been paid. Assumes the same growth investment for each strategy with an average return of 9% pa (4% income plus 5% growth, with a 50% franked component of income return). Return assumes dividends are reinvested, a marginal tax rate of 38.5% (including Medicare), and an average margin loan interest rate of 8% pa. Excludes brokerage and any other fees. Inflation has not been considered. Over long periods, inflation can reduce the purchasing power of your money.
** This example is for illustrative purposes only. It does not represent the past or expected performance of any particular fund, portfolio or investment. Any changes to taxation, loan interest rates, investment returns, or the other assumptions will affect the outcome.

Sarah’s strategy is easy and tax-effective. Even after allowing for the interest payments and the final repayment of the loan, she is $7,000 ahead. Because she is borrowing for investment purposes, she may also be able to claim the interest paid on her loan as a tax deduction, further increasing the value of her strategy.

It is important to remember that borrowing to invest does involve significant risks. Although it has the potential to magnify gains, it will also magnify any losses suffered if the value of your investment falls. Shane Keary can help you decide whether a geared investment strategy is appropriate for you.

Disclaimer
These case studies are for illustrative purposes only. They are not to be taken as personal advice and are intended to provide general information only. They do not take into account your individual needs, objectives or personal circumstances. The information is based on Financial Wisdom Limited’s understanding of the relevant Australian laws at 17 November 2011. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. Past performance is no indication of future performance. Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138.
This web page has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom advisers are authorised representatives of Financial Wisdom.
Information in this web page is based on regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document.
This web page may contain general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

Sound advice is the key to success

As you can see from these case studies, a carefully thought-out strategy could make all the difference to achieving your goals.

Shane Keary offers knowledge, expertise and experience. We’ll take the time to understand your individual circumstances and your goals, and then recommend appropriate investment strategies to help you achieve them.

To find out how we can help you build your wealth through investing, call  (03) 9533 0600 or email us.