Tom Scollon
Tom Scollon
Chief Editor

That is the question. Well at least one important question.

Many investors get locked into the routine of a strategy without really questioning is it relevant today and in these market circumstances. Yes we can be creatures of habit.

I like leverage – in many forms and investment classes. Although I have no gearing at the moment and this is the lowest rate of gearing I have had as far back as I can remember. There are a number of reasons for this.

I believe you only want to gear when opportunities abound. And right now I can’t say that I see much value in any market whether that is shares or property. Now I realise there is still a case to gear property in some situations but that is beyond the scope of this editorial.

But say for shares I believe one gears at the bottom of the market where there is much scope for increases. And as a market climbs higher so does the risk and this is the time to reduce gearing. In my view it is best to use gearing in an inverse manner to risk. High risk low gearing. Low risk high gearing:

click chart for more detail
click to enlarge

I would not gear at the moment for the long term. Not so much that we are at a market high but rather that the propensity for gain is not high – but the risk for a fall is still high. We are sort of ‘twixt between’ - sort of no-man’s land. The case is not clear cut. Should we see a decent market retreat then the one might relook at gearing.

There is also the risk of interest rates climbing higher and without getting into the pros and cons of ‘variable or fixing’ such uncertainty is only an added risk. If the prospect of a great return was more likely then we may accept some level of gearing at a higher interest rate.

The only caveat to the above is that I may look at gearing for short term trades. When we use derivatives we are gearing. If we are using money where the family home is security and we are using this for derivatives – as some people do – this is a highly toxic mix!

So there is ‘no hat fits all’ when it comes to gearing. So the above is not a finite answer on the subject but rather some issues one might contemplate in the decision making process.

Enjoy the ride

Tom Scollon

Chief Analyst