New report shows borrowing to buy shares produces best return

Borrowing to buy shares is usually criticised when markets correct and this time is no different.

Some experts have warned about the dangers of gearing strategies – after the market fell by almost 1,800 points! Their arguments are well-meaning but dangerously simplistic and late.

First things first: Alpha is against borrowing to buy speculative shares, borrowing too much relative to equity, or having too short a time horizon.

Call us old-fashioned, but we like long-term investment strategies based on blue-chip stocks with good yields.

New research from the ASX and asset consultancy, Russell, confirms our approach.

“Borrowing money to invest (i.e. leverage) over the past 10 years has effectively increased the after-tax return of both Australian shares and residential property,” the Long-Term Investing Report says. “The increase in performance of the two asset classes has more than offset the borrowing costs over the 10-year period.”

As the chart below shows Australian shares produced the highest annual return over 10 years (13.3%) and 20 years (12.5%).

Importantly, returns were significantly boosted by gearing strategies for both low and high income earners.

For a summary of this important research by ASX and Russell click here

To see media reports on the research click here