BACK IN ACTION

Geared strategies have come a long way in the past few years, and with equity markets continuing to show strengthit's no surprise they're making a comeback. But does borrowing money to make money really pay off? Eliza Bavin explores.

- Eliza Bavin

As the old saying goes, 'you've got to spend money to make money.' And, as equity markets continue their strong run and global uncertainty calms, geared strategies have been making a comeback.

But for those thinking a geared strategy is a good way to make a quick buck, it's actually far more of a long-term play.

As Andrew Saikal-Skea, founder of Saikal-Skea Financial Advice, tells it, gearing - and specifically the use of margin loans - was a popular method of investing pre-Global Financial Crisis (GFC).

The problem that arose was many investors were taking out margin loans and investing the money into only a handful - if that - of major stocks. So, in the event that one or more of those stocks lost value, so too did the investor and the debt stacked up.

"Margin lending had two major elements that were highly problematic. One was that the interest rates to pay back on the loan were usually quite high," he says.

"The other issue was, if you're a really high-income earner or have other money sitting on the sideline, you can typically meet the margin calls, but for a lot of people, they didn't have enough money outside of the margin loan facility. What they would end up doing is then selling stocks at the bottom of the market, which is the worst possible thing you could do." Saikal-Skea says he avoids the use of margin loans as much as possible, as the risk is too high for most clients.

"I spend a lot of time now, when we eventually see margin loans pop up, unwinding them more than anything else," he says.

Saikal-Skea says when he deals with clients who are looking to take on more risk, his preference is to suggest using equity that the client already has built up in their home to invest.