Gearing can help you reach your long term goals sooner.
Gearing comes into its own if you either need, or want, to accumulate wealth faster than you can by more conventional means. There is no point gearing just for the sake of it. You need to have a definite objective in mind in terms of your own wealth creation and long term income requirements (as a supplement to or a replacement for your income from work).

Gearing is one of a number of tax-effective investment strategies available, and should not be seen as a substitute for other wealth-building methods such as superannuation.

Ideally, gearing should fulfill a specific role in your overall plan and complement you other investment activities.

Remember to spread your investments
Another important investment principle is diversification. You should never rely exclusively on one investment, or one type of investment, but should aim for a balance across the main asset sectors. Not just shares and property but also more defensive assets such as cash and fixed interest.

Because gearing is best suited to growth assets - shares and property - a geared portfolio should not include much fixed interest or cash investments. And because there are restrictions on the tax advantages if you gear into international investments, a geared portfolio will usually be concentrated on Australian assets.

To achieve a diversified investment portfolio, you will need to hold your cash, fixed interest and international investments elsewhere in your financial plan. You should seek professional advice about the investments that are appropriate to your circumstances.

Above all, you should never gear an investment simply to gain the tax deductions. It makes no sense to plan to make a loss unless you have a very strong expectation of turning it into a profit in the future. Any investment should be attractive and appropriate in its own right, regardless of how you fund its purchase. In the next section we see why sharemarket investments (both direct share investments and managed share funds) are ideally suited for gearing.

Sharemarket investments - ideal for gearing
The ideal investment for gearing - and negative gearing in particular - is one which you expect to grow in value over time, and also to generate an increasing income return. For that reason, gearing should only be considered for growth investments

Often the most suitable growth investments are shares and property. Both have a history of long-term capital growth, and both deliver a potential rising income stream (either as dividends or rent) over time.

While investing directly into property has its attractions, there are even better reasons for gearing into shares and property securities. Included in this category are:

•  Australian company shares listed on the stock exchange,
•  Managed shares funds, which may be unlisted or listed on the stock
   market,
•  Listed property trusts, which hold property assets but perform somewhat like shares.
•  Managed property security funds, which are unlisted funds which themselves invest in listed property securities, and
• Index share funds

These investments offer advantages over direct property investment, the most important of which are:

•  Performance
•  Liquidity
•  Ownership costs
•  Accessibility
•  Tax advantages