In Australia we have come to accept that if we want to buy a home in the future we will need to borrow to buy it. Borrowing for investment purposes is a little different. The reason its different is because borrowing for investment purposes is not so much a given but a choice we make.
The role of a financial adviser is to do just that…advise. It would be derelict of a financial adviser to not let a client know if they didn’t agree with their intended course of action. Sometimes that means telling a client they don’t agree with their reasons for borrowing for an investment.
Borrowing for an investment has many benefits. Some of the benefits include:
- The potential to increase your returns
- Allowing you to diversify your portfolio
- Allowing you to reduce tax
Whilst borrowing can do all of the above, can also magnify your losses. If the market falls, the results can be disastrous. Just ask clients of Storm Financial or Opes Prime. Worst case scenario could be that you end up owing moneyfor a worthless investment!
Given the benefits and risks, PFG would suggest borrowing out of necessity. The risks are far too great to contemplate borrowing for any other reason.
You’re probably wondering what ‘out of necessity’ means.
To explain this you need to know one of the fundamental objectives of financial planning. The fundamental objective I am referring to is the process of understanding:
- ‘Where you are today’ (i.e. current assets, liabilities, income and expenses),
- ‘Where you want to get to’ (i.e. when you want to retire and how much you need to retire on)
- The best way of getting you there
If, after exploring all your options, we determine that borrowing is the only realistic chance you have of getting from where you are today to where you want to get to, then that’s when you NEED to borrow… and …when a Financial Planner would suggest you borrow.
