Reader quiz: spot the error in long-term gearing logic

April 9th, 2009

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Today, we will try something a little different. Instead of doing the talking, we will pose a little investment quiz and let our readers do the talking. So, here it is…

Consider this flow of logic:

  1. In the long run, due to inflation, the price of assets (e.g. property, stocks, managed funds) will appreciate.
  2. Gearing (e.g. margin lending, line of credit, investment loans, geared managed share funds), will magnify the returns due to price appreciation.
  3. Therefore, one should use gearing to maximise one’s long term wealth

Long time readers of this publication may have already spotted the error in this flow of logic. But we have come across many people who are close to retirement applying this logic on their retirement funds!

So, our question to our readers are: what is the error with this logic?

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