Bullish confidence pays

AGGRESSIVE investors have enjoyed huge returns from the share market in recent years, but their strategy is risky.

Bullish confidence pays

AGGRESSIVE investors have enjoyed huge returns from the share market in recent years, although adopting their strategy in the current climate may be hazardous to your financial health.

People who followed the simplest rule of aggressive investing - gearing - have made gains double the size of the booming share market.

Gearing, or borrowing to invest, magnifies both gains and losses because it gives an investor a bigger asset base.

It can grow wealth much faster, but if there is a total collapse of the investment to zero the investor loses all their money and still has to repay the loan.

Data by research house Morningstar shows a majority of geared Australian share funds - which typically add $1 of borrowed money to each $1 a investor puts in - delivered investors a 50 per cent-plus return in the 12 months to September 30.

Returns for the past three years from these funds averaged between 29.6 per cent and 48.6 per cent a year.

There has only been one down year this decade for geared Australian share funds - 2002.

Someone who invested at the start of that year would have lost 31 per cent of their money in just 12 months, but more than recovered their money the following two years.

The best consistent performer has been Colonial's CFS Geared Share fund, which has delivered investors annual returns of 52.8 per cent for the past 12 months, 48.6 per cent for the past three years and 48.4 per cent for the past five years.

Morningstar communications manager Philip Gray said there had been strong growth in the number of geared share funds on offer thanks to the share market boom and investors' willingness to take more risk.

"If there's a bull run in a particular asset class, you will see funds launched to try and take advantage of investor interest,'' he said.

"A bull market is wonderful for shares and wealth creation, but it is not good for teaching people about risk.''

Geared funds are just one form of aggressive investing. People can borrow money against their home equity to invest in the market or in property, they can borrow against existing shares, and there are a range of products that give investors a lot more bang - and bite - for their buck.

Macquarie Private Wealth state manager Kieran Purcell said it was important to keep in mind that any investment that could help to amplify returns could also potentially amplify losses.

"We would always recommend discussing investment decisions with a qualified financial adviser first, who can make sure you are aware of any potential downsides before you start,'' he said.

Bourke Shaw Financial Services principal Lawrence Orlando said aggressive investing was not only an option for experienced investors.

Beginners could also use it effectively to create long term wealth, he said. "When considering implementing any aggressive investments it is important that the recommendations are tailored to the investor's specific goals.''