Having been an investor for over a decade, I've seen the allure of leverage firsthand. It's tempting—using borrowed money to amplify potential returns can seem like a shortcut to wealth. However, I've also witnessed the pitfalls. Here's a distillation of my journey and the insights I've gleaned on using leverage responsibly.
Early in my investment journey, I thought of leverage simply as "using others' money to profit." But it's more nuanced. In various scenarios, like real estate, stock trading, or even in business, leverage can be a double-edged sword. One of my first forays into leverage was purchasing a rental property. The potential returns were amplified, but so was the risk.
My first success with leverage was in real estate. By putting down just 20% of the property's value, I controlled an asset five times more valuable. As the property appreciated and rental income flowed, the ROI was significantly magnified.
However, there were hiccups. The 2008 financial crisis hit, and properties in my portfolio depreciated. I faced margin calls in my stock investments. I learned then that leverage magnifies both gains and losses. It's vital to be prepared for both scenarios.
Based on my experiences:
Every successful leverage strategy I've employed was backed by extensive research. Market conditions, asset specifics, and global events—all these factors play a part. I've often used simulation tools to anticipate potential outcomes.
Over time, I've set my own leverage limits. Even if a broker offers more, I have a personal maximum leverage ratio I'm comfortable with. Stop-loss orders became my best friend in stock trading, protecting me from dramatic downturns.
One key lesson from 2008 was diversification. By spreading investments, I cushioned my portfolio from drastic declines in any single asset class.
In the past, I've been caught in situations where I was over-leveraged and illiquid—a tough lesson. Now, I ensure I have sufficient funds accessible at short notice.
At least once a quarter, I review all my leveraged positions. It's a ritual that has saved me from potential pitfalls more than once.
Early in my journey, I sought guidance from seasoned investors. Their advice, often drawn from personal experiences, proved invaluable.
Leverage is a powerful tool in the hands of an informed investor. While it can offer avenues to wealth, it's essential to approach it with respect and caution. My journey taught me the importance of continuous learning, setting boundaries, and seeking guidance. And while the world of investments is ever-evolving, the principles of safe leverage remain consistent.
About Mike Druttman
