4

As a trader, I understand the premise of Leverage and Margined accounts.

I understand that it is almost necessary to use leverage in order to make money from trading.

But the question is about Investing and not so much trading.

Trading can involve holding positions from seconds, to days, to weeks, to months.

However, following Buffet's advice, most investments should be around 5-10 years. With that in mind, is it necessarily a good idea to hold an investment for 5-10 years using leverage? Sure the profit will be greater, but seeing as any stock will fluctuate, can you really hold a leveraged position for 5-10 years without being margin called?

Is it wise?

  • The interest on your leveraged investments would add up to a considerable amount over 5 to 10 years. So your investments would have to beat the interest rate. – user9822 Jun 13 '15 at 4:44
3

Let's do a real example of leverage on the SPY.

Imagine you have $20K today and plan on having $100K by JAN 2018. You could get 100 shares of SPY and ride it out. Maybe buying another 100 shares every few months until 2018, ending up with less than 500 shares to your name ( and zero cash in the bank ).

or

You could lever with DEC 2017 LEAP CALLS. They'll expire in 2.5 years, so you'd have to re-up sooner than your plan. With 20K starting cash, in my example we'll go with 5 contracts to start with. If we choose the $230 strike they'd cost $1250 each (putting roughly $6250 at risk).

The plan in is if the stock market goes up, you've got leverage. You are the proud owner of contracts worth 500 shares of SPY and have only spent 1/3rd of your present day dollars. If the market goes down in the next two years, sure, you lost the entire $6250, but likely saved $93,750 powder dry and can try your luck with the 2021 LEAPS.

Probably get down votes for this, but I'll even argue that proper use of leverage can very much reduce your risk. One truth is you'll never get a margin call from holding long options.

2

Step 2 is wrong. Leverage is NOT necessary. It increases possible gain, but increases risk of loss by essentially the same amount. Those two numbers are pretty tightly linked by market forces.

See many, many other answers here showing that one can earn "market rate" -- 8% or so -- with far less risk and effort, if one is patient, and some evidence that one can do better with more effort and not too much more risk.

And yes, investing for a longer time horizon is also safer.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.