Leverage Investments

MaxiRobriguez

lev-er-ar-je. Noun.

Just wondering what group opinion on leverage is? Not your run of the mill "I've got a mortgage and a pension" but leveraged funds or unsecured loans taken purely to invest with for example.

For those who like playing with fire, how have you leveraged up in the past? Was it successful? Would you do it again? Would you do it differently? How did you manage the volatility risk (if indeed you did).

MK62

Well, you said it yourself really....."like playing with fire".....personally I wouldn't do it, but others might be more comfortable with the risks involved.

PS....the level of borrowing might have some bearing too....

dunstonh

but leveraged funds or unsecured loans taken purely to invest with for example.

It is the sort of thing some people start getting interested in doing towards the end of a high growth period.   Usually ends in tears.

MaxiRobriguez

dunstonh said:

but leveraged funds or unsecured loans taken purely to invest with for example.

It is the sort of thing some people start getting interested in doing towards the end of a high growth period.   Usually ends in tears.

Yes, I was tempted to caveat my OP with "I'm not interested in doing this now" but thought it might mute responses if I did.

Thrugelmir

Some people are born gamblers. The most successfull use other peoples money to take the risk. Might reduce the overall return, but leaves them unscathed should an iceberg be hit. 

Those with large mortgages who've been funding their pension schemes instead. May come to regret their choice in the decade that lies ahead, 

jimjames

Does borrowing on one property to buy others count?

Thrugelmir

jimjames said:

Does borrowing on one property to buy others count?

Is a form of leverage. Cashflow issues are normally what causes the dominoes to toppling over. Lack of income to service all outgoings. 

wmb194

There are tangential ways to do this e.g., I sometimes use investment trusts which use more leverage than other ITs* to try to ride a particular wave. For instance I've done well with one this last year which has a gearing of 22% and its stock market investments are related to or affected indirectly by to the rising oil price and another that invests largely in FTSE350 dividend paying value shares.

*IIRC since about 2000 most trusts have dialled back their gearing to between nothing and 5%.

dunstonh

MaxiRobriguez said:

dunstonh said:

but leveraged funds or unsecured loans taken purely to invest with for example.

It is the sort of thing some people start getting interested in doing towards the end of a high growth period.   Usually ends in tears.

Yes, I was tempted to caveat my OP with "I'm not interested in doing this now" but thought it might mute responses if I did.

You get some allowance because you are a regular not prone to posting silly things

But genuinely, you find there is little talk about gearing in the early stages of a cycle.  It generally pops up towards the end of the cycle when complacency has set in and people who know nothing about investing start giving tips or want to invest heavy in the areas that have done well in recent times.       Some investors see it as a sign that it's time to get out and wait for the next crash.

Purely from a theoretical point of view, as I wouldn't do it or advise it, it boils down to whether you can afford the debt if the investment value wasn't there.     History tells us that those that couldn't afford to lose money are the ones that have suffered the most.  Including bankruptcy and suicide.   

MaxiRobriguez

dunstonh said:

MaxiRobriguez said:

dunstonh said:

but leveraged funds or unsecured loans taken purely to invest with for example.

It is the sort of thing some people start getting interested in doing towards the end of a high growth period.   Usually ends in tears.

Yes, I was tempted to caveat my OP with "I'm not interested in doing this now" but thought it might mute responses if I did.

You get some allowance because you are a regular not prone to posting silly things

But genuinely, you find there is little talk about gearing in the early stages of a cycle.  It generally pops up towards the end of the cycle when complacency has set in and people who know nothing about investing start giving tips or want to invest heavy in the areas that have done well in recent times.       Some investors see it as a sign that it's time to get out and wait for the next crash.

Purely from a theoretical point of view, as I wouldn't do it or advise it, it boils down to whether you can afford the debt if the investment value wasn't there.     History tells us that those that couldn't afford to lose money are the ones that have suffered the most.  Including bankruptcy and suicide.   

I guess the reason I'm asking is I tend to make speculative purchases on dips (of individual stocks) - like topping up my Unilever holding when it fell 10% the other week on the news of trying to buy out GSK consumer arm.

And I'm wondering if I should replace that strategy, or at least add another bow into my arrow, by buying index funds after large crashes/drawdown periods, but with leverage (whilst still continuing to drip feed into my index funds as part of monthly salary).

I guess it's because I don't want to concentrate too much in individual stocks and it's quite easy for that to happen as the volatility range is much greater so the chances to buy on dips is much greater. 

Would a switcheroo to buying index funds dips which are fewer in volume, but with leverage to amplify (expected) gains give me better risk adjusted returns?

Curious, hence asking how others have played it before me.

Malthusian

There was a famous thread on the Bogleheads forum where someone posted about his intention to use a leveraged strategy, which he viewed not as gambling but as equalising returns between him and his future self. The very next year the credit crunch happened. I believe he lost hundreds of thousands.

There was also a thread on this very forum where someone posted about his intention to use a leveraged strategy. He viewed it not as gambling but buying your future pension with borrowed money in the way that you buy a house with borrowed money. Two months later the coronavirus crash happened.

However, he managed to break roughly even after pulling the plug on his strategy in September 2020 in to fund a house move. His strategy had already been derailed because his early losses left him without the necessary minimum stake to buy the options he needed. If I am remembering correctly that forced him to switch to a conventional long strategy which helped recover his losses as the 2020 crash recovered unexpectedly quickly.

I noted at the time that the time people are mostly likely to consider using leverage are the time it is least likely to work. If you believe in omens, people posting about leverage strategies on Internet forums are the modern equivalent of the know-it-all shoeshine boy.