Adding leverage increases your risk, but increased risk is one way to possibly gain better returns. There are many ways to gain leverage, from using loans, to options, to futures.
-
A fundamental question is how much leverage you want to use. Brokerages make it all too easy to over-leverage. I usually use a leverage ratio between 1.5 - 2. For example, if I have $100k cash, I may use that to invest a value of $150k in a diversified portfolio. A typical hedge fund might use a leverage ratio up to 5, so this is not exceedingly risky.
+
A fundamental question is how much leverage you want to use. Brokerages make it all too easy to over-leverage. I usually use a leverage ratio between 1.5 - 2. For example, if I have $100k cash, I may use that to invest a notional value of $150k in a diversified portfolio. A typical hedge fund might use a leverage ratio up to 5, so this is not exceedingly risky.
People use leverage all of the time for home loans, and it is not unheard of to use a 80% loan to value ratio for a mortgage, or a leverage ratio of 5. For a $500k home, you might put up $100k cash and take a $400k loan. You would likely do this at a reasonable interest rate, and your hope is the value of the home goes up faster than your interest charges. Your home value could fall, leaving you with a mortgage that is underwater, i.e. you owe more than the home is actually worth. You could also lose your home in a disaster. All of this can apply to investing as well.