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. I'll explain how to use all of these methods.
-
A fundamental question is how much leverage you want to use. You can easily bankrupt yourself, and unfortunately brokerages make this all too easy. I prefer using leverage with a loan to value ratio of 30%. For example, if I have $100k cash, I will use that to invest $130k in a diversified portfolio. The key is diversified, because you want to be able to ride out the downswings.
+
A fundamental question is how much leverage you want to use. You can easily bankrupt yourself, and unfortunately brokerages make this all too easy. I prefer using leverage with a loan to value ratio of 30%, or a leverage ratio of 1.3. For example, if I have $100k cash, I will use that to invest $130k in a diversified portfolio. The key is diversified, because you want to be able to ride out the downswings.
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. 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. All of this can apply to investing as well. Using a 30% LTV for investing seems perfectly reasonable to me.
@@ 102,6 102,30 @@
- [Lifecycle Investing - Leveraging when young](https://www.bogleheads.org/forum/viewtopic.php?t=274390)
+
### Definition
+
+
We'll use the following for the definition of leverage ratio:
When you have stocks, brokers will let you take a margin loan of at least 50% or more of your equity value. This gives you at least 1.5 leverage, at the cost of margin loan interest, which is usually terrible at most brokerages. For example, Schwab will charge you 13% interest as of today (June 2025). If you cannot make more than 13% on the investments you do with leverage, you won't even break even. Interactive Brokers will give you a much better rate, for example 5%. This is an easier number to beat on investment return.