Monday, March 21, 2005

Unleveraged Portfolio Management

There are many ways to "leverage up" when investing. Stock investors can leverage their positions by buying on margin or buying options. Real estate investors can leverage up by financing and refinancing their properties at high loan-to-value ratios. When the market is going your way, leverage is a great way to produce spectacular returns.

However, as we know from hearing the stories of the likes of Donald Trump, Paul Reichmann, Long-Term Capital Management, Victor Niederhoffer and other prominent investors who have made money quickly on the way up through leverage, paper profits can disappear just as quickly on the way down when the markets reverse course. Some, like George Soros, have miraculously managed to cut losses early enough to avoid total ruin when markets have turned. Others, like Warren Buffett, avoid taking on extreme leverage from the outset, preferring a slower and more steady course to wealth-building.

Leverage is like a "throttle" that allows you to "dial in" the amount of risk you desire. Over the years I have used leverage as an income property real estate owner. However, in my stock investing I tend to operate unleveraged. Certainly, many of the stocks I own are shares of companies and financial institutions that employ moderate leverage on their balance sheets to realize higher return-on-equity. But I avoid buying on margin to leverage my own positions further.

In deciding whether or not to use leverage, I weigh "money management" issues as much as I do risk-return tradeoffs. Currently, I run a "safe," unleveraged portfolio. I find that having no loans makes things much simpler from a portfolio management point of view. I have no loan applications to fill out, no monthly payments to make, no margin calls to worry about, and neither banker nor broker to answer to. Without any debt, my personal balance sheet and tax returns are also simpler and, surely, it is impossible for me to go bankrupt. Psychologically, a tremendous amount of peace of mind comes from operating unleveraged.

While many might surmise that investing without leverage is boring, I contend that the level of excitement really is more dependent on how you play the underlying, unleveraged investing game. With the stock market being as volatile as it is and the companies with listed shares being as diverse as they are, there are plenty of opportunities to invest in high-risk, high-return companies with very substantial leverage in their businesses--even without invoking an additional layer of leverage in your portfolio.

I make one final comment on my attitude towards leverage: With interest rates still near historical lows, mortgages offer homeowners (who are also investors) the opportunity to leverage up their overall investment portfolios at an attractively low borrowing cost. However, here too, my preference is to manage my own portfolio without the complications that come from taking out a mortgage and working with other people's money.

I find that "keeping it simple"--unleveraged--works best for me.


Blogger credit6sec said...

Hey, you have an interesting blog here! I'm definitely going to visit often!
I have a mortgage refinance information site. It pretty much covers mortgage refinance information related stuff.
check it out if you get time :-)

12:36 AM, October 06, 2005  
Blogger heropoo said...

I have a stafford loan site. It pretty much covers stafford loan related stuff. Check it out if you get time :-)

11:44 AM, October 07, 2005  
Blogger Online Incomes said...

Nice blog, keep up the good work!
I have a blog/site toolow interest home equity loan
It's a free information site on on home equity loans and refinancing. It can help you save money if you are in the market for a loan.
You should check it out if you have the time :-)

7:57 PM, October 08, 2005  
Blogger Ray said...

Interesting and highly useful information on your blog.

I like the slant you put on things.

I spend a lotta time on my association mortgage national reverse resource site. If you have any ideas for making it more appealing, let me know.

Also, if your readers are interested, I’ve posted a link to the Red Cross at my site.

Thanks for helping out.


10:37 PM, October 10, 2005  
Anonymous Anonymous said...

Nice post. Check out my site if you can. title loan

10:52 PM, October 23, 2005  
Anonymous Anonymous said...

Nice site. Check mine out if you can. direct investing

11:18 PM, October 24, 2005  
Blogger Goodman441 said...

Hey! I found a great new site for loans and credit card information, Please visit it when you can, You will be glad you did!! Go here now!

12:08 AM, November 03, 2005  
Anonymous Anonymous said...

You said you will love me wow gold the whole life, but you marry her. You said Cheap WoW Gold you will wow power leveling,come to marry me, but this will not be carried out forever.WoW Gold I am trying my best to forget you and do not love you anymore. wow leveling But I failed and I still love you. Maybe wow leveling she needs you more compared wow leveling with me. So I tell you that world of warcraft power leveling you should love world of warcraft power leveling her and take good world of warcraft leveling care of her. You said I was so of warcraft leveling Yes, because I love you,world of warcraft leveling I hope you will be power leveling happy forever.

5:59 PM, February 04, 2009  
Anonymous Portfolio Management said...

This Article is informational.

I Learn some good point for finical investment

Can you post another related article for this article

I am Waiting for your next article

Portfolio Management

6:13 AM, September 10, 2009  
Anonymous Portfolio Management said...

Just read this and really found it so precise and compact that full of information about Portfolio Management without wasting words. For more such type of information, Kindly Visit:

3:43 AM, October 25, 2010  
Anonymous Penny stock neswletter said...

I would like to comment about all the double and triple exchange traded funds that have come out recently. I believe these things are bad news because some many investors are unaware of the huge risks they are taking by buying these things.

10:33 AM, October 25, 2011  

Post a Comment

<< Home