How much Risk and Leverage Should You Go For?

By: ispeculatornew
Date posted: 09.02.2011 (5:00 am) | Write a Comment  (2 Comments)

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It’s interesting how reading about successful investors, traders and business people all have one big thing in common. They are not afraid to use leverage and risk. Of course, there are two types of risks:

-Random, Spontaneous Risks & Leverage
-Thought out, structured risks and leverage

The difference between the two is incredibly important and most of those who succeeded did end up taking the right type of risks. Of course, it’s always much easier to make that judgments years later right? Very few people would say that Bill Gates or Mark Zuckerberg made an error when they quit college or that a few of Warren Buffett‘s big bets would work out when those events occurred. A few decades later, they look like geniuses. Clearly, taking risks and using leverage when investing or doing business is important but I find it very difficult to know to what degree it should be used.

Example #1-A young millionaire that has no debts and is thinking about borrowing 100K to invest in a safe dividend portfolio would certainly seem like a no brainer. The dividends will be more than enough to pay for that loan’s interests and the capital appreciation potential is significant.

Example #2-However, an older investor that is trying to secure a retirement where he can keep a similar lifestyle should probably not even consider doing such a thing.

Those two examples are obvious aren’t they? But chances are you fall between those two situations making it a lot more difficult to judge. When should you take on additional debt to invest or invest additional cash flows instead of paying down your house faster?

Depends What Your Goal Is

If your goal is to live a calm life with a steady portfolio, you can certainly build a dividend portfolio, grow it over time without any leverage and live a good retirement. However, if you aspire to a much higher level of income, to become a multi millionaire or even a billionaire, you will need to take risks and some leverage. It’s not easy and I’m personally risk averse comapred to many so I know that it is a challenge but it is important. Why? How many of those that you know that truly succeeded did not end up taking fairly big risks at some point? My guess is very few would fill that criteria.

My New Rules For Risk And Leveraging

-Only risk what you can afford to lose and what will allow you to sleep well at night
-Do not spread that money around too many bets
-Get as much information as you need and go all in on the ideas that you truly believe in
-Track those bets carefully and adjust when necessary

In my case, that will probably mean trading on margin or on loans in the future, as well as reinvesting more in my online company. Why? Those are the best opportunities for me at this time. Will I be risking much? No. But over time, as my assets increase, that could increase. Stay tuned..!

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2 Comments

  1. Comment by Leah — September 2, 2011 @ 9:39 am

    I would love to see you go into more of these risk types, re: spontaneous risks vs. structured risks and the benefits/drawbacks to both.

    I don’t think that the “new rules” are all that much different from the “old rules.” Buffett would have agreed with you back when he first started investing!

  2. Comment by Eric — September 3, 2011 @ 6:02 pm

    where are you going to borrow money at a low enough interest rate to make money on dividends?

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