If you’re thinking about leveraging investments with a long-term horizon, a sometimes enticing question arises: Is using leverage always a smart move if your portfolio is steady and doesn’t diminish to zero?
Many investors believe that time on their side creates a golden opportunity for leveraging—the idea being that if you find the right balance, you can significantly grow your wealth without disastrous outcomes.
In a previous discussion on leveraged ETFs and strategies with both long and short positions, some important insights came to light:
Shorting has its distinct challenges compared to simply going long, primarily because it potentially exposes you to unlimited losses. To manage this risk, traders frequently rebalance their long and short positions, which can trigger minor losses over time. Additionally, leveraged portfolios experience what’s known as a volatility drag. This is essentially calculated as the negative product of the leverage ratio and half the index’s volatility (standard deviation). In simpler terms, the more leverage you apply and the more volatile the market, the larger the potential hit from volatility drag…
