Is leverage investing a good tool for a young investor?
What is your personal opinion on leverage investing? I am 21 years old and have a couple years of experience as an investor. I want to know if leverage investing is a worthwhile strategy and if an advisor would recommend it to someone as young as me.
Yes, now let me explain further. Leverage either via margin investing or options can be very dangerous. That being said, it is one of the simplest ways to lose or make money. So, let’s go over a few things. First, congrats at 21 years old already investing for a couple years, you are way ahead of the pack. You may want to buy a home in a few years and need a down payment of up to 20%, if so, I would leave this portion of your funds in a safe place. Beyond this, let's take a look at the merits of what you want to do and maybe a better way to do it. As an advisor, I use options to increase leverage, not margin. The reason for the use of options is simple, asymmetry of returns, and only purchasing puts and calls limits your risk to your invested capital. In my own strategy, I keep about 90% cash at all times, which limits my invested capital. Usually the options I purchase are between .5-2% of total portfolio. If you start small, and focus on total capital at risk, this could be a worthwhile endeavor. Let me sweeten the pot for you, the Roth IRA. The Roth is the holy grail of options investing, because you receive a greater reward for taking that risk.You can put up to $5,500/year into a Roth IRA, and on retirement, make tax free withdrawals of these funds. Before I started trading options, I paper traded them for two years. You can learn via this manner weather or not this is a profitable endeavor for you, without losing money. Good luck, and remember one thing, options trading is sharks water, you need to be smart or you will be no more.
Please note that the information above is not a recommendation.
If you're going to risk losing money experimenting and testing the market in an effort to build experience... it's better to do it with a few thousand instead of a few hundred thousand.
Your biggest risk is losing more than you put in and that should absolutely be avoided when you're getting started. Losing 100% is bad, but losing so much that you now owe more money than you started with is potentially very damaging. I would recommend against borrowing to invest until you have experience under your belt, other friends who work at hedge funds and trading desks, etc.
You can gain leverage on your returns without borrowing money by buying out of the money call and put options. If you don't know what that means, you definitely should read Nassim Talib's trilogy, "Fooled by Randomness", "The Black Swan", and "Antifragile". Do that before you jump into leveraged investing. Good luck!
By Leveraged Investing, are you taking about options? If so, NO, a good advisor would not recommend this. I have the knowledge and training to do it, and don't even do it for myself. It's very close to going to Vegas and putting it all on red. Slow and steady wins the race in investing. There aren't any short-cuts. Best of luck to you!
I don't recommend using leverage to invest when it comes to purchasing securities. The risks associated with buying on margin are too high for almost all investors. On the contrary, I do recommend using leverage when purchasing a home. What many people fail to realize is that their home is their largest asset. Using leverage to purchase a home may be one of the best investments you make in your lifetime.
For example, suppose you purchase a home worth $250,000 by putting down $50,000 (20% deposit) and financing the remaining $200,000. If the home appreciates 4% annually, after one year the home is now worth $260,000. Your initial investment of $50,000 has returned a $10,000 gain or return on investment of 20%. Good luck getting that return in the stock market!