Psychologie a chování
Investment Mistake of the Month: Investing on Leverage and on Debt
Key takeaways
- Leverage multiplies both gains and losses symmetrically — but asymmetrically threatens the portfolio.
- With 3× leverage, a 33% decline is enough to wipe out the entire portfolio; a margin call forces a sale at the worst possible time.
- The psychological burden of leveraged investing is permanently unbearable for most people.
- Debt-funded investing (mortgage for investments, loan for equities) adds fixed costs regardless of market direction.
- Leverage is a topic for professionals with sophisticated risk management — not for retail investors.
Investing on leverage or borrowed money is a mistake that destroys portfolios even in situations where the investor is completely right about the market. Leverage doesn't just amplify returns — it amplifies losses too, faster and more destructively than most people can imagine.
How Leverage Works and Why It Is Asymmetric
2× leverage means that with CZK 100,000 you control a position worth CZK 200,000. If the market rises 20%, you earn 40% on your own capital. If the market falls 20%, you lose 40% — and you still owe the broker. But the asymmetry goes deeper: with 3× leverage, a 33% market decline is enough to bring the portfolio to zero. The market fell by a third? You lost everything. And crises do deliver such declines.
Margin Call: Selling at the Worst Time
With margin leverage, the broker monitors the value of the collateral. As soon as the portfolio falls below a set threshold, you receive a margin call — a demand to top up, or permission for the broker to liquidate positions. That liquidation happens exactly at the moment of the market decline. You lock in the maximum loss and miss out on the recovery. Yet markets have historically always bounced back — investors without leverage survived and profited; investors with a margin call did not.
A Loan for Investments: Fixed Costs Regardless of the Market
- Interest on a loan accrues even when the market is falling
- If the decline lasts 2–3 years (2000–2002, 2008–2009), costs accumulate and psychological pressure grows
- Forced sale to make a loan repayment = a realised loss with no return
For Whom Leverage Is an Absolute Taboo
For the vast majority of retail investors, leverage and debt-funded investing are inappropriate. The exception is experienced professionals with sophisticated risk management, a clearly limited maximum loss, and a substantiated strategy. Without these conditions, leverage is a form of gambling. We write about the right approach to risk in the article what is risk and how to measure it. The right approach to regular investing without leverage is offered by DCA — cost averaging.
FAQ
Why is investing with leverage so dangerous?
Leverage multiplies losses just as it multiplies gains — but losses can be final. With 3× leverage, a 33% decline wipes out the entire portfolio. A margin call additionally forces a sale at the worst moment, locking in the loss permanently.
What is a margin call?
A demand from the broker to top up collateral or permission for a forced sale of positions. It occurs when the value of a leveraged portfolio falls below a set threshold. The sale happens during a market decline — the investor thereby locks in the maximum loss.
May I take out a loan to invest?
Practically never for a retail investor. A loan adds fixed costs (interest) regardless of the market, increases psychological pressure, and risks forced selling to meet repayments. Even a well-reasoned bet on a good index can lead to a loss with poor timing and leverage.
When is leverage used legitimately?
By professional investors and funds with sophisticated risk management, hedging, and clearly defined maximum losses. In retail investing in equities and ETFs, leverage has no place — its potential benefits do not justify the risk.