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Rekenthaler Report

Does Leverage Ever Make Sense?

John Rekenthaler

Theory Ignored
Yes, this headline looks silly. Almost nine years into a powerful rally, and with the Dow suddenly caving, I bring up the subject of leverage. Talk about a columnist high on the fumes of a bull market! But never mind the timing. This subject is evergreen. Consider this a "clip-and-save" article; it would have been equally relevant had it been published in March 2009. (Although appearing even more ridiculous.)

More than half a century ago, William Sharpe advanced the capital asset pricing model, for which he was later awarded a Nobel Prize. That model states that although volatile stocks tend to deliver higher returns, the best policy for aggressive investors is not to overweight such companies but instead to hold more of the overall stock market. Determine one's risk tolerance, then leverage the portfolio by the required amount.