Fifteen years ago, when I was still pretty much a novice investor, I went to an AAII meeting to hear Jeremy Siegel speak about his new book, “Stocks for the Long Run.” I brought my copy to have him sign it. I hung around after the talk to listen to some of the more informal things he might say, and in a dead moment, I asked him (something to the effect of), “You suggest that young people should lever up to buy stock; do you really mean that?” His answer was and unreserved “Yes.”
I am here to disagree. Why? It is all very well and good for academics to assume that returns occur randomly, but returns occur in streaks. Think of all of the “lost decade” articles you have seen in the recent past. Here’s my main reason for not levering up while young: It won’t work well about one-third of the time, because young people will take humongous losses during a “lost decade,” and in the panic, they will sell at the wrong time. My secondary reason, is that in really bad markets, such as 1929-32, 1973-4, and 2000-2002, you could be wiped out.
Don’t trust the results that rely on the veracity of Modern Portfolio Theory, when those ideas would have failed off of historical returns. As I often say, “The markets always have a new way to make a fool out of you.” This is another example.
One final note, perhaps more scholarly: the idea of levering up requires buying and holding, and that bad markets happen randomly, with no streaks. Unfortunately, the equity market returns less than a buy-and-hold investor receives, because people buy and sell at the wrong times. Buy-and-hold investors are daring people; they confront the natural tendencies toward greed and panic, and they do better than average in the long run. One buying and holding on leverage would have to have a steel gut, which is not characteristic of younger investors.
So, don’t lever up. I say this to investors young and old, experienced and inexperienced. Getting an equity-like return is difficult enough in the long run. Don’t make your life more difficult by levering up.