Also called: Portfolio leverage, Gearing, Margin.
Leverage scales both the return and the hole. A month the index falls 15% is a 15% loss at 1× and about a 30% loss at 2×, after financing. A month large enough to take 1 + L × r through zero closes the account.
Constant leverage is a policy, not a one-time loan. An overlay that is reset to 2× every month must sell into strength and buy into weakness to hold the multiple. That is the same rebalancing math as a daily-reset leveraged ETF, at a different frequency.
Whether a given multiple helped on US history depends on the objective. On our 1928–2025 sweep the one long path, the median 40-year window and the 5th-percentile window peaked at different multiples, and above about 2.4× every 40-year start year took an 80% drawdown.
Leverage is not the same as a mortgage on a house you live in, and it is not the same as holding a 3× ETF through a decade. Those are related ideas with different reset rules, costs and failure modes.
Research on this
- What History Did to Every Leverage Multiple from 1.00× to 3.00×
- Which Investing Strategy Wins? Six Strategies Benchmarked on the Same Markets
See also
- Drawdown — The percentage fall from a portfolio’s previous peak to its lowest subsequent point. Maximum drawdown is the largest such fall over a period.
- Volatility drag — The gap between the average of a series of returns and the compound growth actually achieved. Higher volatility widens the gap, even with an unchanged average.
- Sequence of returns risk — The risk that the order in which investment returns arrive damages a plan, even when the average return is unchanged. It matters most when money is being withdrawn.
- Asset allocation — The split of a portfolio across asset classes — equities, bonds, cash, and others — which is the primary determinant of both its expected return and its volatility.