Why use leverage in an investment portfolio?

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The potential benefits and risks of a leveraged investment portfolio


Just as a lever allows you to increase your potential force, leveraged investing through the use of borrowed funds can increase your potential gains. If you're confident about an investment, leverage allows you to invest more than you otherwise could and potentially enhance your profits.

In addition, some investors may choose a leveraged approach to assist with their cash flow management. For example, rather than contributing the entire upfront investment amount from their own funds, investors can borrow to invest and only contribute a small portion of their own funds to meet the borrowing costs. This means that the investor may be able to use their remaining capital to make other investments and diversify their portfolio. For example, if an investor wanted $10,000 worth of exposure to one particular share, the investor could borrow $10,000 and only pay the interest expense of, for example, $1,000. The investor could then use their remaining capital to manage overall portfolio risk by diversifying their investment portfolio.

Some investors may choose a leveraged approach to improve their cash flow management

The costs of borrowing may also be offset partly or entirely with income, such as share dividends, generated by the assets in which you've invested.

It's important to remember that leveraged investing can be risky. If the investment turns in a direction you don't expect, your losses will be significantly higher. Additionally, given the costs associated with borrowing, the performance of the underlying investment will need to at least equal the borrowing costs before you can break even on your investment.

Macquarie offers a range of specialist leveraged investment solutions including Macquarie Equity Lever, Macquarie Geared Equities Investment plus and Macquarie Flexi 100 Trust. Talk to your financial adviser about whether these investments could be right for you.

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