Originally Posted by clifp
... Somebody, probably Buffett, said that "leverage is the only way for a rich man to become poor". While a small 1st mortgage isn't leverage in the same way as say a margin account, an interest only option ARM, or buying call options, it is still leverage. One thing that leverage isn't good for is a getting a good nights sleep, ...
I won't comment on the mortgage decision itself, as I *know* that you know the pros/cons and have chosen as you see fit. However, I do think that your 'leverage' statement could be misleading to some.
Sure, leverage can be dangerous. But sometimes, I think people just get scared by the term itself, and avoid it w/o digging deeper. That's fine, but they might miss out on an opportunity. Or they might be taking more risk than they think.
For example, who is taking more 'risk':
- Person A with an ~ 50/50 AA who decides to use margin to put 1% of his portfolio on a stock, or...
- Person B, with a 70/30 AA?
Person B doesn't have that dirty leverage or margin term in his portfolio - he *must* be better off, no?
I've been in the position where I saw what I thought might be an attractive short term investment. But I'd have to sell other stock in that portfolio to free up the cash, and I didn't want to trigger a Cap Gain event (or maybe a wash?). So, I used margin for a month or two, on a small % of my portfolio. Slept fine, knowing that I had a chance of a quick profit, and if it went to heck, I risked a total of x% of my portfolio, a risk I was willing to take.
In the meantime, my un-leveraged portfolio could have reduced my net worth far more by dipping just a few %, like markets often do.
Which part of my portfolio should have kept me up at night?