Been thinking a lot about this lately. Sparked in part by my ever increasing tolerance for risk, my goal of “retirement” by 45, and through conversations with risk-averse people in general. Here’s my 2-cents.
I’ve worked with some of the wealthiest individuals and families in the country. My guess would be that 70% have gotten extraordinarily rich via leverage (be it in their business or real estate - almost NEVER through marketable securities), 20% just inherited it, and 10% through a slow grinding savings plan based on lifestyle austerity. You could mix in high income earners ($1m+/yr) but they’re few and far between. Don’t hold me to those figures, just a cursory assessment without going through my records.
Lately this discussion has come up time and time again. My take is that those who fear leverage or don’t understand it and make an average, or above-average pay are destined for a life of painfully slow wealth accumulation. Essentially, working until 65 or longer with no idea what to do with themselves outside of work. I think for a long time I was trending down this path. Head down, work my ass off and try and save as much as I could. I did own real estate in my 20’s, but just buying and selling primary residences with the goal of a bigger-house. Sheer stupidity looking back on it.
In my 30’s I began to leverage up - mostly real estate which gives you far greater leverage than a margin account. But also leveraging my stock portfolio when prices are depressed. So far, so good.
Now I’ve seen people get blown up using leverage. Of course they’re the ones who are now scared out of their mind and tell their friends to watch out. The main reason these people get blown up is emotion. Poor investment decisions play a part, but mostly if you own quality assets you should not pay attention to short term market prices. Whether it’s a leveraged stock portfolio for $1m+ that somebody sells at a 30% loss in March (I witnessed this multiple times in my office) or somebody dumping, or not buying real estate because of Covid-19 or some other fear, it’s usually panic that causes the loss.
The compounding effect of wealth accumulation via leverage at a young age will make a world of difference in your retirement years.
In spite of this rant I’m usually hesitant IRL to suggest a younger individual pile on the leverage - primarily due to a general lack of understanding and the typical knee-jerk reactions that come along with inexperience. Would welcome a counter-assessment if somebody sees things differently.