Imagine if we were to run a project to determine the optimal point of leverage for an investment portfolio. If an investor employs too low a leverage, he will extract too small a gain in the stock-market. If the leverage is set too high, then the investor can be wiped out in the next downturn.
The fitness of an investment strategy can thus form a Mount Fuji like shape. As leverage goes up, the fitness of the portfolio hits a peak and then drops thereafter.
In practice no one really knows what the ideal leverage multiplier is. Warren Buffett was theorized to have it at around 1.7. My personal rate is between 1.3 and 1.5. Making matters worse, we aren't really sure whether leverage has multiple peaks.
Making matters even more complicated is that the portfolios we choose as well as the market cycle will determine the optimal leverage rate. Being back to
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