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I was thinking if I should invest in some mutual funds using low-interest rate debt. But then I read this Q&A: Why are daily rebalanced inverse/leveraged ETFs bad for long term investing?

  • If I use my loan on regular mutual funds, can I avoid the daily rebalancing effect from leveraged mutual funds?
    • If so, is it also good for long-term investment, unlike leveraged mutual funds?
  • Are there any other differences between leveraged mutual funds and loan-fueled regular mutual funds?
  • I think I don't quite understand the "daily rebalancing". What's different between with and without daily rebalancing?
user2652379
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1 Answers1

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There is one important difference: If you invest in a leveraged fund, you can only lose 100% of your investment. If you take on debt to invest, you can lose more.

For simplicity let us assume that you are having double leverage and your investment drops by 60%. With a leveraged fund you will be wiped out at 50% and that's it. If you borrowed money, you are now in debt. If you are speculating using a margin account you will receive a margin call well before the 50% but if you are using uncorrelated debt (like consumer debt, HELOC) this can be a real problem. An investment may take a very long time to recover or maybe it never will.

glglgl
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Manziel
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