Emotional Acid Test

Properly understanding and minimizing the emotional risks is probably the most critical factor in successfully implementing a leverage plan that benefits the investor.

The fact remains that even if you have addressed each of the other risks and completely understand the mechanics of leveraging, not thoroughly understanding and resolving the emotional risks can result in leverage doing more harm than good.

The following Emotional Acid Test can help investors assess if they are emotionally ready for the downside of leverage, before even starting. It can also serve as a reminder to 'stick to the plan' when markets drop and emotions are truly being tested.

Emotional Acid Test

If my investments drop 30% in value 3 weeks from now, I will:

  • Want to buy more, because investments are now "on sale"
  • Have faith and hold, committed to the long-term plan
  • Hold somewhat nervously, questioning why I leveraged
  • Want to sell, unable to sleep at night due to stress
  • Insist on selling, stressed and upset with my advisor
  • Shoot (or sue) my advisor and/or educator who introduced leverage