The recent drop in the stock markets is causing many leveraged investors to experience their first lesson about the downside of borrowing to invest. In the last few years, margin account levels hit all-time highs as investors tried to take advantage of rising stock markets.

But what goes up must eventually come down, and most markets, lead by a drop of over 60% in the technology-focused Nasdaq, have fallen substantially in the last 12 months.

Lenders, who often hold the leveraged investments as security for the loans, issue a margin call when the investments drop too much. This means that the investor has only a few days to increase the lender’s security by either investing more in the account, or selling some of the investment at a big loss.

"The typical response to a margin call, especially for inexperienced investors, is to get scared and want to bail out," says Talbot Stevens, author of the new bestselling booklet Dispelling the Myths of Borrowing to Invest. "But because borrowing to invest simply magnifies returns, selling when leveraged investments are down increases the loss," explains Stevens.

The volume of margin calls highlights the need for investors to better understand the controversial strategy of borrowing to invest. Stevens advises that investors should only consider the conservative use of leverage, after they fully understand the potential downside. “No one ever gets upset with their advisor about the upside of leveraging,” Stevens muses. “So it is critical for investors to understand how leveraging can hurt them, and take steps to minimize the risk of not benefiting.”

In his new booklet, Stevens offers a Conservative Leverage Checklist to help investors reduce the risks of borrowing to invest. While Stevens’ guidelines do not eliminate the possibility that leveraging will hurt an investor, they increase the probability that an investor will benefit.

Ironically, margin calls can actually benefit investors who understand the strategy and are committed to the long-term plan. Those investors who respond to a margin call by investing more, automatically end up buying low. “A margin call can force investors to buy more, often at prices 20% to 40% less than they originally paid, which only benefits those with a diversified, long-term commitment,” says Stevens.

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Talbot Stevens is a financial educator, industry consultant, and author of "Financial Freedom Without Sacrifice" and "Dispelling the Myths of Borrowing to Invest". For other story ideas, visit the Free Resources menu of www.TalbotStevens.com. For more information, contact Judy Culford, Communications Director for Talbot Stevens, by calling (519) 663-2252, or emailing judy@TalbotStevens.com.