One Chart... A Bigger Problem

Dear Fellow Expat:

A chart rarely leaves me speechless. But that happened today.

As the market spirals up to new record highs, there’s a key word that we need to understand as investors: how we manage risk.

That word is Leverage.

How Leverage Works

Leverage is a lot like using a jack on your car or SUV.

The jack helps you lift something heavy with less force. In essence, it multiplies your strength. With markets, money works the same way. Leverage is a tool that can amplify and lift your money’s power.

When investors or funds use leverage, they magnify their exposure to an underlying asset, index, or portfolio.

The investor's returns are much higher if the underlying asset increases in value.

However, if the asset declines in value, losses are also magnified. In other words, leverage can boost gains more than a simple cash investment would, but it also increases the risk and potential scale of losses.

But sometimes, they spread that leverage across more than just one company.

And that’s …