The world high jump record currently sits at 2.45 metres, achieved in 1993 by Cuban athlete Javier Sotomayor. Although this is an impressive accomplishment that is yet to be beaten over 20 years later, a new pole vault world record was set earlier this year at 6.26 metres by Sweden’s Armand Duplantis. Both sports have the same objective – to jump as high as possible to clear the horizontal crossbar. The difference, however, is the vaulting pole used by pole vaulters that allows them to reach significantly greater heights. The use of a simple tool has an extraordinary effect on the height that the jumper can achieve.
Similarly, investors have a tool known as leverage that allows them to achieve potentially higher returns that couldn’t be achieved with their capital alone. By borrowing money from lenders to purchase property or shares that are worth far more than their initial equity investment, returns can be amplified as the investor gains from the appreciation of the entire asset, not just the amount they invested themselves.
For example, if an investor puts down $100,000 and takes out a loan to buy a property worth $500,000, they now have control of an asset five times the value of their initial outlay. If the property appreciates by 10%, its value increases to $550,000. This $50,000 gain represents a 50% return on the investor's initial $100,000, thanks to the leverage applied. Comparatively, without leverage, investing $100,000 directly into a property or another asset that appreciates by the same 10% would only yield a $10,000 gain.
While leverage can significantly magnify returns, it’s crucial to recognise that it also increases the risk. Just as gains are magnified when markets are up, losses are magnified when markets are down. Like the pole vaulter who must carefully control their balance to avoid a fall, investors must be mindful of managing their debts and potential market downturns. Having a financial professional on your side can give you the confidence to make these leaps with peace of mind.
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