Let’s start by knowing the real meaning of leverage.Leverage in general is the degree to which an investor/ business in general is utilizing borrowed money.Companies that are highly leveraged may be at risk of bankruptcy if they are unable to pay their debts on time and consistently.
It is important to notice that leverage is not always bad as when it is used properly it can increased the shareholders’ return on their investment.But lately the stockmarkets are in havoc and a lot of people are panicking as many companies are on the verge of going south due to improper ‘leveraging’ concept been applied.For example,in the case of two famous companies in US that have attracted people attention lately ,all for wrong reasons.I am sure you guys will be identify which and what companies that i am talking about.Let’s just call them A and B.
A and B are in big trouble ……
Wrong usage of the leverage concept is the problem with these government-backed institutions. They have been said to have bought $1.7 trillion in assets using only $70 billion of investors’ money!!!! So these assets only have to decline by $70 billion – 4.1% – to wipe out shareholders.No matter how big and stable you are ,as we can see from here,this kind of arrangement should not have done in the first place.Overly leveraged. Actually, if you include their mortgage guarantees, A and B are liable for $4.8 trillion worth of mortgages. So to wipe investors out, mortgage values only have to decline by 1.4%,and it seems thats is what happening right now.So are we suprise that the Dow Jones are having tough time lately???
So what shall we do?just cash out and wait for the bottom??? the obvious answer is NO.Stay invested,do not panic .Go for defensive stocks,preferably those that provide high dividend that might be acting as an anchor to our overall portfolios until the situation gets better.
And if you think you dont have the expertise in doing the stock picking ,call us to start investing in Public Mutual .Good idea eh???:-)
Call us at 0122780077(Ben) or 0122150151 (Michele)
