Thread by @TaylorPearsonMe

One thing I've changed my mind on in the last few years is the risks presented by leverage.

My historical thinking and most people's thinking tends to be too black and white and leads to sub-optimal decisions.

To give an extreme example, what is riskier:

1. having 100% of your (unlevered) portfolio in Tron and XRP

2. Having 1.5x leverage applied to a highly diversified portfolio of stocks, bonds, commodities, and illiquid alternatives

I think basically everyone would agree the first is riskier (don't @ me XRP people).

In general, I think investors often take on more risk through concentration to achieve outperformance and they would be better using diversification + modest leverage to get the same returns with less risk.

I can think of a pretty significant number of people I know that are mega-long crypto and tech but think even mild leverage is way too risky and not even a consideration.

In the long run, I think this will prove to be a bad choice.

Of course, the most prudent/ergodic option would be to use a highly diversified portfolio with no leverage, but that tends to trail common benchmarks and people get hit trying to keep up with the Joneses.

taylorpearson.me/ergodicity/