Leverage ratio
Total assets divided by your own equity; it shows how much a market move is magnified in your net worth.
Leverage ratio = Total assets ÷ Equity = 1 ÷ (1 − LTV)
Explanation
If you invest only your own money, a 10% market move changes your wealth by 10%. Borrow to invest more, and the same move changes your equity by more than 10%. The leverage ratio tells you by how much: multiply the market’s percentage move by the leverage ratio to get the move in your equity (ignoring interest).
Leverage ratio and LTV are two views of the same thing. A 33.3% LTV means 1.5x leverage; a 50% LTV means 2x.
Why it matters:
- Losses compound against you. A 2x leveraged position that falls 50% is wiped out before any interest.
- Interest is a hurdle. Borrowed money has to earn more than its interest rate after taxes to add value.
- Volatility drag grows. Leveraged portfolios lose more in down years than they gain back in up years, so long-run results can lag what the multiplier suggests.
- Leverage rises as markets fall. When collateral drops, the loan does not, so your leverage and LTV climb, edging you toward a margin call.
Leverage also exists when you borrow for spending against a portfolio: your net worth becomes more sensitive to market moves even though you did not buy more assets.
In scenarios, the app reports your leverage ratio alongside LTV each year, so you can see how borrowing changes the range of outcomes.
Example
You have $1,000,000 of your own money and borrow $500,000 on margin at 7% to buy more stocks.
- Total assets: $1,500,000
- Leverage ratio: $1,500,000 ÷ $1,000,000 = 1.5x (LTV 33.3%)
If stocks rise 20%: assets become $1,800,000, equity $1,300,000, a +30% gain. After $35,000 of interest, +26.5%.
If stocks fall 20%: assets become $1,200,000, equity $700,000, a −30% loss. After interest, −33.5%.