Much of the material that you will learn in this textbook is applicable to your own investment strategy as well. A recent article
on CNBC highlights a couple of these lessons. As you will read, the
article discusses the problems faced by a couple in their attempt to
become landlords. We would like to point out two sentences near the end
of the article. First, "Without leverage, the most you can lose is your
initial investment. With leverage, you can lose substantially more than
your initial investment." As we have discussed, leverage is a double
edged sword that can increase returns when times are good and decrease
returns when times are bad. As an equity investor in a company, you are
protected from losing more than your initial investment in the company.
However, when you use leverage for personal investments such as
purchasing a rental home with a mortgage or borrowing for a stock
investment, you can lose more than your initial investment and your
entire wealth can be at risk.
The second statement
we would like to point out is "Owning more of a good thing is not always
better. Concentrating is gambling; diversifying is investing."
Hopefully you are well aware of the benefits of diversification by now. A
concentrated portfolio can make you wealthy if you hit it lucky,
however, it can also break you if things go poorly. For investing in the
future, we believe the same as the author of this article: For most people, a diversified portfolio is a much better strategy to achieving personal investment goals.
