Interesting article, and the theory seem sound. However, my concerns in applying it are:
- The relative interest rate of margin debt
- The issue of portfolio wipe-out from margin calls in high volatility events
- The psychology of actually buying and holding on leverage through the full market cycle - its much harder to do this than people assume!
That said, its not far from the approach I've taken personally. I've used margin debt extensively since I've been investing, with gearing ratios between 2:1 and 4:1 (currently sitting at a LVR of 70%, or 3.3:1), and my margin debt has typically been 2-3 years gross income. I've been margin called twice (one I managed to re-buy all at lower prices (resulting in a paper profit of ~7k), the other I ended up re-buying at a loss of about $5k. i.e. in practice, I've ended up about break-even on margin calls. Neither was a pleasant experience at the time though.
I've also taken the approach that I'm only prepared to expose part of my portfolio to margin - I effectively invest through three vehicles, my super fund (retirement), which has no margin debt, an investment company, which has no debt, and my personal portfolio, which does have debt. I've taken the view that I'm prepared to take this risk with a part of my portfolio, but that I'm not prepared to face a total wipe-out. In terms of equity, I've got about 52% exposed to margin, 30% in retirement, and 18% in the investment company. My intent is to keep reducing the quantity of leverage over time.