As Warren Buffett said, “when you combine ignorance and leverage, you get some pretty interesting results”. The sudden surge in inflation following the pandemic rebound has led central banks to aggressively start to raise interest rates, introduce quantitative tightening and cause significant dislocation in many asset markets. Although it would be comforting to think that the leverage shake-out is finished, it’s likely that there are a few more surprises in store.

There is no doubt that gearing can be a powerful tool in wealth creation. Debt allows an investor to gain a much larger economic interest in an asset and scale returns. Often, interest and other costs of gearing may be deductible and used to lower taxable income legitimately. Investors often use borrowing against a stable portfolio to unlock additional funds and diversify their holdings.