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January 8, 2008
Leverage and Lady Luck
You can make a lot of money through leveraged investing, “which is Wall Street speak for ‘using borrowed money,’” says Allan Sloan in The Washington Post. But if you time it wrong, “it’s like having the football team you’re rooting for give up a touchdown on the opening kickoff—before you can blink, you’re in the hole.” Leverage is the “secret sauce” that has made buyout firms and hedge funds so profitable recently. But it’s easy to “look like geniuses” when times are good. Next time you read about “eye-popping numbers” from a firm or trading desk, look to see how much of the return comes from leveraged money. And be wary.
Personal finance, family-style
With so many people resolving to spend “more time with family” in the new year, it’s a good time to teach your kids about money, says Marshall Loeb in MarketWatch. And don’t be afraid to tackle “concepts that go beyond putting coins in the piggybank.” Try acting like “your child’s credit company,” fronting allowance money ahead of time—and charging extra chores as “interest” if they don’t get the job done. And have them divide their allowance into three jars, for long-term and short-term saving and charity. “If your son wants an iPod,” say, he’ll understand the rewards of filling short-term financial goals.
of The Week magazine.