Steep market declines can leave leveraged investors exposed

THEY say that change doesn't happen overnight. But anyone following the financial markets recently will beg to differ. It has been a turbulent time for investors, with markets across the world experiencing record-breaking movements as extreme uncertainty in the economic outlook acts as a drag on growth and market sentiment. Despite markets recovering some of their losses after unprecedented central bank intervention, it is clear that the music has stopped and the 11-year bull market has come to an end.

The free-fall has left most investors wincing, and struggling to come to terms with double digit falls in markets across the world. But those who have made investment decisions that adhere to their risk profiles, with suitable time horizons, should take comfort in the knowledge that short-term market falls should be smoothed by long-term returns. Any bump in the road can be managed by simply leaving your investment portfolio alone.

For some leveraged investors, however, this current period will not be quite so comfortable. They will be hurting more than most after the sudden market reversal. Leveraged investors have borrowed against the value of their securities in order to increase their exposure, with the intention of amplifying gains.