Leverage Is Almost Always A Very Bad Idea

"Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people."

-- Warren Buffett, 2010 Berkshire Hathaway Annual Report 

The preceding from Warren Buffett is undeniably true and recently the amount loaned by brokerages to clients is at an all time high except three weeks before the financial meltdown in 2008.

Boomers are rarely in a position to make back large losses so while tempting, I would stay away from any kind of leverage especially margin debt.

Warren Buffett's Berkshire Hathaway vs S&P500

Warren Buffett is certainly the best known investor of all time and one of the most successful.  He has amassed a fortune managing Berkshire Hathaway, a holding company which owns other companies, some public such as Coke, American Express, Wells Fargo and others and trades A shares and B shares.

Question - is it better as an investor to own Berkshire Hathaway or the S&P500?  Consider that over the last ten years, Berkshire has gained an impressive 80% while the S&P500 has gained just 60% but when you include dividends (and you must and charts don't show this), the S&P500 gained 116%.

The answer depends but I would say the S&P500, as much as I revere Warren Buffett.

A few reasons;

• Berkshire Hathaway does not pay a dividend and the S&P500 does which means in tougher times such as the last ten years, the S&P500 should do better but in a raging bull market, dividend paying companies tend to lag growth companies
• Warren Buffett is not getting any younger and while a transition is already in place for when he retires, it just won't be the same without him at the helm

Bottom line for boomers is that safety is paramount with any company that doesn't provide a dividend isn't a great idea.