It’s been a theme these past few months, maybe this year – that I’m constantly adding leverage to my portfolio.

As I become more educated and also more confident in my investment theses, I find that it would be disadvantageous to not use up available liquidity just for the sake of “safety”.

Of course that being said, safety needs to be a concern at all times, and so I am adding metrics to safeguard the downside while making sure I’m not leaving huge amount of money on the table by having too much idle liquidity.

Another important reason for adding leverage

Before going into the metric, I’d want to lay out one more reason why I would want to add even more leverage than before now.

And that is to hedge against my potential Japanese home purchase perhaps in 2026 or 27.

If I can get a Japanese home mortgage, that would be so great, but I am also not counting on it too much due to low Japanese income and potential rejection from being a company owner instead of an employee.

In any case, I’d probably be borrowing at least HKD1M+ to fund the purchase, beside maybe selling some assets and taking out extra liquidity from my securities account.

Not counting asset sale because it’s currency neutral, borrowing the HKD1M would expose me to exchange rate risk – if USDJPY goes down -10%, my HKD1M purchasing power would immediately decrease by HK$100k.

If I lever up now before the purchase, at least I can get the capital to “currency neutral” and protect myself from any USD weakness (or JPY strength, which is somewhat unlikely IMO).

And if I ever get close to exhausting excess liquidity due to a downturn, I can always just borrow the money at that point to gain extra liquidity.

Meanwhile any USD weakness would be offset by increasing asset prices and I can make sure my future home isn’t getting “more expensive” relative to my net worth.

The new metric I am using – max tolerable drawdown

Previously I was looking at my “leverage ratio”, and thinking maybe 30%, or 40%, would be the max I should go.

But that’s pretty arbitrary – why 30, or 40, or 50? how much of a drawdown can I tolerate then?

So now I actually decided to just using the most direct data – the excess liquidity in the accounts.

I am in trouble if excess liquidity reaches zero, and I can see exactly how much “cushion” I have by looking at the excess liquidity number.

Also by doing [excess liquidity / net asset value], I can see how much excess liquidity I have as a percentage of my total net worth, or in other words, how much my portfolio can drawdown before I get into trouble.

Let me do an example to confirm my math. So let’s say I have $1M assets, I bought $2M worth of stocks, and all the stocks has a 30% margin requirements.

So the margin requirement is $600k, and I have $400k liquidity.

My logic tells me that with $400k excess liquidity against $1M NAV, I should be able to endure a 40% portfolio decrease before I have 0 excess liquidity.

Now let’s say the market drops by 20%, I lose $400k which is a -40% on my portfolio.

The stocks are now worth $1.6M and my margin requirement is 540k. I have $600k NAV and now the excess liquidity is $60k, which is actually not 0 yet but it’s getting quite close.

Alright so with my formula, it actually still has a natural cushion since once the asset value drop, the margin requirements will also fall.

So I feel good using this metric, and the next question is what’s the max drawdown I should keep around as a “cushion”.

And I think 20-25% is fine – since I have a low vol portfolio with such a heavy gold allocation already. And also I would already start doing rebalances and maybe de-leverage a bit if things drop far enough. So it’s not necessary to keep an over-excess amount of cushion.

The case for stretching out further

My base case is that I can generate an average of at least +10% per year from my investment vehicles. (probably more)

With yen borrowing costs around 2% (1.5% for the amount >1.1M) … I am leaving 8%+ per year on the table for every dollar (yen) that I don’t borrow.

Last month I was at 34% leverage, around HK$1.46M worth.

I am at least going to increase that to 50-60%, maybe around HKD2.4M.

So that’s HKD1M and once I do that, I should on average generate an extra $100k/year or $10k/mo.

A significant amount to be leaving on the table if I don’t take that leverage out.

If things do get dangerous, I will review my strategy and reformulate again. But for now, I will slowly lever up and see if everything goes well.