Why is leverage not suitable for long-term holding?

Following up on @资深韭菜 teacher's Why Does Triple Leverage Have Decay?, I proposed the viewpoint that "Leverage is not suitable for long-term holding", which raised many questions. Let me briefly explain.

First, we need to understand that market gains are compounded. For example, if I have $100 and invest in a stock that rises 10% on the first day and falls 10% on the second day, the final result would be: Day 1: 100*1.1=110, Day 2: 110*0.9=99, resulting in a loss of $1.

Similarly, if the stock falls 10% on the first day and rises 10% on the second day, the final result would be: Day 1: 100*0.9=90, Day 2: 90*1.1=99, also resulting in a loss of $1.

In other words, daily market fluctuations create decay.

Leverage amplifies this decay! Let’s take triple leverage as an example (the same logic applies to double leverage).

If I have $100 and invest in a stock that rises 10% one day and falls 10% the next (as we saw earlier, the order doesn’t matter), the calculation would be: 100*1.3*0.7=91, resulting in a yield of (91-100)/100=-9%.

Now, what if we increase the principal by 1.3x without applying leverage? The principal becomes $130, and the yield remains 0.1. The loss would be: 130*0.9*1.1=128.7, a loss of $1.3, with a yield of (128.7-130)/130=-1%.

Next, let’s consider a profitable scenario. Assume an initial principal of $100 over five days: three days with a 10% return, one day with a 20% return, and one day with a 20% loss. This simulates a "long-term profitable, reasonably volatile market," aligning with expectations for the U.S. stock market.

Without leverage: 100*1.1*1.1*1.1*1.2*0.8=127.776

With triple leverage: 100*1.3*1.3*1.3*1.6*0.4=140.608

With a 1.3x principal increase: 130*1.1*1.1*1.1*1.2*0.8=160.1088

1.3x principal yield > triple leverage yield > no leverage yield

This demonstrates the difference between a 1.3x principal and a 1.3x yield. In the long run, triple leverage (1.3x yield) consistently underperforms a 1.3x principal increase due to decay.

Many argue that the U.S. stock market is a long-term, one-way market suitable for leverage.

But in long-term investing, which is more achievable: increasing the principal by 1.3x or using triple leverage? My simulation shows the former yields higher returns.

Leverage is reasonable for short-term speculation when capital is limited, but long-term investing favors increasing principal.

Leverage magnifies market volatility decay, and unstable fluctuations erode returns over time.

For long-term investing, increasing principal is more stable and sustainable than high leverage.

Leverage is better suited for short-term speculation and specific arbitrage strategies, not long-term portfolios.

(Disclaimer: This post isn’t anti-leverage. As shown, leverage on quality assets (140) outperforms no leverage (127). So, if cash flow is tight, leverage on a good stock is viable. But long-term decay is significant—here, triple leverage only beats no leverage by $13. While extreme, it illustrates triple leverage doesn’t triple returns due to decay, so increasing principal is better long-term.)

Everyone has their own investment philosophy and financial situation. Choose what suits you best. Short-term and long-term strategies differ—investment philosophy isn’t about others’ theories but building your own based on your circumstances and understanding.

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