Optimize your leverage

21 August 2026, 09:36 UTC Chief Investment Office GWM Investment Research

Strategic: Optimize your leverage Optimize your leverage Author: Sagar Khandelwal, Strategist, UBS Switzerland AG

Why? 1) Borrowing strategies can mitigate tax drags, potentially improve returns, and enhance diversification when carefully managed. 2) Some borrowing capacity can be reserved to build resilience against emergency situations, including market downturns, without locking in losses. 3) The unique risks of borrowing, including the potential requirement to sell assets to meet a margin call or repay debt, should be carefully managed as part of a well-diversified investment approach. Source: Jason Leung_Unsplash

Borrowing is risky, but we believe that proactive, prudent, portfolio fluctuations and broaden return sources, with and strategic borrowing can enhance an investor’s financial future cash flows used to gradually reduce debt. plan. Investors may be initially more reluctant to look at lending given the repricing in both interest rate expectations • Currency management: Borrowing in foreign currencies can help manage exchange rate risks and government bond yields due to fears that the Iran war associated with future foreign income and offer and reduced oil supply may push up inflation. additional funds for domestic investments. It may also be more cost-effective to borrow in a foreign currency with While we believe long-dated bonds may remain vulnerable a lower funding cost. However, this approach requires to further rises given long-term fiscal sustainability concerns, careful risk management, including tools to limit adverse our sense is that the direction of travel for short-dated debt impacts from an appreciation in the funding currency. is for lower yields. We expect high-quality bond yields and Borrowing in a foreign currency should also align with US interest rates to fall into early 2027, especially as US long-term currency management and the wider financial growth and labor market activity moderate. If volatility picks plan for one's needs today, over one's lifetime, and up again on a prolonged Middle East conflict, borrowing to beyond. fund short-term investment or spending while letting asset prices recover may be a preferable strategy to selling assets • Boosting return potential: For those with a high risk- at a loss, subject to careful consideration of the risks and tolerance, borrowing could potentially lead to higher one's own financial plan. long-term gains if returns exceed borrowing costs, particularly as interest rates decline. However, this Borrowing can help with: strategy is risky, as leverage can amplify both losses and • Managing liquidity: A flexible line of credit can provide gains. immediate access to funds without the need to sell assets, reducing the necessity of holding excess cash, Before engaging in borrowing, investors should carefully money-market funds, or fixed-term deposits. This may be consider both the cost and robustness of any loan. beneficial for handling tax bills, capital calls, or retaining the flexibility to make larger investments. If an investor Costs involve comparing loan rates with expected returns for needs funds but finds a part of the portfolio has sustained the investments in which borrowed funds are put to work. losses, it may be more prudent to borrow against a more resilient part of one's holdings, than to sell the assets If the expected return of the intended asset is lower than the whose price has fallen and lock in losses. borrowing cost, borrowing does not make financial sense. If the expected return is higher than the borrowing cost, • Improving diversification: Borrowing against existing taking on debt could make sense. assets to invest in less correlated assets may help smooth

This report has been prepared by UBS Switzerland AG. Please see important disclaimers and disclosures at the end of the document.

principles: It is important to remember that short-term returns often 1. Use debt to diversify and build resilience. deviate significantly from long-term expected returns. As a 2. Avoid a mismatch between the duration of liabilities and result, cost should not be the only…