I’ve been reading Andrew Ross Sorkin’s new book 1929. It follows some of the leading players on Wall Street and Washington during the 1920s bull market, the crash, and the subsequent economic and political fallout.
Markets are complex and there is seldom a single factor that leads to a crash. Yet Sorkin shows that the magnitude of the crash and resulting economic fallout largely resulted from investors using margin to buy shares.
Borrowing money to purchase shares was common practice for nearly every type of investor. The wealthy executives running Wall Street banks and investment companies used margin. The first-time investors who fueled the bubble used margin. The possibly fictional shoeshine boy who famously gave stock tips to Joseph Kennedy probably used margin.
In the 1920s banks only required investors to put up 10% of the purchase price of a share. That 90% loan amplified returns significantly – if the market went up. By 1929 10% to 12% of the total market value of New York Stock Exchange listed shares were made up of borrowed money.
There is a cascading effect in any significant bear market. A market drop causes other investors to sell, which induces more selling. In October 1929 margin lending acted as an accelerant to the cascading effect as investors were forced to either put in more capital or have the shares sold by their broker.
Margin lending gained a well-deserved black eye after the 1929 crash. In 2025 $16.7 billion of margin loans were outstanding in Australia which represent about 1% of the total value of local shares. But that doesn’t mean that investors can’t – and aren’t – gearing their investments.
Gearing in 2026
Investors have far more choice today when it comes to introducing gearing into a portfolio. Leveraged ETFs are growing in popularity with the largest being Betashares Geared Australian Equities Complex ETF which has $580 million in assets. Betashares alone has 13 geared ETFs.
There is Fundlater which allows investors to acquire one of four diversified portfolio choices by putting down 40% of the investment and borrowing the remainder. NAB Equity Builder provides loans for investing. Both products are different from traditional margin lending as they come with a set payment schedule made up of principal and interest.
There is debt recycling where investors borrow money against their home to invest while gaining a tax advantage.
Australia is one of the only countries in the world that permits contracts for difference or CFDs which allow investors to add gearing to short-term speculation on shares.
Australians are very comfortable with borrowing money and we have the second highest household debt levels in the world. Given that markets have appreciated significantly since the global financial crisis and have bounced back quickly from dips many investors see little risk from gearing.
Are markets at risk given increased gearing?
Structurally there is less risk from today’s version of gearing than in 1929. The forced margin selling doesn’t occur in any of the new ways that investors can gear their investments. Due to regulatory changes margin buying occurs with less debt.
That doesn’t mean there isn’t any risk. I suspect that many of the investors who are gravitating to these products don’t fully understand how they work. For instance, geared ETFs can suffer from various degrees of volatility drag that may result in long-term returns differing from what an investor would expect from the gearing ratio.
Additionally, in any market drop gearing exaggerates losses which makes it more likely those investors will sell. After a long bull market complacency sets in and for many investors now is one of those times.
Morningstar’s annual Mind the Gap study compares the returns of funds and ETFs with the returns of the investors who’ve owned those funds and ETFs. And yes, there is a difference.
Investor returns are influenced by the timing of buy and sell decisions. The gap between investment and investor returns is an indication of how poor we are at making decisions. Each poor decision is a point of failure.
The cumulative impact was a 1.10% gap between investment returns and investor returns over the previous decade in our latest study. Collectively investors are not up to the challenge in the best of times.
Given this is an annual study the size of the gap will fluctuate each time we run a new set of data. Over time we’ve noticed several patterns. The gap widens if there is more volatility - a feature of all geared products.
The behavioural issues associated with volatility are evident when different types of investments have different levels of volatility—say share ETFs and bond ETFs. The investor gap is bigger for share ETFs than bond ETFs. This suggests the gap is bigger for geared products and non-geared products.
It is also evident when different periods of time have different levels of volatility. For instance, in 2019 the gap was around 1%. In 2020 with turbulent markets in response to COVID the gap widened to close to 2%.
Final thoughts
I’ve been surprised at how many investors are casually using gearing as a foundational part of their long-term investment strategy. Maybe I shouldn’t be. Throughout history investors have been looking for a short-cut to riches.
I don’t see gearing at these levels as a systemic risk. Instead, I think the probable losers are many of the investors that are overindulging in these products. Caveat emptor.
Mark LaMonica
Also in this week's edition...
Kaye Fallick catches up with UK retirement expert Guy Opperman for some suggestions on how super funds can improve their support for members in deaccumulation.
Harry Chemay with a reminder that the success of a retirement strategy is based on both the timing of cash flows and the sequence of returns.
Most SMSF members have likely ignored the new Payday regulations. Meg Heffron outlines some areas to look out for.
Media reports continue to forecast wide scale AI-related job losses. Nick Maggiulli looks back on the history of technological change and outlines why he thinks these forecasts are inaccurate.
The government is exploring taxes on wealth. Chris Evans, Peter Mellor and Richard Krever with their take on tax policy.
Why aren’t oil prices higher? Given the level of disruption history suggests they should be. Jason Teh looks at the impact of structural changes to the oil market to explain today’s prices.
Rachael Rofe outlines changes to philanthropic tax laws.
This week's white paper from GSFM affiliate Man Group looks at who can solve the fundamental economic problems AI faces.
Curated by Mark LaMonica and Leisa Bell
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