The use of leverage is something that the recent financial crisis has raised awareness about. The word itself implies dangerous investment practices, when in fact it is not that. Leverage, in fact, is drawing on the equity one might have in one asset or pool of assets and using that equity to purchase another asset (or pool of assets, of course). Notwithstanding the fact that the use of leverage is completely separate from the new investment, there are some clear dangers involved with using leverage, including the most-feared fact that one can end up owing more against the leveraged asset than what it or other assets are worth. The following three tips will help everyday, retail investors stay out of trouble when it comes to using leverage with their own portfolios.

1. Use leverage sparingly. This might seem like common sense, but the use of leverage should be reserved for only the most vital opportunities. In many cases, people will use leverage “right out of the gates.” Instead of drawing 100% of one’s available equity, consider an approach of “easing.” This means that if one has $250,000 in equity available (through the practice of leverage), purchase only when absolutely needed and even then, purchase in increments rather than all at once.

2. Use leverage only when selling the actual asset against one is borrowing does not make financial sense. For most investors, once an asset reaches a certain value, it is to be sold. However, this might not always be the case because the asset may be expected to increase further in value. When selling the asset poses an opportunity risk, using leverage makes sense. The family home is a perfect example. One can borrow against one’s equity in the family home and invest that equity in low-priced stocks; it does not make sense to sell the house and live in a trailer simply for the sake of not being leveraged. With that in mind, it is worth revisiting Tip #1 - use leverage sparingly.

3. Liquidate losing positions and repay loans against leveraged assets at least twice per year. This may also seem like a common sense practice, but too many people will hold onto losing positions because they believe they will turn around. One way to ensure you are not over-extended is to make sure you repay loans on leveraged assets twice per year - if one is unable to do so, either because the assets are worth less than the loan or they do not want to liquidate positions to repay such loans, then leverage is being used for more aggressive investment reasons and this article about prudent and conservative leverage use is really not for them anyway.

The use of leverage need not be an overly complicated and risky investment strategy. Being conservative and wise about leverage use involves the above tips and more.

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Chris has more than 17 years of financial services experience. He currently manages a website about Class B CDL Jobs at Class-B-CDL-Jobs.com.