Kevin O’Leary Says This Mistake Can ‘Wipe Out’ Years of Investment Gains

Borrowing money can help investors buy more assets and potentially increase their returns when markets are rising. But Kevin O'Leary warns that the same strategy can quickly work against you when investments fall.

The Shark Tank investor says excessive leverage is one of the biggest mistakes investors can make, warning that it can wipe out years of investment gains. His warning matters whether you're buying stocks on margin, financing investment property, or simply trying to make sure one bad move doesn't derail your retirement goals.

Kevin O'Leary warns that too much leverage can wipe you out

In a September post on X, Mr. Wonderful warned investors about the dangers of relying too heavily on borrowed money.

"The biggest killer of investment value is too much leverage," O'Leary said while discussing common investing mistakes. "You can have a great company or real estate project, but when you're overleveraged, and the market turns against you, your equity can get wiped out fast."

He also warned about going above 50% loan-to-value based on an overly optimistic valuation. "And then the markets don't play in your favour, you get crushed, your equity gets wiped," he said.

'Leverage is not always your friend' says O'Leary

His warning isn't that investors should never borrow. O'Leary acknowledges that leverage can sometimes make sense, but he becomes much more cautious once debt represents a significant share of an investment.

"Leverage is not always your friend," he said. "You have to use it sometimes, but once you're taking on more than 30% leverage, you should understand exactly how much risk you're putting on the table."

Here's how leverage can magnify your losses

O'Leary's warning becomes clearer when you put actual numbers behind it. Suppose you invest $50,000 of your own money in a $100,000 portfolio and borrow the other $50,000. If the portfolio rises 20%, it becomes worth $120,000. After accounting for the $50,000 loan, your equity would be $70,000 before interest.

Your investment gained 20%, but your original $50,000 increased by 40%. The same leverage works against you when markets fall. A 20% decline would leave the portfolio worth $80,000. You would still owe $50,000, leaving just $30,000 of your own equity. Your investment fell 20%, but your original $50,000 fell 40%.

That's the risk O'Leary is highlighting. An investment doesn't have to collapse completely for leverage to do serious damage to your savings.

Borrowing also raises the return you need

Borrowing also creates another hurdle your investment has to clear before leverage actually improves your return.

Margin loans charge interest, which directly reduces how much you make. The same principle applies to real estate, where rental income and appreciation need to outweigh financing costs and other expenses.

The risk can become more serious during a downturn. Margin investors may have to add cash or securities if their equity falls below brokerage requirements, potentially forcing them to sell investments while prices are already down.

O'Leary also warns against putting too much in one place

O'Leary's advice on diversification follows a similar principle. Don't put yourself in a position where one bad outcome can do permanent damage.

"Never put more than 20% in a sector or 5% in a single stock," he has advised. "When poo hits the fan, you want to survive."

Diversification doesn't prevent losses, but it can reduce the damage caused by one company, sector, or investment performing badly.

Check where leverage appears in your finances

O'Leary's 30% warning isn't a universal cutoff, but it gives you a reason to check where debt is amplifying your risk.

If you invest on margin, check how much you've borrowed, the interest rate you're paying, and your brokerage's maintenance requirements. It's also worth understanding how far your investments could fall before you would need to add money or risk having positions sold.

Real estate investors can ask a similar question. Look at how much debt you're carrying relative to the property's value and whether you could continue making payments if rent fell, expenses jumped, or the property lost value.

You don't necessarily need to eliminate every form of investment debt. O'Leary himself acknowledges that leverage sometimes has a place.

Bottom line

Kevin O'Leary says excessive leverage can wipe out an investor's equity surprisingly quickly, even when the underlying company or real estate investment still has value.

Borrowing can magnify gains when investments rise, but it magnifies losses too, while interest costs make it harder to come out ahead. O'Leary's broader advice also focuses on limiting how much damage any one investment or sector can do.

If you're using borrowed money to invest, consider what would happen if the market dropped 20% tomorrow. Understanding whether you could withstand a margin call, forced sale, or major loss could help you avoid money mistakes that might take years to recover from.

This article is for informational purposes only and should not be considered investment advice.

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