The Lever Principle in Investing
Leverage time to reduce risk and increase your portfolio balance
A lever is one of the oldest machines in engineering. The lever principle was discovered by Archimedes. Archimedes once said: “Give me a lever long enough and a fulcrum on which to place it, and I shall move the Earth.”
The lever principle is illustrated on the figure shown above. A 20 kg mass placed 2 units to the left of the fulcrum is balanced by a 5 kg mass placed 8 units to the right of the fulcrum. So we observe that given enough distance, a smaller weight can be used to balance a larger weight. The balancing condition is described by the equation:
(Weight_1)*(Distance_1) = (Weight_2)*(Distance_2)
Let Weight_1 = 20 kg, Distance_1 = 2.0 units, Weight_2 = 5 kg, and Distance_2 = 8.0 units, then we observe that:
20 x 2 = 5 x 8 = 40
In personal finance, thanks to compound interest, the lever principle can be used to increase portfolio value. Here, the lever is not distance, but time. As shown below, a small amount of money invested over a long period of time will yield a large return.
