Wealth Planning

Why borrow when you have money?


In a recent J.P. Morgan survey, more than 65% of our clients said they view keeping cash on hand as a missed opportunity to grow their investments and other assets. And 73% said they prefer not to liquidate investments when they have to meet a large unexpected expense.1

These survey results did not surprise us, as many clients choose to access credit both to meet their unexpected obligations and to take advantage of timely opportunities—without disrupting their carefully planned portfolios.

Expanding your options

How do you make sure you have cash when you need it? One of the most strategic, yet sometimes overlooked ways is to establish a line of credit based on your portfolio. 

We’ve seen clients tap into these lines of credit to:

  • Purchase real estate for cash in a competitive market and put permanent financing in place down the road
  • Bridge a liquidity gap when they need funds immediately and expect cash flow from a bonus or sale of a business in the near future
  • Respond to time-sensitive market and business opportunities 

Borrowing to invest

Many sophisticated investors use portfolio lines of credit so their investments can do double duty: let them respond to immediate investment opportunities while staying invested for the long-term benefit.

This approach may makes sense. Our research consistently finds that, historically, one of most effective ways to compound wealth has been to stay invested through economic and market cycles, despite episodes of volatility. (See “Stay invested to stay ahead” below.)

Also, borrowing to invest may help U.S. taxpayers enjoy an important tax benefit: Interest on loans used for investment purposes can be deductible. So, although taxes should never drive investment decisions, it is wise to keep in mind that investing tax-efficiently can save money—which may be particularly helpful in an environment of more modest equity returns.


Stay invested to stay ahead

Bar chart shows performance of the S&P 500 from January 1999 through December 2018 in four example portfolios: Fully invested through this time period, missed the 10 best days in this time period, missed 20 best days in this time period, and missed 30 best days in this time period. The chart highlights that a portfolio that stayed fully invested during this time period (despite the highs and lows of the market cycle) saw the highest return.

The chart above highlights that a portfolio that stayed fully invested during this time period (despite the highs and lows of the market cycle) saw the highest return.

Source: J.P. Morgan Asset Management analysis using data from Morningstar Direct. Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Past performance is not indicative of future returns. An individual cannot invest directly in an index. Data as of December 31, 2018. Analysis is based on the 2018 J.P. Morgan Guide to Retirement.

For illustrative purposes only. This information does not reflect the performance of any specific investment scenario.

The views and strategies described herein may not be suitable for all investors, and more complete information is available which discusses risks, liquidity, and other matters of interest. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Outlooks and past performance are no guarantee of future results. It is not possible to invest directly in an index. Please refer to “Definition of Indices and Terms” for important information.

 

How a portfolio line of credit works

Portfolio lines of credit can be particularly attractive because they typically offer low rates and have a streamlined approval process, due to the surety of the assets pledged. Borrowers pledge securities in an account and are free to trade in that account so long as they maintain the collateral levels to support the line of credit.

Borrowers are usually charged an index-based variable interest rate. Repayment terms are flexible, with interest paid only on the amount borrowed. 

Of course, borrowing against securities has its risks. Among them: market fluctuations may cause the value of the assets to decline, which could trigger a need for additional collateral or liquidation of securities.

Looking at your big picture 

Having a flexible liquidity plan in place can be a strategic complement to your investment portfolio to help meet your financial goals—your J.P. Morgan team is available to help you evaluate your options.

To get started, you may want to:  

  1. Identify your goals for the next 6–12 months
  2. Evaluate all your borrowing options
  3. Inventory your liabilities in light of low interest rates now available

We also offer a helpful Bucket List series of articles:

Lines of credit are extended at the discretion of J.P. Morgan, and J.P. Morgan has no commitment to extend a line of credit or make loans available under the line of credit.

 

1 J.P. Morgan Chase Client Survey, June 2018, of 551 primary or shared decision makers with net worth of $500k–$10MM+

 

 

 

 

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