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Was this a dumb, risky move with no merit?
Old 05-29-2009, 06:46 PM   #1
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Was this a dumb, risky move with no merit?

During the last 2 years I have taken my annual distribution requirements (about 3 1/2% of portfolio balance) by utilizing my home equity line of credit (rate prime -1) rather than drawing off the portfolio. When I look at my portfolio I mentally subtract the balance of the home equity loan and say "this is what you really have". I don't want to do this anymore because I do not like debt. Was this a risky way to do things and when should I pay this off? It is not costing me that much right now.
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Old 05-29-2009, 06:51 PM   #2
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Well, depends.

If interest rates go up on your HELOC and portfolio tanks, yes it was a very bad decision. If interest rates fall and portfolio advances it was a great decision.

Essentially, what you are doing is leveraging your investments. Does it feel good? Act accordingly.
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Old 05-29-2009, 10:23 PM   #3
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Would you have felt comfortable borrowing money (using your house as collateral) to buy some stock? Because what you did is essentially the same thing. The only factor that might make it slightly different is the tax aspects of selling stocks if they were in a taxable account.
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Old 05-30-2009, 06:45 AM   #4
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All depends on your risk tolerance and view of the world, as well as the degree of magnitude. I chose to lever up somewhat in the last 6 months to buy corporate bonds, but what I did was within my risk tolerance and I started out with modest leverage and a very secure job.

Another thought: I believe that intercst/John Greaney publuished some work on his site a few years ago that showed you would have been better off historically by borrowing against your assets for money to live on in downturns. Maybe poke around his site and see if you can turn it up: The Retire Early Home Page.
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Old 05-30-2009, 07:54 AM   #5
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This may have been smart if you have other things in your portfolio besides stocks. Bonds or CD's yielding 4-5% in a tax deferred account would produce enough income to more than offset the 2.25% rate you are paying on your HELOC.
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Old 05-30-2009, 03:43 PM   #6
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I think I came out better by using my HELOC for my distributions, at least during this downturn. The investment income from the portfolio far exceeds the interest cost on the $60,000 current HELOC balance at todays rates. Also, the portolio gain since the March lows are greater than the HELOC balance so I got lucky. Maybe I took more of a gamble that I was aware of, now I am going to pay off if I can bring myself to liquidate the securities. I like my stuff.
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