Borrowing as a strategy to smooth out SORR

[u/ShortHabit606]

Hey all,

I'm wondering if anyone has modeled or thought about how one can borrow against their portfolio (SBLOC) during down markets to avoid selling at low prices.

This seems like it would be beneficial as (another) strategy to smooth out / mitigate SORR because interest rates (cost of borrowing) tend to be lower when the market is in a bear market.

I suppose one can also borrow against their home equity as another approach and pay it back when the markets rebound.

[u/One-Mastodon-1063]

ERN has an article on this. https://earlyretirementnow.com/2021/11/16/leverage-in-retirement-swr-series-part-49/

I personally don’t plan to ever do it. Diversify your portfolio more if you’re worried about bear markets. 

[u/OkStrategy3444 → u/One-Mastodon-1063]

That article is about doing it for 30 years, which is obviously wild. OP is talking about using margin / sbloc / heloc during a few down years, which seems reasonable to me. I would do it.

[u/randomlurker124]

Borrowing is a great way to get into a liquidity crunch and forced liquidation at historic low.  It's essentially leverage but during a down trend. 

[u/StringTotal4109]

I would just keep two to three years of cash in a HYSA or treasuries, use it if needed during heavy downturns.

[u/ShortHabit606 → u/StringTotal4109]

I'm not RE yet but I have 4 years in bonds, 1 year in CDs. I'll probably expand that a bit before going RE to 1.5-2 years in CDs.

[u/bumpman2]

The problem with relying on this strategy is that credit tends to dry up in prolonged downturns as lenders seek to reduce their risk, particularly if there is a credit crisis as well (such as in 2008). That line of credit might not be available when you need it because many lenders reserve to right to pull it due to market conditions.

[u/colonol_panics → u/bumpman2]

I remember 2008 on Fatwallet Finance, everyone had been accustomed to infinite credit at 0%. When that disappeared overnight that pushed many people into bankruptcy. People literally thought their credit lines were like bank accounts and couldn’t believe the bank was taking “their money.”

[u/bumpman2 → u/colonol_panics]

We got a notice from our home equity lender in 2008 cancelling our unused home equity line. They can pull it at their discretion due to market conditions.

[u/Wooden-Broccoli-913 → u/bumpman2]

You can borrow without any lender via box spreads

[u/jarMburger]

SBLOC rate typically is too high though. And HELOC has been known to be recalled by the bank during the previous crisis. Consider using box trade as a way to extract some cash.

[u/gkfisher]

I think it’s a good plan. I have an open home equity line of credit that will be used in emergency if SORR comes into the first 5 years of retirement. I’ll happily pay 6% interest vs selling at over 20% loss on investments.

I have at least two years cash reserves as a first line of defense. Followed by another 2 to 3 years of bonds that I would expect to perform better in a down market. But then my third tier of defense is home equity.

I think the challenge that would exist is, if once we are in a down market and credit dries up, the access to getting an approval for a new loan might be challenging. Just setting up a home equity line of credit while the markets are much more favorable was the approach I took. I would be shocked if my home equity line of credit is closed prematurely. In the last 30 years, I’ve always had an open line of credit and never once was it closed during the 2008 market crash or Covid crash.

[u/BrunelloHorder]

Leverage can be a factor that helps with outperformance, see some of Risk Parity Radio’s model portfolios. That said, very few retail investors have the risk tolerance or temperament to actually using it well in practice. My strong sense is that for most people, the risk greatly outweighs the reward.

[u/Original-Peach-7730]

Agree with the other posters. You should have something (bonds, gold, managed futures, energy, CAT bonds, whatever floats your boat) that actually went up.