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I bought a home after the market crash in 2009 and I have quite a bit of equity in it now (100k). I still have 20 years until I retire and currently my main brokerage account is very high risk / high return. I'm entertaining a 10/15 HELOC at 3% to add more money to my current investment account but am assessing the risk before pulling the trigger.

From my research the worst bear market since the great depression (~34months) was the housing market crash in 2008 at ~25 months (down 45%) so as long as I am able to weather that length give or take 6-12 months I figured it's a pretty good bet.

To me a long bear market seems to be the biggest realistic risk. Does this thinking check out or am I missing other obvious likelihoods? Many thanks.

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    Will you be paying the HELOC with current income, or from the proceeds of the investments? – RonJohn Dec 14 '20 at 0:57
  • @RonJohn during the draw period (10 years) I don't have to making any payments and per my projections I should be able to recoup the loan amount in 5-10 years depending on market performance (using last 10 years performance of s&p) – Jacksonkr Dec 14 '20 at 1:15
  • @RonJohn Do you know the technical term for a HELOC call? I'd like to research that so I have questions ready for my credit union. While it seems unlikely I'd still like to be prepared for that scenario – Jacksonkr Dec 14 '20 at 1:42
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    I did a bit more research, and discovered I was confusing some things. Still, if you lose your job during a recession, and the HELOC comes due during that time, you could take a serious bath. Your desire to take risks now are much higher than they will be in 20 years. – RonJohn Dec 14 '20 at 1:55
  • @RonJohn Thanks for clarifying and yes I agree that now is a much better time to take the risk! Part of my asking questions here is to make sure I have accounted for the risks so that I can double check my comfortability eg would I be able to comfortably weather the unavoidable bear markets that are coming. – Jacksonkr Dec 14 '20 at 14:57
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While your research shows you how the market has historically recovered from a crash, you haven't shown that you will be invested in that market.

I still have 20 years until I retire and currently my main brokerage account is very high risk / high return. I'm entertaining a 10/15 HELOC at 3% to add more money to my current investment account but am assessing the risk before pulling the trigger.

If you are taking more risk than the market as a whole you might find that your research didn't look for the right thing.

Take a look at the NASDAQ index:

Milestone Date
2500 January 1999
3000 November 1999
4000 December 1999
5046 March 2000
1108 October 2002
2500 January 2007
3000 March 2012
4000 November 2013
5056 April 2015

Time to fully recover 15 years and 1 month.

Plus individual investments can do better or worse than the market.

During the 2008 financial crisis there was an impact on Lines of Credit. The untapped portion was cut. So if the market has crashed or home values have crashed your access to more money could be limited.

Check your assumption of how much you can borrow. You said how much equity you have (100k), but you didn't specify what the value of the house is, and will they let you borrow 100% of the value, or do they limit you to 80% or 90%. The more they let you borrow, the greater the risk. They may even charge a different rate for 100%. If you have to sell the house and home prices have dropped you may be far under water on you house and your investments. many people in late 200's were trapped in this situation. housing values dropped first then a year or two later the stock market dropped. I know people who took 10 years for the house to return to the price they paid for the house.

Check your interest rates. You may have to pay interest during the draw period, but if you don't it would be added to your debt. Make sure that you can afford the rates from current income. Some rates are variable, and can have a very high cap. Asking what the rate will be 10 or 15 years from now is a guess.

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    Thanks for this, I appreciate you highlighting so many things that could go wrong and I definitely noted the impressive nasdaq dotcom bear as it's arguably the largest con considering that my diversification is weighted in tech. I can borrow up to 80% of the equity and interest is applied to the currently drawn balance (which would be the entire amount from day 1). Per my rough sketches I would have to pay back $134,935 with a projection of making $330,038 over 10 yrs at the s&p 12% average. My current thought is to invest 50% of the equity over 5 years, for safety. What do you think ? – Jacksonkr Dec 14 '20 at 15:28
  • Make sure that it is " I can borrow up to 80% of the equity" and not all loans can't exceed 80% of the value. – mhoran_psprep Dec 14 '20 at 15:32
  • Good point, and it's definitely capped at a point. I have 750+ credit and I don't think I could even get a loan for 10k without putting up collateral! – Jacksonkr Dec 14 '20 at 16:17
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The United States (S&P 500) is a great example of Survivorship Bias.

There is no reason to believe it will continue to deliver returns as good as the last hundred years going forwards.

There are plenty of developed countries (or even sub-sectors of the US itself) that crashed and never recovered to their previous levels, especially if you add in a 3% hurdle rate.


Take Japan:

They were the second-largest, most developed economy in the world from 1968 to 2010. They are still the world's 3rd largest.

This is the Nikkei 225 Total Return. The yellow shaded region is where you would have had to invest to be breaking even today at 3% a year:

enter image description here

That was 40 years ago. If you invested after that record-breaking runup (300% in 10 years, pretty damn close to the position the S&P is in today), you may well be talking 60 years if not more. 20 years is not enough.

If you can afford for your investments to go to zero and never recover, then feel free to take the risk. Otherwise, I wouldn't recommend it.

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    Great answer - something that would be helpful to point out, is that the noted '3% annual return comparison' would be a pretty reasonable zero risk interest rate over the period. However, since the OP will be paying interest on the mortgage, that comparison rate would be inflation (probably 1-2%) + interest to pay on their HELOC (probably 2-3%). So with a comparison rate of say 5% total annual 'risk free' return by not taking on the debt, it would take far, far longer to recover. – Grade 'Eh' Bacon Dec 14 '20 at 17:15
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    I don't understand why you only hilighted the early 80s in your chart. Obviously if you bought-in in the late 80s then you're still underwater even today. However if you bought in like 2012 then you're doing pretty well. I don't mean to take away from your point but just as a matter of accuracy that's not the only time you could have invested to have done better than break-even against 3% cost of money. – Dean MacGregor Dec 14 '20 at 20:35
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    @DeanMacGregor Fair point. What I was trying to highlight is that it's possible for a developed, relatively safe, world-class stock market to crash and not recover for a lot longer than 20 years. – Kaz Dec 14 '20 at 20:40
  • @Kaz I assume you mean 3% value lost due to inflation, right? – jpaugh Dec 16 '20 at 3:28
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    @jpaugh interest on the loan – Kaz Dec 16 '20 at 8:26
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You have correctly identified a couple of the main risks associated with investing through debt. Namely, that you would need to be able to bear interest costs for the period of time that your investments might be 'underwater', or you risk needing to liquidate your assets which might not cover your debt, leaving you with less than nothing. You've also correctly identified that housing losses in particular have borne the brunt of recent major economic downturns.

However, the risk of using home equity for investing is not just in the leverage itself, it is also in what that mortgage really means to you from a flexibility standpoint. Consider the order of events of the Global Financial Crisis that started in 2007:

(1) The early 2000's had a significant upturn in the US housing market, which dominated attention and captivated the national interest (see: DIY / house flipping show boom around the same time). People began buying larger and larger houses, using the oft-repeated proviso of 'they aren't building more land!!!!', taking on debt that banks were practically begging them to accept, on terms that would now be considered literally criminal [No Income, No Job or Asset 'NINJA' loans being perhaps the most infamous]. The financial pressure riding on the continued success of the housing market became massive. The point here is that markets are tied in a very intricate way, and it is often difficult to predict the outcome of a collapse in one sector, on another. Even the Global Financial Crisis may have been a non-worst case scenario of how this might happen in the future.

(2) By 2007, many homeowners were overleveraged, having borrowed more than they could reasonably afford, temporarily buoyed by an expectation that ever-rising house prices would always allow refinancing to occur, with loans to be ultimately paid off by the value of the underlying housing assets themselves [sounds like a bubble, right?]. In 2007, when housing supply finally outpaced speculation-laden demand, prices plateaued, and then started to drop. Suddenly, people couldn't refinance their homes which they couldn't afford on their own (especially if they had infamous balloon payment mortgages which deferred some of the larger principal repayments of the loan for 5+ years, inherently necessitating refinancing to be afforded). So make sure you are truly able to afford your total debt, not just that the bank will approve you for it. They don't have your best interests at heart.

(3) As some people became unable to refinance their homes, they were forced to sell. Mass sellings occurring at the same time dumped housing supply on the market which had simultaneously reduced demand. Housing prices of course dropped. How unique is your house if you needed to sell at the same time as your neighbors? Toronto's sub-550 sq ft condo market continues to spiral, as literally thousands of identical units came on the market for rent and sale simultaneously due to new builds coming online, and air-bnb's being taken off that market due to Covid.

(4) As the housing market crashed, financial markets which were directly tied to it followed suit. Financial market collapse precipitated other economic crashes, as secondary and tertiary industries also faced reduced cashflows. No matter how far removed your investments are from housing, the way our markets work now means that it is very difficult for a major collapse in one sector, to not hit all sectors.

(5) Job losses created big problems - if you can't sell your house, you can't move for work, so temporary unemployment became permanent unemployment for many. The point here is that tying your financial success to your house physically places you in one space, and reduces your flexibility to (a) cut housing costs if needed, or (b) move to better employment elsewhere. If you lose your job while a housing crisis is in process, and you have overleveraged yourself, and financial markets get hit at the same time as part of a 2008-style GFC snowball effect, you may not have any desirable financial options outside of bankruptcy.

(6) Recovery took a long time, and it was not universal across the country, or across the world. Some areas have housing markets which have still not fully recovered on an inflation-adjusted basis, and some areas are many times higher than they have every been. The point here is that it is not truly fair to expect that weathering a few years of poor financial results would be enough in a future downturn. As an example of how this might happen now - consider 'what if' the world truly moves towards more remote work, after the practical test-case of COVID: will San Francisco's housing market collapse, as tech works leave for literally greener, lower cost pastures? The US is not a singular housing market, it is many thousands of housing markets, and your house is in exactly one of them. Sure hope you don't double-down on house debt right before they put a hog rendering plant next door!

So before taking on these risks, consider not just whether you could whether a 3 year storm of dropped equity prices, but also dropped housing prices, and what job loss might mean for you particularly if it happened while your house was underwater. Interest rates are very attractive right now, but debt still has costs. And leverage itself inherently increases the risk of a portfolio, which you admit is already high-risk.

Be careful out there.

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    Oracle and HPE just announced they're moving from Silly Valley to Austin, and Apple and MSFT are transferring big chunks of people there. – RonJohn Dec 14 '20 at 14:20
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    @ronjohn Yes it's going to be a very interesting shift in working culture for tech companies, I think. My personal speculative opinion would be that small-market cities (but not small towns without significant culture/infrastructure) will be the big winners if 100% remote work really takes off for even 5% of the workforce (which would be an absolutely massive shift). – Grade 'Eh' Bacon Dec 14 '20 at 14:22
  • @user253751 Agreed... I think it is pretty amusing to (a) say that Austin, Texas currently runs as a corrupt command economy, and (b) All the money that flows in from capitalist tech companies arriving with a highly educated workforce in tow, will cause its residents to starve... – Grade 'Eh' Bacon Dec 14 '20 at 15:43
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    These answers just keep getting better and better, thanks!! Very good point about how the markets & futures are all connected, especially during times of chaos (bubbles & crashes). Points 3-5 really made an impact on me to the point that I'm going to double down on the worst theoretical scenario based on 100yrs history and once I've stripped down my risk to the point that I could survive rather comfortably then I will move forward. – Jacksonkr Dec 14 '20 at 16:13
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    "that would now be considered literally criminal" Well, hindsight's 20/20, right? :-) – jpaugh Dec 16 '20 at 3:30
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Another question asked if one should get a 15 year mortgage, or a 30 year, and invest the difference.

I offered the results of a spreadsheet, looking at the 15 year rolling returns for 100 15-yr periods using S&P data, starting 1900. The result shows that even through the crashes, there were no negative 15 year results. The lowest 5 returns ranged from an annualized .7% to 3.5%. In other words, 95% of the analyzed periods beat the 3.5% mortgage cost. Half of the periods showed 9.9% or higher.

This showed such a compelling disparity, i.e. a chance of success being 95% and the failures, not a 'risk of ruin' failure, just not great. But that was at the 15 year mark, Sticking with the plan for the second 15 year period offered a certainty of success.

Many respected members advised to take the 15 year and be done with the debt, and sleep better at night. You are suggesting a level of risk that's seems 5-10X what I was addressing. And most conservative investors would reject it. Any plan that has a risk of wiping you out on a 40-50% market correction is one I'd avoid, and I'm not convinced yours would survive such a drop.

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  • Thanks for your thorough answer. The s&p historic research is precisely why I'm entertaining such a risky move. I like to think I'm not betting more than I have to lose and I'm young enough that I have time to weather a 15-30 year period. That said, your last paragraph makes me sit up a bit straighter. I'm curious, what makes you say my risk is 5-10x greater? – Jacksonkr Dec 14 '20 at 15:11
  • I may have been overreacting to "very high risk / high return". Maybe my own assessment of the S&P long term is actually too low? Either way, knowing your own true risk tolerance is key. – JTP - Apologise to Monica Dec 14 '20 at 19:51
  • @Kaz already pointed out the fallacy in this thinking: The S&P includes survivorship bias (and a number of other biases). On average, for an ordinary investor, returns will always be lower than S&P (even if you invest in an S&P index fund, due to costs). – Kevin Keane Dec 15 '20 at 0:25
  • The ETF VOO has a .03% expense. I'm ok with a long term 9.97% compared to the S&P's 10.00% (give or take, depends how far back one goes.) – JTP - Apologise to Monica Dec 15 '20 at 0:56
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The obvious risk, of course, is that your investments lose money, and you are stuck paying back the HELOC with income or existing assets.

Among the less obvious costs, insurance might well loom fairly large, especially if you live where flood insurance is required by your lender. While I'm not sure if this applies to a HELOC, your mortgage lender will usually require you to have insurance covering the amount of the outstanding loan. Given the recent increases in housing and land prices, this could well be significantly more than the replacement value of the house.

As an aside, you might do well to remember the classic advice about buying low and selling high. IMHO, when the market is at historic highs is not the time to be investing with borrowed money.

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