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Scenario

I have an etrade Line Of Credit that is leveraged against a brokerage account with rather aggressive nyse etfs (heavy in nasdaq).

  • Brokerage acct total 330k
  • LOC total 150k

Rather than pay down the LOC I continue to add funds to my leveraged account as the market returns have outpaced my LOC roi. With the FED's strategy to curb inflation I'm thinking it may be time for my modify my strategy.

RUNNING IDEAS

  • A) pay off the loc in total, using market assets. I don't like this idea because the markets have taken a good hit over the last year and my spending power is down.
  • B) move from adding to the brokerage to paying down the loc, or at least the interest. I still don't like this for the same reason as A but it seems to hedge both sides a bit better.
  • C) stay the course as the markets ALWAYS find their way back. Take any losses in stride prepare an emergency fund (heloc ?) for a possible equity call scenario.

Question

For now I'm holding out with option C. Am missing any obvious solutions or am I on the right path?

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  • 1
    How much have you actually borrowed, and at what rate?
    – RonJohn
    Mar 23, 2023 at 17:24
  • How much risk do you want to take? Lots of risk: keep what you're doing. Less risk: don't have a LOC, but keep trading stocks. Even less risk: cut your losses and get out of stocks entirely. Your choice. Makes no difference whether the market was up or down last month, you already lost that money. It matters whether it's going up or down next month.
    – user253751
    Mar 23, 2023 at 23:24

1 Answer 1

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You're essentially borrowing money to invest in the stock market (whether that was your initial goal or not, that's effectively where you are now) which is a risky proposition. You're paying a guaranteed rate of interest against a risky rate of return, which is hard to equate. Yes on average you earn more than you pay in interest, but it also can move against you very quickly. If you can afford to make the minimum payments on your line of credit without touching your investments, then you might be able to weather any downturns, but you have no idea how big or how long the next downturn will be.

Can you come out ahead? Yes there is a possibility. But there's also a possibility of an extended downturn, and if there's ever a change in your situation where you have to sell investments to pay down the LOC, then the losses will be much harder to recover from.

So it all comes down to how much risk you're willing to take and how confident are you that you can pay down the LOC no matter what happens to the investments.

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  • 2
    To sum it up: debt is risk.
    – RonJohn
    Mar 23, 2023 at 20:57

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