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Read This If You Think You Don’t Need Credit

March 29, 2012
by Jack Reynolds

Isn’t it ironic that banks are most willing to lend money to people who need it the least? Individuals with significant resources tend to bypass credit, especially if their portfolio is salted with cash and cash equivalents, i.e., short-term bonds. If however, you exclude credit from your portfolio, then you might miss out on a significant opportunity to make your super-liquid resources work harder for your portfolio.

Ironically, if you have a good deal of cash and cash equivalents in your portfolio, then you might be a good candidate for securing a line of credit. Consider for a moment using credit to take care of your ongoing cash requirements for matters such as:

  • living (or operating) expenses,
  • taxes, which are sometime unpredictable,
  • charitable gift commitments,
  • intra-family gifts and transfers,
  • private equity capital calls, and
  • opportunistic asset purchases.

Once you have a line of credit in place you may get comfortable putting more of your super-liquid resources (i.e., cash and short-term bonds) to work more productively in your long-term investment portfolio.

I have been asked whether my suggestion about using credit creates undue risk or is imprudent. This is an excellent question and here is why: the tactical, short-term use of credit is prudent and thoughtful when it is combined with periodic asset class rebalancing. Actually, it is almost a no-brainer. Credit can be used 1) as a tactical tool to address your cash needs, and 2) to establish a discipline process for paying off the line annually with over weighted assets. Approached in this way, credit encourages you to rebalance your portfolio toward your long-term targets each year, which is entirely prudent and judicious.

Your line of credit can also be used to acquire personal use assets, rather than liquidating productive investment assets. Investment portfolio credit used in this way can be rational, low cost and sensible.

Using credit as a lever to increase your portfolio’s exposure to investment assets, diversify a large, concentrated, possibly low-cost-basis, or illiquid legacy holding is more controversial. I do not advocate the use, or avoidance, of portfolio leverage for these strategic purposes. Rather, I encourage you to make a knowing and thoughtful decision about credit’s potential strategic use with your investment adviser or team.

Given today’s very favorable interest rates for borrowers, it is worth noting that this is an excellent time to discuss setting up a line of credit with your private banker. It is also a good context in which to get an update from your private banker about other resources that could be of benefit to you.

To read a more expansive discussion of the use of credit please see my article from July 19, 2011 regarding the wise use of credit. I also encourage you to view my video (above) about the prudent use of credit.

I would love to know what you think of my video and article, so please send me an email or give me a ring at 617.945.5157

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