When Strategic Borrowing Can Enhance Portfolio Returns
Exploring the careful use of leverage—such as securities-based lending—to increase investment capacity without disrupting long-term strategies.
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In certain circumstances, borrowing against existing assets can improve long-term outcomes for sophisticated investors. The most common tool among high-net-worth clients is a securities-based line of credit (SBLOC) or portfolio line of credit.
How Securities-Based Lending Works
An SBLOC allows the owner of a diversified brokerage or managed account to borrow a percentage of the portfolio’s value (often 50–70% depending on the underlying holdings and the lender’s policies) at rates that are typically competitive with other forms of secured credit. Funds can be used for real-estate purchases, business investments, tax payments, or other purposes without selling securities and triggering capital gains.
Potential Advantages
Because the portfolio remains invested, the investor continues to participate in market returns on the full asset base. If the after-tax cost of borrowing is lower than the expected return on the invested capital, and if the client can withstand collateral calls during market declines, the strategy can enhance net worth over time.
Critical Guardrails
Important guardrails are essential. Leverage amplifies both gains and losses. A significant market decline can trigger a margin or collateral call, forcing the sale of assets at inopportune times. Interest rates on these facilities are usually variable. Over-concentration in a single stock or highly correlated assets reduces the borrowing capacity and increases risk.
Asset management firms that offer or coordinate such facilities typically impose conservative advance rates, require diversification, and integrate the borrowing into the client’s overall risk budget and cash-flow plan. Strategic borrowing is never a substitute for living within means or maintaining adequate emergency reserves; it is a specialized tool best used when the math, the risk tolerance, and the purpose all align.
Investing risk disclosure
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