Insulate your investment strategy with a portfolio line of credit

Volatility in the market over the last few years has prompted many wealth management clients to wrestle with whether to invest their cash or keep it on the sideline. With short-term cash and cash equivalents paying competitive yields, the S&P 500 generating strong returns and concerns about the economy's trajectory, many struggle to decide how much cash to hold, how much to invest, and what to do when unexpected expenses arise. If this sounds like you, then it could be worth learning about a portfolio line of credit. 

In 2024, the macroeconomic stars aligned to deliver remarkable market performance. Inflation fell to palatable rates, gross domestic product growth proved strong, corporate profit growth accelerated and central banks cut policy rates. Global stocks returned 20%-plus, while bonds gained. Global multi-asset portfolios built on their 16.5% gain from 2023 with a total return of 12.5%. But here’s the good news as you consider an action plan for 2025: You’re poised to build on strength (PDF). The past year’s market gains provide a solid foundation, and just as important, the flexibility to weigh different approaches and fresh perspectives.

One approach that many clients consider is the strategic use of lending as a strategic complement to their investment portfolio. Whether planning for celebrations or preparing backup liquidity options for the unknown, it could be worth learning more about a portfolio line of credit.

Understanding a portfolio line of credit

A portfolio line of credit can be a useful tool for a well-developed, long-term investment strategy that provides an alternative source of capital instead of liquidating your portfolio’s holdings.

Securities-based lending is a form of credit backed by marketable securities in a taxable account (not retirement). In order to determine the amount of available credit and interest rates charged on a portfolio line of credit, many institutions that offer securities-based lending will analyze the credit quality and lending value of underlying collateral assets. Clients often pay no fees to set up or maintain these lines of credit, and clients are only charged interest on the amounts borrowed. Some firms may have minimum asset levels and minimum draw amounts, which may vary by state.

A portfolio line of credit can be an effective alternative source of liquidity that helps insulate a portfolio from the need to liquidate securities, capital gains and disruption to an investment strategy. A credit line may also be a more tax-efficient method of managing short-term cash needs while maintaining longer-term investment strategies.

Clients that borrow on a portfolio line of credit are charged the daily floating Secured Overnight Financing Rate plus a spread. Interest rates have begun a slow decline in the past year due to Federal Open Market Committee rate cuts, which means that borrowing against your fully paid-for, longer-term portfolio may still offer a way to maintain your wealth strategy while outpacing your cost of capital. Depending on asset allocations, market performance and amounts borrowed, the underlying portfolio may be able to support the loan fully without sacrificing material upside on the principal compared to remaining all in cash.

How a portfolio line of credit helps keep you invested

Many investors fear the impact of short-term volatility when trying to decide when to deploy money into the market. What happens if you need it at a bad time? Selling to fund unexpected expenses could mean locking in losses or large tax bills. Having a solid financial plan means accounting for short-term spending needs and ensuring that you have an appropriate amount of cash in reserve for emergencies and near-term expenses.

However, held cash in excess of your expected short-term and emergency needs may lose purchasing power over time due to inflation. Investing can help build long-term wealth, but having access to liquidity when needed is key. A portfolio line of credit is not a replacement for an emergency fund, but it can provide a way to stay invested while still having the flexibility to access cash without disrupting an investment strategy.

This can be critical because studies show that staying invested over time typically outperforms an active market timing strategy. This means that regardless of whether long-term dollars were invested on the best or worst days of the market, a buy-and-hold strategy tends to realize better overall growth than constantly moving in and out of the markets because of the likelihood of missing its “best days.” A portfolio line of credit provides liquidity when needed, allowing investors to remain in the market even when unexpected expenses arise.

Managing an unexpected opportunity

Imagine this: Bob and Janet have a 20-year horizon before they wish to retire. They recently sold a property and netted $1 million in cash that needs to be invested to help realize their retirement nest egg planning goal.

The couple expects to buy a rental property for around $200,000 that will generate monthly income, so they invested $1 million into a portfolio that expects a 9% annual return. Next, they establish a credit line against their investment portfolio and borrow $200,000 to handle their investment property purchase at 7.7% interest. The returns from the portfolio pay interest, and the income from the property reduces the principal each year for the first four years, enabling their investments to grow to $2,290,369.68 over a 10-year time frame.

A complement to your investment strategy

In the end, the decision to move money out of cash and into the market is largely driven by the ultimate intended use of those funds. Everyone should maintain some amount of emergency reserves in a highly liquid investment that is easy to access when unexpected expenses arise, but a holistic wealth plan can help you see just how much of those dollars need to be working harder in the context of the overarching plans you’ve built to reach your financial goals.

A portfolio line of credit can be a liquidity option that compliments your longer-term investment strategy and allows you to access cash without needing to liquidate some or all of your portfolio. Portfolio lines of credit are generally easy to establish and can offer the competitive borrowing cost of most traditional consumer credit products available, which makes them a potentially useful tool to have in your financial toolkit well before you need it.

The following generally applies to portfolio lines of credit:

Portfolio lines of credit may be subject to minimum asset levels and draw amounts, depending on the provider and state.

Like any other investment strategy, though, portfolio lines of credit also pose several risks:

Contact a J.P. Morgan professional

In order to evaluate your financial goals and how a credit line may be able to complement your investment needs, contact a J.P. Morgan advisor today and ask about whether a portfolio line of credit is something you should consider.

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