Making the most of Fed rate cuts with a portfolio line of credit
Earlier this month, the Fed cut the effective federal funds rate by a quarter point for the second time this year.
But what does this mean for you and your portfolio?
When the effective federal funds rate (EFFR) goes down, it creates a ripple effect across lending options, pushing interest rates down and making borrowing more accessible. While traditional loans like HELOCs and auto loans might seem like the obvious choice, there’s a more strategic and simpler alternative that deserves attention: your portfolio.
Instant access to cash with a portfolio line of credit
For investors seeking liquidity beyond conventional loans, a portfolio line of credit enables you to borrow against your investments, converting your portfolio (this includes your direct index) into a ready source of funds.
A portfolio line of credit, also known as a margin loan, uses your existing securities as collateral, offering you access to capital without disrupting your long-term investment strategy. Here are some key advantages of a portfolio line of credit:
- Flexible repayment: With no fixed repayment schedules, you only need to repay if you exceed your borrowing limit or if a decline in your assets triggers a margin call. Our platform is designed to help you monitor and manage these situations effectively.
- Non-purpose: Funds can be used freely, including outside of Frec or for purchasing securities
- High liquidity: Skip credit checks and access your cash nearly instantly without triggering capital gains taxes
Frec’s interest rate is EFFR + 1%, meaning as the EFFR changes, so does our rate. Today, this stands at 5.58%, a competitive option compared to other brokerages (check out how we compare here).
Why borrowing may be a better move than selling
Now you may be wondering why someone would choose to borrow against their portfolio over selling their securities.
Selling your securities might seem like the simplest way to access cash, but it often comes with drawbacks like capital gains taxes or disrupting your investment strategy. Borrowing against your portfolio, on the other hand, can be a strategic alternative.
If borrowing costs are low, like Frec’s rate, and your portfolio is growing faster than the borrowing cost, it may be more beneficial to borrow rather than sell your stocks. Take the S&P 500 for instance, which has an average annual return of 10% as shown in the graph below. By borrowing at a rate below the portfolio’s expected return, you can allow your investments to compound while accessing liquidity.
Graph from Macrotrends
Still on the fence? Check out our “Sell or Borrow” tool to help you visualize the different trade-offs and make a more informed decision.
How to manage risks of a portfolio line of credit
With any investment or loan, there are risks. A portfolio line of credit carries the risk of a margin call—a requirement to add more cash or securities to your account. However, this risk can be managed with the right tools and a proactive approach.
Let’s put some numbers to this
Suppose you have a $500,000 portfolio with a loan-to-value (LTV) of 75%. You take a portfolio line of credit for $325,000 (65% of your portfolio).
Imagine the market dips by 15% and your portfolio decreases to $425,000. This triggers a margin call, which means you must restore the balance.
To resolve this you have three options:
- Deposit $6,250 in cash
- Sell $25,000 in securities
- Use a combination of the above two
Failure to do so on time will result in us selling securities on your behalf. However, Frec’s tools can help you prepare for surprises like this. Our margin call risk forecaster allows you to visualize the impact of your stocks dropping by different percentages. You can move the slider up and down to a hypothetical portfolio drop, and instantly see the estimated cash or stocks needed to restore your LTV (pictured below).
By staying proactive and leveraging Frec’s tools, managing margin risks can become a strategic part of your investment strategy—not something you fear.
Learn more about how our forecaster works
The bottom line
Today’s interest rates offer investors a unique opportunity to leverage their portfolios strategically. A portfolio line of credit, paired with our competitive low fees, opens up a new avenue to fund what matters to you now. Remember, it’s all about employing smart strategies and tools that stand the test of time.
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