A Reason to Worry

Look%20Out%20Below%20SignLast week we passed the five-year anniversary of the post-financial crisis lows. The ongoing bull market, fueled by decent economic news and an activist Fed, may well continue for a long time yet. I don’t have a crystal ball.

But I saw a reason to worry this morning: this article at Benzinga (also highlighted at MSN Money and Yahoo! Finance). Yup. We’re back to seeing arguments that people should take out home equity loans in order to buy stocks — because that tactic has worked out so well in the past!?! It’s as if leverage doesn’t come with major inherent dangers, especially at the retail level.

If an advisor were to pitch such a scheme, the regulators would be all over it. Note, for example, this Investor Alert from FINRA.

We are issuing this alert because we are concerned that investors who must rely on investment returns to make their mortgage payments could end up defaulting on their home loans if their investments decline and they are unable to meet their monthly mortgage payments. In short, investors who bet the ranch could lose it.

As Felix Salmon put it, “it’s pretty much always a bad idea to borrow money and invest it in the stock market — and it’s an even worse idea to borrow money against your house and invest it in the stock market.”

Maybe this article is signalling a market top. Or maybe it’s just silly and dangerous. But it surely shows that we have been in a very good market cycle for a long time now. And that makes me nervous.

3 thoughts on “A Reason to Worry

  1. I am not sure we are at a top. It really depends on the economy and earnings growth. I am willing to say that we are fairly valued right now. If one has made some nice gains, perhaps it’s time to take some money off the table, and rebalance. That is especially true if one is in mutual funds.

    As for using our homes to fund stock investing, you can’t fix stupid. The people who will do that will simply get burned, and then promptly blame the market, instead of having that “man in the mirror” moment.

  2. What could possibly go wrong?

    This is the inverse of an equally short-sided get-rich-quick strategy from the late ’90s when dot-com employees would exercise options borrow against the stock (while waiting for long-term treatment) and buy a house (because, like tech stocks, real estate prices would never go down). That worked like gangbusters…’til Y2K.

  3. Pingback: Margin by any other name | Abnormal Returns

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