Sustaining Your Investment Strategy with a Marketable Secured Line of Credit

Dan Sullivan
July 24, 2018

An effective wealth management strategy plans for your near- and long-term financial goals and aspirations while also providing for life events that are impossible to anticipate.
 

Life is full of routine expenses, and diligently saving and investing increases the likelihood that future cash flow needs are met. Certain events like college tuition, weddings, and large purchases can be budgeted for in advance so that cash is available at the right time. However, planning for the unknown is more challenging, and unforeseen expenditures such as opportunistic investments, major home repairs, or divorce often leave investors feeling less prepared. An effective wealth management strategy plans for your near- and long-term financial goals and aspirations while also providing for life events that are impossible to anticipate.

When faced with unexpected expenses, investors are often forced to withdraw funds from their investment portfolios if cash reserves fall short. Untimely withdrawals can have unintended consequences on a portfolio, such as tax implications, reduced income potential, or an exaggerated drawdown if the market is in decline. When used as part of an investor’s overall investment strategy, a Marketable Secured Line (MSL) can limit portfolio disruptions when unanticipated costs arise.

What is a MSL?

A Marketable Secured Line is a loan or line of credit secured by an investment portfolio that allows you to borrow funds to meet expenditures without disrupting your investment strategy. Using a MSL can be advantageous when you do not have enough cash available, you want to delay or avoid triggering capital gains taxes, or portfolio distributions are not aligned with the timing of your cash flow needs. Repayments can be funded by portfolio assets that are sold judiciously over time, or the balance may be refinanced with a long-term, fixed-rate lending solution.

How can a MSL help preserve your investment strategy?

Whether your portfolio is structured for capital appreciation or to generate income, an unexpected withdrawal can impede progress towards your financial goals.

In an income-oriented portfolio, a Marketable Secured Line may help you meet your financial obligations while preserving the earnings potential of your assets. On the other hand, a large liquidation will likely reduce your future income stream by reducing your principal. Complementing an investment strategy with a MSL results in “positive carry” when a portfolio’s yield exceeds the interest rate on the secured loan. Positive carry allows you to maintain part of your income stream as you repay borrowed funds.

If your investment strategy is growth-oriented, an unanticipated withdrawal may result in taxable gains from selling appreciated assets. In negative market environments, untimely liquidations can exacerbate portfolio drawdowns and extend the recovery period. For example, if the value of your portfolio declines 20% due to market volatility, you need a 25% gain to break even. If your portfolio balance declines 20% as you liquidate 5% of your beginning portfolio value, you now need a 33% gain to get back to even. A MSL can help limit the harmful impact taxes or large drawdowns may have on your ability to grow your assets.

A Marketable Secured Line allows you to use time to your advantage by restructuring the way you finance expenses. Rather than liquidating assets to satisfy obligations, a MSL allows you to borrow funds to meet each expenditure and make payments over time to minimize the impact to your overall investment strategy. Ideally, the benefit of utilizing a MSL to preserve your income stream, reduce taxes, or maintain market exposure exceeds the cost of borrowing. Having the flexibility to liquidate your portfolio in smaller, more timely pieces may mean the difference between meeting your long-term financial goals and experiencing undesirable financial setbacks. Talk to your advisor about whether adding a Marketable Secured Line to your investment strategy is right for you.

Dan Sullivan is a managing director and head of private banking for CIBC Private Wealth Management, with more than 25 years of industry experience. In this role, he is responsible for developing client relationships and working with personal and commercial clients to deliver CIBC’s broad array of wealth solutions to individuals, families and middle-market companies. 

Private banking solutions are offered through CIBC Bank USA, Member FDIC and  Equal Housing Lender. CIBC Bank USA and CIBC Private Wealth Group, LLC are both indirect, wholly owned subsidiaries of CIBC. CIBC Private Wealth Group and its subsidiaries do not provide, and are not responsible for, the products and services offered by CIBC Bank USA. CIBC Bank USA (Bank) will not pay employees of CIBC Private Wealth Group or its subsidiaries for referring clients to Bank, but to the extent permitted by applicable laws and regulations, the referral of clients to Bank for eligible products or services may be considered by CIBC Private Wealth Group in determining discretionary compensation to employees.