To Borrow or Not to Borrow? That is the Question

To Borrow or Not to Borrow? That is the Question

There is certainly no secret that interest rates keep going up this year as the Fed is raising rates to combat inflation.  The other day they raised rates, yet again, another .75% in hopes of finally taming the very stubborn inflationary environment we are in.  We know this has had a short-term effect on the global stock market as virtually every asset class is down this year. 

All that said, the question of the day is: at what point does it no longer become advantageous to borrow funds?

Let’s lay out the issue first and then talk about my thoughts.  Stocks down, interest rates up.  Mortgages went up for the 5^th straight week recently and average rates are 6%.  This will reverberate through all lending environments whether it be homes, cars, colleges, and the list goes on.  The very natural question to think to yourself, is if your portfolio is going down and interest rates going up, should you simply not borrow as much and use more of your investments to fund big purchases these days?

On Borrowing Money While Rates Are High

Aha, the million-dollar question at last.  I am not sure there is a one size fits all answer, but let me bullet out my thoughts below.

1. Although rates are high and no end in sight, I still think in general we are a few percentage points off where you should really consider using liquid funds vs. borrowing.
2. It is important to ground yourself and not put too much focus on today’s stock environment.  Rather, if rates are still below what you expect a long-term stock portfolio to perform then certainly borrow if you can.
3. What impact financially does borrowing at a higher rate have on you?  Is it the difference between affording that home or not?  Or is it instead a matter of preference?  If it is the former and you cannot afford something without using outside funds then there is a real discussion to be had.
4. Think opportunity cost.  The value of liquidity to me is worth a lot as it gives you options.  I tend to generally prefer to use someone else’s money as I’d rather pay back, with interest over 30 years a mortgage than try to pay it all upfront.
5. How long will you have this note?  I tend to prefer if it is a longer borrowing need, like a house, try to borrow if you can.  The reality is you will either move before 30 years are up, or have the ability to refinance in the next bunch of years.  If you simply sell stocks now you lose all that flexibility.
6. If it is a shorter borrowing need and can be replaced relatively quickly there is a little more credence to avoiding debts.
7. How much is your need?  Is it relatively low?  Is it a large amount?  Depending on the actual amount and ability to pay it off over time is certainly a large variable to consider.  If you have a 3M investment account and you have a 20k borrowing need, sure, use some liquid funds. 
8. If you have no other choice, I’d rather you use your bond allocation than stock allocations.
9. Stocks are down now as we established, thus why would you sell low as it goes against all intelligent investment beliefs?  Regardless if it is a month or a year until we rebound it generally happens quickly and you want to be part of that ride, not just to recoup your losses, but to continue this incredible stock market journey.
10. If/when rates hit 8% is my internal clock to start reevaluating and giving a harder look at using outside funds. 
11. Take the long-term view.  Looking at things myopically here can be a huge mistake.  Instead think through the benefits, options, life span, and opportunity costs of borrowing vs. using investment funds. 
12. Naturally, the biggest question of them all is can this purchase wait?  Rates will not stay this high forever, nor will markets stay this low.  I say both these things with the highest-level conviction imaginable.  Could they get worse before better?  Sure.  Will things eventually revert back to their mean?  I simply see no reason to suggest otherwise.  So, then worth considering can this purchase wait until smoother sailing is ahead.  I know the Fed is hoping you make that decision!

Grand Finale

I know this question will be coming up more and more the longer things persist.  That is why I figured let me get ahead of the curve to start giving you some things to noodle on.  I can tell you my fairly strong preference, is to utilize other people’s funds.  In summary, I never sell personal funds when markets are down, I would rather spread my payments over an extended period of time, and I firmly believe in the long-term viability of the global stock market.

All I got… stay wealthy, healthy, and happy.

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