HELOC as a bonds replacement for drawing down from in a downturn?

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andrew99999
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HELOC as a bonds replacement for drawing down from in a downturn?

Post by andrew99999 » Wed Sep 19, 2018 8:40 pm

I've been thinking about this for a while.

The purpose of bonds as I understand it, boils down to 2 fundamental purposes
1. To avoid drawing down equities when they are low
2. To help psychologically avoid the selling equities when they are low

The idea here is to have a HELOC available to use, but which you don't actually use, until/unless there is a major crash.
It won't help with #2, but what about #1?

Say you have a HELOC available for 10 years worth of living expenses. Would this not help alleviate the problem of the first point since you would be taking money from (borrowed) cash which you can replace sometime in the next 10 years when the market recovers?

Some problems I can see
1. It probably will not help with the psychological aspect. This still would need to be decided upon separately.
2. You generally can not get a HELOC in retirement. You would need to plan on getting it available before you retire.
3. You still need to pay interest on this money, but you could go with 7-8 years of the 10 years of living expenses and keep the rest available for interest payments.

So my thought is this - if one was able to stomach the psychological part, wouldn't this allow you to not have 40% of your entire portfolio sitting in bonds earning nothing in real terms, missing out on compounding for decades, especially for those retiring early? 40-50 years with 40% of your money earning nothing in real terms is an enormous opportunity cost.


Appreciate your thoughts.
And if it has been discussed previously, links to those threads would be appreciated, as would letting me know what words to search for.
Thank you.

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nisiprius
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by nisiprius » Wed Sep 19, 2018 8:45 pm

Check what happened to people with HELOCs during the financial crisis. Debt is not the same thing as money. Lines of credit are only available when a bank has money available that it wants to lend. And when is that? Good times, when, in your scenario, you don't need the loan. They are not guaranteed to be there at the time you need them, just because you need them. For example,
banks can lower HELOC borrowing limits overnight if they choose. When real estate prices plunged precipitously during the market meltdown, lenders did just that, and people who were planning to use their HELOCs for anticipated needs like paying college tuition often were forced to look for alternatives.
andrew99999 wrote:...bonds earning nothing in real terms...
In the past, from 1926 through 2014 inclusive, intermediate-term government bonds averaged 5.3%/year (CAGR) while inflation over the same period average 2.9%/year, so they earned an average positive real return of 2.3%/year.
Last edited by nisiprius on Wed Sep 19, 2018 8:59 pm, edited 7 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

sailaway
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by sailaway » Wed Sep 19, 2018 8:53 pm

So, you plan to draw equity from your home as it is falling?

Is this theoretical home paid off other than the HELOC?

What if your HELOC only has a 5 year draw period and the crash comes in year 6?

Thesaints
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by Thesaints » Wed Sep 19, 2018 8:54 pm

andrew99999 wrote:
Wed Sep 19, 2018 8:40 pm
The purpose of bonds as I understand it, boils down to 2 fundamental purposes
1. To avoid drawing down equities when they are low
2. To help psychologically avoid the selling equities when they are low
Well, not really.
There are many people who are not drawing down a single cent, actually they are adding up to their investment portfolio, and plan to do so for many years to come. Yet, they still have a bonds component in their AA.
Furthermore, drawing from the bonds side while "equities are low" is tantamount to market timing. We never know if they are low, high, or at their right price.

The one fundamental purpose of bonds is reducing portfolio volatility and that is true whether one is contributing, or withdrawing.

andrew99999
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by andrew99999 » Wed Sep 19, 2018 9:15 pm

nisiprius wrote:
Wed Sep 19, 2018 8:45 pm
Check what happened to people with HELOCs during the financial crisis. Debt is not the same thing as money. Lines of credit are only available when a bank has money available that it wants to lend. And when is that? Good times, when, in your scenario, you don't need the loan. They are not guaranteed to be there at the time you need them, just because you need them. For example,
banks can lower HELOC borrowing limits overnight if they choose. When real estate prices plunged precipitously during the market meltdown, lenders did just that, and people who were planning to use their HELOCs for anticipated needs like paying college tuition often were forced to look for alternatives.
Ok good point.
What if you released equity into an offset account so that it was no longer a line of credit? ie the cash was sitting in your own account (but offsetting the loan to reduce the interest to zero).
Would that make a difference?
nisiprius wrote:
Wed Sep 19, 2018 8:45 pm
andrew99999 wrote:...bonds earning nothing in real terms...
In the past, from 1926 through 2014 inclusive, intermediate-term government bonds averaged 5.3%/year (CAGR) while inflation over the same period average 2.9%/year, so they earned an average positive real return of 2.3%/year.
Since interest rates have been on a 30 year bull run from high rates down to almost zero, I think there is pretty much no chance of getting a 2.3% real return over the next decade, more likely closer to no real return as rates move back up to average historical levels. And with the levers that are pulled to maintain inflation, I think there is a high chance it becomes a permanently lower real return.

andrew99999
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by andrew99999 » Wed Sep 19, 2018 9:16 pm

sailaway wrote:
Wed Sep 19, 2018 8:53 pm
So, you plan to draw equity from your home as it is falling?

Is this theoretical home paid off other than the HELOC?

What if your HELOC only has a 5 year draw period and the crash comes in year 6?
As I replied just above to someone else, what if you released equity into an offset account so that it was no longer a line of credit? ie the cash was sitting in your own account (but offsetting the loan to reduce the interest to zero). Would that make a difference in the use of this as a strategy?

andrew99999
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by andrew99999 » Wed Sep 19, 2018 9:18 pm

Thesaints wrote:
Wed Sep 19, 2018 8:54 pm
andrew99999 wrote:
Wed Sep 19, 2018 8:40 pm
The purpose of bonds as I understand it, boils down to 2 fundamental purposes
1. To avoid drawing down equities when they are low
2. To help psychologically avoid the selling equities when they are low
Well, not really.
There are many people who are not drawing down a single cent, actually they are adding up to their investment portfolio, and plan to do so for many years to come. Yet, they still have a bonds component in their AA.
Furthermore, drawing from the bonds side while "equities are low" is tantamount to market timing. We never know if they are low, high, or at their right price.

The one fundamental purpose of bonds is reducing portfolio volatility and that is true whether one is contributing, or withdrawing.
Isn't the purpose of reducing volatility an action specifically to address the above 2 points?

delamer
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by delamer » Wed Sep 19, 2018 9:23 pm

At some point, you’ll need to start paying back the HELOC principal too.

How does that figure into your plan?

sailaway
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by sailaway » Wed Sep 19, 2018 11:27 pm

andrew99999 wrote:
Wed Sep 19, 2018 9:16 pm
sailaway wrote:
Wed Sep 19, 2018 8:53 pm
So, you plan to draw equity from your home as it is falling?

Is this theoretical home paid off other than the HELOC?

What if your HELOC only has a 5 year draw period and the crash comes in year 6?
As I replied just above to someone else, what if you released equity into an offset account so that it was no longer a line of credit? ie the cash was sitting in your own account (but offsetting the loan to reduce the interest to zero). Would that make a difference in the use of this as a strategy?

Where are you going to find a stable account paying above prime to make this offset with?

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by AlohaJoe » Thu Sep 20, 2018 12:02 am

delamer wrote:
Wed Sep 19, 2018 9:23 pm
At some point, you’ll need to start paying back the HELOC principal too.

How does that figure into your plan?
This is the hard part with any plan like this. You also need to be careful about whether you're really considering all possible scenarios and not just the one or two that make your strategy look good.

I once did an analysis of using debt instead of selling equities during the late 1960s/1970s:

https://medium.com/@justusjp/using-a-ma ... 3ecd2f9bb9

delamer's point about paying back the debt is the crux of the matter. You can see that a simple approach eventually gets destroyed by mounting interest payments, with interest payments alone (not counting principal repayment) making up 30% of the monthly spending. Now you can argue that the specific strategy I took wasn't ideal but the point is:

If you don't test it, how do you know what is and isn't ideal?
If you don't test it, how do you know it is better or worse than the alternative?
If you don't know how to test financial strategies, maybe you shouldn't be inventing them?

Spirit Rider
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by Spirit Rider » Thu Sep 20, 2018 12:27 am

Also, keep in mind that HELOC interest that is not used to purchase, refinance or improve the secured property is no longer tax deductible. Further increasing the borrowing costs.

andrew99999
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by andrew99999 » Thu Sep 20, 2018 12:59 am

delamer wrote:
Wed Sep 19, 2018 9:23 pm
At some point, you’ll need to start paying back the HELOC principal too.

How does that figure into your plan?
Yes this is a good point.
Lets say you had 10 years of expenses available even at 6% including principle. If you took out 65% of this the last 35% should last you at least those 6 years including both interest and principle repayments.
Even if you didn't want the risk of a bull market that lasted 10 years or more, could you not still get some use out of this by combining this with a reduced bonds allocation so that you have more in growth assets? Say 5 years worth of bonds plus your 10 years worth of borrowed money at home loan rates, allowing your other 5 years of bonds to be in growth assets?

andrew99999
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by andrew99999 » Thu Sep 20, 2018 1:00 am

AlohaJoe wrote:
Thu Sep 20, 2018 12:02 am
delamer wrote:
Wed Sep 19, 2018 9:23 pm
At some point, you’ll need to start paying back the HELOC principal too.

How does that figure into your plan?
This is the hard part with any plan like this. You also need to be careful about whether you're really considering all possible scenarios and not just the one or two that make your strategy look good.

I once did an analysis of using debt instead of selling equities during the late 1960s/1970s:

https://medium.com/@justusjp/using-a-ma ... 3ecd2f9bb9

delamer's point about paying back the debt is the crux of the matter. You can see that a simple approach eventually gets destroyed by mounting interest payments, with interest payments alone (not counting principal repayment) making up 30% of the monthly spending. Now you can argue that the specific strategy I took wasn't ideal but the point is:

If you don't test it, how do you know what is and isn't ideal?
If you don't test it, how do you know it is better or worse than the alternative?
If you don't know how to test financial strategies, maybe you shouldn't be inventing them?
Thank you for the link.
However, what exactly is the point of them deciding to never pay it back. The idea is to lessen the hit you take by paying it back once the market has recovered, not just to never pay it back. I see no value in the article due of that assumption.

AlohaJoe
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by AlohaJoe » Thu Sep 20, 2018 2:58 am

andrew99999 wrote:
Thu Sep 20, 2018 1:00 am
AlohaJoe wrote:
Thu Sep 20, 2018 12:02 am
delamer wrote:
Wed Sep 19, 2018 9:23 pm
At some point, you’ll need to start paying back the HELOC principal too.

How does that figure into your plan?
This is the hard part with any plan like this. You also need to be careful about whether you're really considering all possible scenarios and not just the one or two that make your strategy look good.

I once did an analysis of using debt instead of selling equities during the late 1960s/1970s:

https://medium.com/@justusjp/using-a-ma ... 3ecd2f9bb9

delamer's point about paying back the debt is the crux of the matter. You can see that a simple approach eventually gets destroyed by mounting interest payments, with interest payments alone (not counting principal repayment) making up 30% of the monthly spending. Now you can argue that the specific strategy I took wasn't ideal but the point is:

If you don't test it, how do you know what is and isn't ideal?
If you don't test it, how do you know it is better or worse than the alternative?
If you don't know how to test financial strategies, maybe you shouldn't be inventing them?
Thank you for the link.
However, what exactly is the point of them deciding to never pay it back. The idea is to lessen the hit you take by paying it back once the market has recovered, not just to never pay it back. I see no value in the article due of that assumption.
So provide some math or simulation that your way works better.

If you pay it back then it makes the results even worse. Not paying it back is saying "stocks will have higher returns than 90 day Treasuries". If you don't think that is true, why not just sell the equities in the first place instead of using debt?

CRTR
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by CRTR » Thu Sep 20, 2018 3:12 am

I like(d) the strategy so much that I used it for a related reason. I used a HELOC as my emergency fund for >20 years, which allowed me to keep that money in the market instead of a low interest account. I set it up at my bank (BofA). Their HELOC came with a 25 year term/10 year draw, usually had 1 year below prime intro rate and a lock option. I renewed it every ~5 years. I stopped doing it ~6-7 years ago as I'm happily overfunded for my retirement and have no need of an emergency fund now. Currently, I have 20% bonds in my portfolio now but the purpose of that is to reduce volatility, provide a rebalance benefit in market corrections and keep me from getting an ulcer. The cost, of course, is a slight drag on my long-term portfolio return.

The above strategy is not without real risk however. Using 2008 as an example, good luck getting a HELOC at the peak of the crisis . . . right when you might need it most. I didn't have that problem (I recycled my HELOC ~2005 if I remember correctly) but it's a real risk. In addition, if you happen to hit a bigger market correction and long/slow recovery, the math might not work out so well, especially if interest rates are higher . . . which seems to be a real risk these days . . .

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by msk » Thu Sep 20, 2018 3:32 am

We always have to compromise:
nil volatility but 100% assured to fall behind inflation: keep under the mattress/savings account/CDs
max return with nil active management: 100% stock indices
Each of us has to choose between those extremes. Myself I go for 100% stocks all the time with one-year's worth of cash (savings accounts are basically = under the mattress!). Emergency fund? Withdrawals during extended market collapses? etc.: I'll use margin loan (IB charges < 3% interest)

Am I terrified of the excessively high P/Es for some of the tech stocks at the top of the SP500? Check Amazon... Yes! So my stocks are worldwide by market cap. For me, that is a reasonable compromise for the long term (with one year under the mattress). For others I suggest you analyse yourself and decide how long a collapse you wish to ride out, with, say, a 4% WR; and put that under the mattress or in bonds. 3 years? 12%. 10 years? 40%, etc. For me, trying to cater for a very lengthy market collapse handicaps your portfolio excessively. Probability is that most of our futures will be spent outside periods of markets actively falling and those periods are the only times that the mattress will be protecting you.

I am more worried about IB being shut down because they have done a Madoff. Whoever is supposed to be regulating brokers (and Vanguard and Black Rock) can only recover funds that have not vanished. $500k insurance suddenly looks very puny if your $10m portfolio has disappeared.

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by whodidntante » Thu Sep 20, 2018 6:54 am

For a lot of us here, our portfolio overwhelms the amount available through a HELOC. I'm not clear what you are trying to do, however. Are you trying to maintain constant equity exposure?

andrew99999
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by andrew99999 » Thu Sep 20, 2018 8:53 am

whodidntante wrote:
Thu Sep 20, 2018 6:54 am
For a lot of us here, our portfolio overwhelms the amount available through a HELOC. I'm not clear what you are trying to do, however. Are you trying to maintain constant equity exposure?
Yes, the goal is to maintain a higher exposure to growth assets rather than keeping 40% of the wealth earning nothing for decades.

delamer
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by delamer » Thu Sep 20, 2018 11:35 am

CRTR wrote:
Thu Sep 20, 2018 3:12 am
I like(d) the strategy so much that I used it for a related reason. I used a HELOC as my emergency fund for >20 years, which allowed me to keep that money in the market instead of a low interest account. I set it up at my bank (BofA). Their HELOC came with a 25 year term/10 year draw, usually had 1 year below prime intro rate and a lock option. I renewed it every ~5 years. I stopped doing it ~6-7 years ago as I'm happily overfunded for my retirement and have no need of an emergency fund now. Currently, I have 20% bonds in my portfolio now but the purpose of that is to reduce volatility, provide a rebalance benefit in market corrections and keep me from getting an ulcer. The cost, of course, is a slight drag on my long-term portfolio return.

The above strategy is not without real risk however. Using 2008 as an example, good luck getting a HELOC at the peak of the crisis . . . right when you might need it most. I didn't have that problem (I recycled my HELOC ~2005 if I remember correctly) but it's a real risk. In addition, if you happen to hit a bigger market correction and long/slow recovery, the math might not work out so well, especially if interest rates are higher . . . which seems to be a real risk these days . . .
It isn’t clear if you ever actually had to draw against your HELOC during the period you describe.

The strategy works great if you never need to make amy withdrawals.

CRTR
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by CRTR » Thu Sep 20, 2018 5:22 pm

delamer wrote:
Thu Sep 20, 2018 11:35 am
CRTR wrote:
Thu Sep 20, 2018 3:12 am
I like(d) the strategy so much that I used it for a related reason. I used a HELOC as my emergency fund for >20 years, which allowed me to keep that money in the market instead of a low interest account. I set it up at my bank (BofA). Their HELOC came with a 25 year term/10 year draw, usually had 1 year below prime intro rate and a lock option. I renewed it every ~5 years. I stopped doing it ~6-7 years ago as I'm happily overfunded for my retirement and have no need of an emergency fund now. Currently, I have 20% bonds in my portfolio now but the purpose of that is to reduce volatility, provide a rebalance benefit in market corrections and keep me from getting an ulcer. The cost, of course, is a slight drag on my long-term portfolio return.

The above strategy is not without real risk however. Using 2008 as an example, good luck getting a HELOC at the peak of the crisis . . . right when you might need it most. I didn't have that problem (I recycled my HELOC ~2005 if I remember correctly) but it's a real risk. In addition, if you happen to hit a bigger market correction and long/slow recovery, the math might not work out so well, especially if interest rates are higher . . . which seems to be a real risk these days . . .
It isn’t clear if you ever actually had to draw against your HELOC during the period you describe.

The strategy works great if you never need to make amy withdrawals.
It's good question. I never had the need to access my emergency funds. BofA never closed the account, even during the financial crisis. I doubt it would have been difficult to access the fund if I did need them. The HELOC came with checks, a VISA or I could have had the $$ directly deposited into my checking account.

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by Spirit Rider » Fri Sep 21, 2018 8:24 am

CRTR wrote:
Thu Sep 20, 2018 5:22 pm
It's good question. I never had the need to access my emergency funds. BofA never closed the account, even during the financial crisis. I doubt it would have been difficult to access the fund if I did need them. The HELOC came with checks, a VISA or I could have had the $$ directly deposited into my checking account.
Do not confuse luck for strategy.

I was unexpectedly without a main salary from 2001 - 2003 and again from 2009 - 2010. Also, I personally knew several people who had their BOA HELOC credit lines in 2007-2008 reduced to their current balance, and continuously adjusted down on any payment.

I paid my living expenses during 2001 - 2003 with 1/2 emergency funds and 1/2 (high five figures) 0% balance transfers including "0% for life" offers from Chase, Citibank and Discover. The latter was dumb luck that I didn't have to liquidate my beloved 3%+ I-Bonds. However, I wouldn't have done the 0% offers without the I-Bond emergency funds backing them up.

Do not confuse luck for strategy.

CRTR
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by CRTR » Fri Sep 21, 2018 3:20 pm

Spirit Rider wrote:
Fri Sep 21, 2018 8:24 am
CRTR wrote:
Thu Sep 20, 2018 5:22 pm
It's good question. I never had the need to access my emergency funds. BofA never closed the account, even during the financial crisis. I doubt it would have been difficult to access the fund if I did need them. The HELOC came with checks, a VISA or I could have had the $$ directly deposited into my checking account.
Do not confuse luck for strategy.

I was unexpectedly without a main salary from 2001 - 2003 and again from 2009 - 2010. Also, I personally knew several people who had their BOA HELOC credit lines in 2007-2008 reduced to their current balance, and continuously adjusted down on any payment.

I paid my living expenses during 2001 - 2003 with 1/2 emergency funds and 1/2 (high five figures) 0% balance transfers including "0% for life" offers from Chase, Citibank and Discover. The latter was dumb luck that I didn't have to liquidate my beloved 3%+ I-Bonds. However, I wouldn't have done the 0% offers without the I-Bond emergency funds backing them up.

Do not confuse luck for strategy.
I'm sorry to hear about the difficulties you experienced during those times. You also raise a really good point. A HELOC is not a very good source of emergency funds if it can be cut off arbitrarily. I wondered why they didn't touch my HELOC if so many others were affected. So, I called K Fitzgerald, my personal banker during that period, to ask what the deal was. He explained that BofA (as well as most major banks - Chase, Wells Farge, etc) suspended, froze or reduced existing HELOC accounts in areas that were hit by major housing market declines. At BofA, they used updated estimates of house prices to determine new LTV rates. If the LTV rate was worse than 60%, the account was reduced. If it was worse than 80%, it was reduced or even frozen/suspended. The decision was not necessarily final as the homeowner could appeal. He recalled a couple customers that had it reopened after submitting documentation. On the other hand, he also recalled a LOT of people that had their HELOCs closed for the above reasons.

So, in light of the above, you definitely got me to reconsider and reduce my enthusiasm for a HELOC or even a reverse mortgage as a potential source of emergency funds. Clearly, the strategy is not for everyone, especially for people with higher debt levels and/or lower levels of equity in their house. For me, however, it worked out well. Was it strategy or luck, as you would like to believe? I guess that depends on your perspective. I've never taken on much debt and, therefore, was not at risk for closure of my HELOC . . . luck had NOTHING to do with that. On the other hand, I guess you can call it luck that I didn't lose BOTH of my jobs, need to tap the HELOC and that BofA didn't just randomly close ALL HELOCs at the same time . . . although, even if they had, I had other assets (brokerage account) I could have used.

Thanks for the thoughtful advice about luck and strategy but think I know the difference between the two. My strategy always has been to follow a thoughtful, relatively boring, conservative path and have been rewarded for such. I would like to believe this is an example of such as opposed to just dumb luck.

delamer
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by delamer » Fri Sep 21, 2018 3:33 pm

CRTR wrote:
Fri Sep 21, 2018 3:20 pm
Spirit Rider wrote:
Fri Sep 21, 2018 8:24 am
CRTR wrote:
Thu Sep 20, 2018 5:22 pm
It's good question. I never had the need to access my emergency funds. BofA never closed the account, even during the financial crisis. I doubt it would have been difficult to access the fund if I did need them. The HELOC came with checks, a VISA or I could have had the $$ directly deposited into my checking account.
Do not confuse luck for strategy.

I was unexpectedly without a main salary from 2001 - 2003 and again from 2009 - 2010. Also, I personally knew several people who had their BOA HELOC credit lines in 2007-2008 reduced to their current balance, and continuously adjusted down on any payment.

I paid my living expenses during 2001 - 2003 with 1/2 emergency funds and 1/2 (high five figures) 0% balance transfers including "0% for life" offers from Chase, Citibank and Discover. The latter was dumb luck that I didn't have to liquidate my beloved 3%+ I-Bonds. However, I wouldn't have done the 0% offers without the I-Bond emergency funds backing them up.

Do not confuse luck for strategy.
I'm sorry to hear about the difficulties you experienced during those times. You also raise a really good point. A HELOC is not a very good source of emergency funds if it can be cut off arbitrarily. I wondered why they didn't touch my HELOC if so many others were affected. So, I called K Fitzgerald, my personal banker during that period, to ask what the deal was. He explained that BofA (as well as most major banks - Chase, Wells Farge, etc) suspended, froze or reduced existing HELOC accounts in areas that were hit by major housing market declines. At BofA, they used updated estimates of house prices to determine new LTV rates. If the LTV rate was worse than 60%, the account was reduced. If it was worse than 80%, it was reduced or even frozen/suspended. The decision was not necessarily final as the homeowner could appeal. He recalled a couple customers that had it reopened after submitting documentation. On the other hand, he also recalled a LOT of people that had their HELOCs closed for the above reasons.

So, in light of the above, you definitely got me to reconsider and reduce my enthusiasm for a HELOC or even a reverse mortgage as a potential source of emergency funds. Clearly, the strategy is not for everyone, especially for people with higher debt levels and/or lower levels of equity in their house. For me, however, it worked out well. Was it strategy or luck, as you would like to believe? I guess that depends on your perspective. I've never taken on much debt and, therefore, was not at risk for closure of my HELOC . . . luck had NOTHING to do with that. On the other hand, I guess you can call it luck that I didn't lose BOTH of my jobs, need to tap the HELOC and that BofA didn't just randomly close ALL HELOCs at the same time . . . although, even if they had, I had other assets (brokerage account) I could have used.

Thanks for the thoughtful advice about luck and strategy but think I know the difference between the two. My strategy always has been to follow a thoughtful, relatively boring, conservative path and have been rewarded for such. I would like to believe this is an example of such as opposed to just dumb luck.
I respect that you’ve thought this through some more.

But objectively, it was luck that you never needed to tap the HELOC. Since that didn’t happen, your plan was never tested so you don’t know if it would have worked.

CRTR
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by CRTR » Fri Sep 21, 2018 4:17 pm

delamer wrote:
Fri Sep 21, 2018 3:33 pm
CRTR wrote:
Fri Sep 21, 2018 3:20 pm

I'm sorry to hear about the difficulties you experienced during those times. You also raise a really good point. A HELOC is not a very good source of emergency funds if it can be cut off arbitrarily. I wondered why they didn't touch my HELOC if so many others were affected. So, I called K Fitzgerald, my personal banker during that period, to ask what the deal was. He explained that BofA (as well as most major banks - Chase, Wells Farge, etc) suspended, froze or reduced existing HELOC accounts in areas that were hit by major housing market declines. At BofA, they used updated estimates of house prices to determine new LTV rates. If the LTV rate was worse than 60%, the account was reduced. If it was worse than 80%, it was reduced or even frozen/suspended. The decision was not necessarily final as the homeowner could appeal. He recalled a couple customers that had it reopened after submitting documentation. On the other hand, he also recalled a LOT of people that had their HELOCs closed for the above reasons.

So, in light of the above, you definitely got me to reconsider and reduce my enthusiasm for a HELOC or even a reverse mortgage as a potential source of emergency funds. Clearly, the strategy is not for everyone, especially for people with higher debt levels and/or lower levels of equity in their house. For me, however, it worked out well. Was it strategy or luck, as you would like to believe? I guess that depends on your perspective. I've never taken on much debt and, therefore, was not at risk for closure of my HELOC . . . luck had NOTHING to do with that. On the other hand, I guess you can call it luck that I didn't lose BOTH of my jobs, need to tap the HELOC and that BofA didn't just randomly close ALL HELOCs at the same time . . . although, even if they had, I had other assets (brokerage account) I could have used.

Thanks for the thoughtful advice about luck and strategy but think I know the difference between the two. My strategy always has been to follow a thoughtful, relatively boring, conservative path and have been rewarded for such. I would like to believe this is an example of such as opposed to just dumb luck.
I respect that you’ve thought this through some more.

But objectively, it was luck that you never needed to tap the HELOC. Since that didn’t happen, your plan was never tested so you don’t know if it would have worked.
I guess you're right: like I already stated, it was luck that I didn't lose both my jobs (although I did take a big income hit) and didn't need to tap the HELOC. Generally speaking, I guess you're also right: one never knows if ANY plan will work until it is implemented. I feel reasonably OK about how it would have worked out for me given that my HELOC never was touched by BofA nor, according to Mr Fitzgerald, would it have been.

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by AlohaJoe » Sat Sep 22, 2018 1:09 am

andrew99999 wrote:
Thu Sep 20, 2018 1:00 am
AlohaJoe wrote:
Thu Sep 20, 2018 12:02 am
delamer wrote:
Wed Sep 19, 2018 9:23 pm
At some point, you’ll need to start paying back the HELOC principal too.

How does that figure into your plan?
This is the hard part with any plan like this. You also need to be careful about whether you're really considering all possible scenarios and not just the one or two that make your strategy look good.

I once did an analysis of using debt instead of selling equities during the late 1960s/1970s:

https://medium.com/@justusjp/using-a-ma ... 3ecd2f9bb9

delamer's point about paying back the debt is the crux of the matter. You can see that a simple approach eventually gets destroyed by mounting interest payments, with interest payments alone (not counting principal repayment) making up 30% of the monthly spending. Now you can argue that the specific strategy I took wasn't ideal but the point is:

If you don't test it, how do you know what is and isn't ideal?
If you don't test it, how do you know it is better or worse than the alternative?
If you don't know how to test financial strategies, maybe you shouldn't be inventing them?
Thank you for the link.
However, what exactly is the point of them deciding to never pay it back. The idea is to lessen the hit you take by paying it back once the market has recovered, not just to never pay it back. I see no value in the article due of that assumption.
I did more simluations to show the strategy still doesn't work:

https://medium.com/@justusjp/surviving- ... 5a56c8f113

You never get a chance to "pay it back" because in the 1970s the market stays down for so long and you quickly run into limits of lending. So you end up selling stocks at a loss and having a lot of debt while interest rates are high.

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by andrew99999 » Sat Sep 22, 2018 2:00 am

AlohaJoe wrote:
Sat Sep 22, 2018 1:09 am
I did more simluations to show the strategy still doesn't work:

https://medium.com/@justusjp/surviving- ... 5a56c8f113

You never get a chance to "pay it back" because in the 1970s the market stays down for so long and you quickly run into limits of lending. So you end up selling stocks at a loss and having a lot of debt while interest rates are high.
Thank you for the article and the time to write it!

I wish I had a hold of you while you were writing it. One thing I would have changed was to just sell equities and pay down all the debt, instead of just "starting repayments" at that time.
Then you have already achieved your goal of withdrawing your 4% withdrawal rate using 4% of your portfolio instead of withdrawing 8% after it halves.
Doing this would leave you without the ongoing interest payment, which looks to be the crux of the problem?
I wonder how it would have fared doing it this way.

Still a tough question to answer of whether to do this at 85, 90, 95, or 100% though. Maybe 90% would be a good compromise, or possibly pay some down at 80, some at 90 and the rest at 100.

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by randomizer » Sat Sep 22, 2018 2:38 am

AlohaJoe wrote:
Thu Sep 20, 2018 12:02 am
I once did an analysis of using debt instead of selling equities during the late 1960s/1970s:

https://medium.com/@justusjp/using-a-ma ... 3ecd2f9bb9
Blog looks interesting (this and the other articles). Thanks for sharing.
87.5:12.5, EM tilt — HODL the course!

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by camillus » Sat Sep 22, 2018 2:47 am

Fun story.

My dad was reliant on a HELOC to pay for my two younger sibs to go to college in 2009, 2010.

In a true downturn the banks are panicking - trying to limit their exposure to the sky that's falling. My pop's line of credit was reduced to zilch. My sibs were S-O-L. More of a sad story.

Debt products don't make the best safety net, assets do.

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by AlohaJoe » Sat Sep 22, 2018 3:04 am

camillus wrote:
Sat Sep 22, 2018 2:47 am
Fun story.

My dad was reliant on a HELOC to pay for my two younger sibs to go to college in 2009, 2010.

In a true downturn the banks are panicking - trying to limit their exposure to the sky that's falling. My pop's line of credit was reduced to zilch. My sibs were S-O-L. More of a sad story.

Debt products don't make the best safety net, assets do.
Do you have more details about your dad's situation? I've never heard of a HELOC being cancelled per se during 2008. The only thing I've ever seen is that a bank reevaluted the property value, discovered the owner no longer actually had any equity due to their outstanding mortgage, and reduced/removed the line of credit. I've never heard of someone with no mortgage having their HELOC closed. But maybe that's what happened here?

In any case, yes, you are absolutely right that relying on someone else to lend money to you during a very long crash/bear market introduces counterparty risk, which is hard to model and think about....and probably not something you want to do in retirement if you can avoid it!
Last edited by AlohaJoe on Sat Sep 22, 2018 3:10 am, edited 1 time in total.

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camillus
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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by camillus » Sat Sep 22, 2018 3:10 am

AlohaJoe wrote:
Sat Sep 22, 2018 3:04 am
Do you have more details about your dad's situation? I've never heard of a HELOC being cancelled per see during 2008. The only thing I've ever seen is that a bank reevaluted the property value, discovered the owner no longer actually had any equity due to their outstanding mortgage, and reduced/removed the line of credit. I've never heard of someone with no mortgage having their HELOC closed. But maybe that's what happened here?
"Zilch" was an exaggeration. I believe the bank reevaluated the property-value-to-mortgage (equity), just as you said, and reduced the HELOC to nearly nothing. I believe the 900k home was now worth 500k. This was California. I believe the loss of the HELOC was a 6 figure swing in terms of credit line. Wells Fargo.

It was a housing bubble that popped, so counting on debt related to your home did not turn out to be a winning strategy :(

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by AlohaJoe » Sat Sep 22, 2018 3:26 am

andrew99999 wrote:
Sat Sep 22, 2018 2:00 am
AlohaJoe wrote:
Sat Sep 22, 2018 1:09 am
I did more simluations to show the strategy still doesn't work:

https://medium.com/@justusjp/surviving- ... 5a56c8f113

You never get a chance to "pay it back" because in the 1970s the market stays down for so long and you quickly run into limits of lending. So you end up selling stocks at a loss and having a lot of debt while interest rates are high.
Thank you for the article and the time to write it!

I wish I had a hold of you while you were writing it. One thing I would have changed was to just sell equities and pay down all the debt, instead of just "starting repayments" at that time.
Then you have already achieved your goal of withdrawing your 4% withdrawal rate using 4% of your portfolio instead of withdrawing 8% after it halves.
Doing this would leave you without the ongoing interest payment, which looks to be the crux of the problem?
I wonder how it would have fared doing it this way.

Still a tough question to answer of whether to do this at 85, 90, 95, or 100% though. Maybe 90% would be a good compromise, or possibly pay some down at 80, some at 90 and the rest at 100.
The article makes it crystal clear that 90% isn't a good compromise - it flat out fails. And the failure is of such a huge magnitude that it is hard to imagine small tinkering like "pay at 80% instead" will make a difference. What's more, the strategy is clearly fragile in the sense that every time I show how a strategy fails people go, oh but what if you make this one change instead? At this point we are simply backfitting a solution to the very specific circumstances of the 1970s which should give us little confidence that it is a general solution that works well in other scenarios.

That said, I plan to show various "pay back" schemes and how every single variant also fails.

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by bdaniel58 » Sun Sep 23, 2018 10:34 am

I have a HELOC through our credit union. The interest rate is prime + 4 and there are no annual fees. I can use it like a credit card. I love the thing.

I bought a new Honda Gold Wing back in the spring and just wrote the dealer a check using HELOC. A few days later I went to the credit union, got a traditional loan and paid off the HELOC.

Did the same thing with a truck and RV in years past. We don't have stupid debt and never carry credit card balances. We don't have an emergency fund. I have always used our HELOC for that. It may not be the Boglehead way but it has worked for us. We had a car loan with the credit union when we bought a RV. Only half the car was financed, so they just added the RV financing to the car loan. It was easy. And all at 1.49%. If you have access to a credit union, definitely use it.

I was laid off in Dec 2008. I had a couple of loans with the credit union and a HELOC. I was many payments ahead on the loans and had a lot of equity in my house. I wanted to reduce my cash outflow, so I called the credit union and asked if they could reduce my loan payments for a few months. I was fully honest up front about being laid off and trying to reduce cash outlays. I think they cut my loan payments in half.

There is more info in some blog posts I did around that time on my website.

https://www.bobbystuff.com/blog/393/une ... ed-by-tags

Bobby

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by andrew99999 » Sun Sep 23, 2018 9:25 pm

AlohaJoe wrote:
Sat Sep 22, 2018 3:26 am
That said, I plan to show various "pay back" schemes and how every single variant also fails.
Just saw your latest article and spent a moment looking at the s&p 1960-1986, and yes I see your point. If a market stays under for a decade and a half, then at what point do you actually pay it back. If you wait for a full recovery, the interest could easily wipe you out. Thanks for pointing it out.

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by bhsince87 » Sun Sep 23, 2018 9:35 pm

If you are over age 62 a reverse mortgage might be a better deal than a HELOC.
Retirement: When you reach a point where you have enough. Or when you've had enough.

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by NoHeat » Sun Sep 23, 2018 10:18 pm

andrew99999 wrote:
Wed Sep 19, 2018 8:40 pm
... you would be taking money from (borrowed) cash which you can replace sometime in the next 10 years when the market recovers?
Using debt to boost one’s stock allocation looks a lot like buying stocks on margin.

It would require a huge risk tolerance for a retiree to buy stocks on margin during a bear market.

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by andrew99999 » Mon Sep 24, 2018 12:16 am

bhsince87 wrote:
Sun Sep 23, 2018 9:35 pm
If you are over age 62 a reverse mortgage might be a better deal than a HELOC.
Not sure how it's different.
Compounding has two sides.
Growing assets: you earn returns on not only you principle but on the previous returns and it snowballs.
Reverse mortgage: The interest snowballs in the other direction until you owe more than you can repay.
That's really the point AlohaJoe made very well.
You need an end plan of how to deal with the debt or the resulting weight of the compounding will crush you.

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Re: HELOC as a bonds replacement for drawing down from in a downturn?

Post by msk » Mon Sep 24, 2018 2:47 am

NoHeat wrote:
Sun Sep 23, 2018 10:18 pm
It would require a huge risk tolerance for a retiree to buy stocks on margin during a bear market.
Last two bear markets I used margin to buy one-year Call Options. Much less risk; cost $50k to own Calls on a million $ worth of SPY. Of course, the market has to rebound at least 5% within a year to break even. But it was a pleasant enough experience overall.

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