I generally dissuade people from introducing market risk into their emergency fund.
My wife and I were watching a show on a financial network the other day, and a guest said he was so confident in the market that he recommended people take out home equity loans to invest in the market right now, due to discount prices. That seemed very risky to us. What do you think?
Raleigh, North Carolina
Believe it or not, I saw that exact same show. I listened to that guest make that claim, and my jaw nearly hit the floor. Not because it was so brilliant, but because it was reckless and unsuitable for nearly every investor who might try to employ that strategy.
As you know, Timothy, this isn’t the first financial crisis in our lifetime, and it certainly won’t be our last. The feeling of helplessness which washes over each and every one of us can be paralyzing. And it’s in these moments an urge to flip the crisis on its head with bold investment moves, can rise to the surface. It’s a tale as old as time. The crisis is Goliath and we’re David. While we may collectively defeat this crisis, urges to personally defeat a volatile market are wholly unrealistic.
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It’s in your best interest to squash those feelings. It’s simply not worth the risk.
I do buy into the theory that the market always trends up, which was that “expert’s” justification, but what’s often left-out of that sentence are the words “over a long period of time.”
The word of the moment is uncertainty. Sure, we may be relatively certain the economy and the market will recover, but there’s very little certainty around when that might occur and at what pace.
Uncertainty is another word for risk. Not only is uncertainty risk, but the level of economic uncertainty we have right now is unlike anything we’ve seen in nearly 100 years. Driving face-first into this level of risk and uncertainty with your primary manifestation of stability and calm (home equity), is ill-advised.
One of the biggest lessons coming-off the Great Recession of 08-09 was how dangerous using your home equity as a piggy bank can be.
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Your home equity can be leveraged appropriately to better your life, in stable times. For example, tapping it to add value to your home in the form of creating additional spaces can make a tremendous amount of sense as long as you don’t go hog wild.
Home equity is also a fantastic backup plan for a backup plan. Ideally you have three to six months worth of expenses set aside in an emergency fund, and a home equity line of credit can provide an additional layer.
At times of great uncertainty, you may be forced to take certain risks you normally wouldn’t take. But taking-on increased stock market risk is not a path worth pursuing. The problem with diving deep into the market with borrowed money is you don’t know when the market will stabilize and climb in relation to your potential need for access to your home equity.
I generally dissuade people from introducing market risk into their emergency fund, and I urge you to protect your home equity from unnecessary risks too.
I do believe people should still consistently buy into the market, according to the same plan they were executing in January and February of this year. Doing so is a prudent, savvy action which will allow you to reap healthy gains in the years to come. Any additional action beyond that, especially if you don’t have a healthy emergency fund and employment stability, is introducing way too much risk into your life right now.
Don’t try and be a hero.
Do what I’ve resolved to do: Stop watching the financial networks all day. They have so much time to fill that dangerous fringe ideas are making it to air.
Peter Dunn is an author, speaker and radio host, and he has a free podcast: “Million Dollar Plan.” Have a question for Pete the Planner? Email him at [email protected]. The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.
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