Quora Answer: Should I Borrow against My Portfolio in a Recession?

The following is my answer to a Quora question: “Should I borrow against my portfolio in a recession?” 

That depends on several factors.  First, you need to ask yourself whether you need that money?  If not, it would be better not to.  When there is a recession, your investment portfolio is likely to be negatively affected, meaning that the overall value of that portfolio is down.  You are borrowing against lesser value, limiting how much you can take out.  That loan to value is disadvantageous to you.  If your loan is tied to the value of that portfolio, it would be very expensive to pay back against it. 

You need to consider the make-up of your portfolio, and how long you believe the recession will last.  You then need to project the value of your portfolio in the period, and how long it will take to recover.  Recovery does not refer going back to positive, but back to the projected value it would have been had there not been a recession.  That may take more than a few quarters.  If the portfolio is especially conservative, this may take more than two or three years. 

One of the paradoxes of finance is that it is better to borrow when you do not need the money to lock in the lower interest rates than borrow when you actually do need since you are now a higher risk of default, meaning there is premium on the rates.  Borrowing during a recession is likely to be expensive since banks are concerned about their own liquidity in a period of uncertain revenue.  Although incorrectly attribute to Mark Twain and others, this quote sums it best: A banker is a fellow who lends you his umbrella when the Sun is shining, but wants it back the minute it begins to rain.