In our industry we have our share of financial advisors that have counseled their clients to actually take the equity out of their house and invest it. The argument is, if the after-tax rate of return on the investment portfolio is higher than the after tax interest rate on the mortgage, then you would be better off taking out a mortgage on your house, investing the money at a higher rate of return and putting the difference in your pocket.
When a client comes into our office and asks about pulling equity out of their house because their investment portfolio did so well, we discourage it.
The problem is, no matter how confident your financial advisor or money manager is, no one can guarantee you what the rate of return will be on a stock and bond portfolio. Nor can they guarantee that you won't lose money. However, what is guaranteed is that your mortgage payment is still going to be due every month. Whether you lose money on your stock portfolio or not, you still have to make that mortgage payment.
If a person has a higher risk tolerance and can still afford to make their mortgage payment if their stock portfolio drops, perhaps they should go ahead.
Let’s say you’re in retirement and you’re depending on your stock and bond portfolio for income to pay your expenses. If we go through another stock market crash like in 2008, you may have to reduce your expenses so you’re not liquidating stocks for income while their down in value.
A mortgage payment is one expense you won’t be able to eliminate unless you sell your stocks while they are down in value, which would cause a permanent loss in your portfolio.
Just remember that this is not just a financial decision, this is a risk tolerance decision and no financial advisor or CPA has the right to try to tell somebody what their risk tolerance is.
We have found that most people that are getting close to retirement feel very uncomfortable and risk averse to large amounts of debt, as they should.