When markets are volatile, it’s tempting to want to stay away from investments and sit on cash until the next market correction. But being uninvested—even for a brief period—can hurt you in the long run. And if you have an emergency fund or “fun money” account, market volatility might scare you away from investing that cash and letting it potentially grow. So, what are your options?

In this excerpt from our webinar, “Putting Your Cash to Work: 4 Strategies for Excess Cash & Volatile Markets,” find out how collateralized loans can provide you with liquid cash without having to sell off your investments.

If you’re interested in learning more about collateralized loans, reach out to a Wealth Enhancement advisor today. And if you want to learn more about the other three cash management strategies discussed in the webinar, you can do so below:

• High-yield savings accounts
• Money market funds
• Defensive investments

VIDEO TRANSCRIPT BELOW

If you have excess cash, there are strategies you can employ that can help make your cash work harder for you than just sitting around in a bank account. A collateralized loan is also known as a securities-based line of credit or an SBLOC. It's a loan secured by the value of your taxable investment portfolio, usually at some variable interest rate.

Collateralized loans can help you finance short-term or unexpected expenses without requiring you to liquidate your investment holdings. An SBLOC lets you fund unexpected expenses or opportunities, so you can avoid selling stock when it is at a low or triggering your capital gain on the sale of highly appreciated stock.

Now, while retirement accounts aren't eligible collateral for these types of loans, you may be able to use this strategy with a taxable brokerage account. And the amount you borrow could be as high as 70% of the value of the portfolio you were pledging. For example, if you have $1 million in your taxable brokerage account, you may be able to borrow up to $700,000.

Beyond helping you cover a cost such as an unexpected tax bill, a securities baseline of credit can help you bridge a funding gap. For example, the time between selling one home and purchasing a new one. An SBLOC can also enable you to finance new investment opportunities, such as a new business or house or the purchase of a multifamily building.

It might also allow you to cover a cash crunch without dipping into your emergency fund or paying the penalties associated with taking early withdrawals from a tax advantage account, such as your IRA. The great thing about an SBLOC is that it lets you fund these investments without liquidating your taxable investment holders, which allows you to stay in the market with the continued potential of long-term gain.

These tend to be no-fee loans with variable loan sizes, and collateralized loans are interest only lines of credit, so principal payments are not required. Just remember, the loan is secured by the value of the account, so the account value cannot drop below a certain amount relative to the loan size, whether through market losses or withdrawals. We do recommend you be off your loan as you're able. 

Now, these loans tend to be variable based on a certain benchmark. Wealth Enhancement through Goldman Sachs uses a secured overnight funding rate plus a few percentage points based on the size of the loan.

If you're interested in collateralized loans, I recommend that you reach out to your financial advisor. They can help you determine and set up a collateralized loan if one is right for your particular situation.

The underlying thought behind all of these strategies is that they are short to medium term in nature. We strongly recommend that you work closely with your advisor and craft a strategy that is flexible and resilient but can also meet the limit.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances.

There is no guarantee that asset allocation or diversification will enhance overall returns, outperform a non-diversified portfolio, nor ensure a profit or protect against a loss. Investing involves risk, including possible loss of principal.

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