In an era of soaring inflation, geopolitical turmoil, and volatile markets, long-term investors are constantly seeking ways to unlock liquidity without derailing their carefully constructed portfolios. The practice of borrowing against stock holdings, often called a Securities-Based Loan (SBL) or a Portfolio Margin Loan, has surged in popularity. Prominent figures like Elon Musk have famously used this strategy to access billions without selling shares and triggering capital gains taxes. On the surface, it seems like the ultimate financial hack: your money works for you in the market while you use its paper gains to fund your life or new investments. But beneath the sleek surface of this strategy lies a complex web of risk, especially for the investor whose horizon is measured in decades, not days. Is this a safe tool for building generational wealth, or a dangerous lever that could dismantle it?
The mechanics are simple. You pledge a portfolio of stocks, ETFs, or mutual funds as collateral to a bank or brokerage firm. In return, they extend a line of credit, typically up to 50-70% of the portfolio's value. You don't sell the assets, so they continue to (hopefully) appreciate and pay dividends, and you avoid any tax event.
This strategy resonates deeply with today's economic climate. With interest rates higher than they've been in years, the traditional method of taking cash out of a home via a refinance or HELOC has become significantly more expensive. For the affluent, an SBL can offer a lower interest rate compared to unsecured debt. Furthermore, in a world obsessed with "efficiency," the idea of letting a multi-million dollar portfolio sit idle while you need cash for a business venture, a real estate purchase, or even a luxury like a yacht feels like a missed opportunity. It’s the financial equivalent of having your cake and eating it too.
The tech boom created a new class of wealth: individuals with immense net worth almost entirely tied up in company stock. Selling large blocks can spook the market, signal a lack of confidence, and incur a massive tax bill. Borrowing against those shares became the standard playbook to fund lavish lifestyles or reinvest in new startups, all while maintaining ownership and voting rights. This narrative has trickled down to the mass affluent, making SBLs a mainstream product.
While the benefits are aggressively marketed, the risks are often buried in the fine print of a 50-page margin agreement. For a long-term investor, whose strategy is predicated on weathering market cycles, these risks are not merely academic; they are existential threats to the portfolio.
This is the single greatest risk. The loan is not static; it's a dynamic equation based on your portfolio's fluctuating value. The bank sets a "maintenance requirement"—the minimum equity you must hold in the pledged account.
Let’s say you have a $1 million portfolio and borrow $500,000 (a 50% loan-to-value ratio). If your portfolio's value drops to $800,000, your equity is now $300,000 ($800k - $500k). However, the bank's maintenance requirement might be 30%. They now require you to have $240,000 in equity (30% of $800k). You're still above that with $300k, so you're okay.
But what if the market crashes? A 2008-style or COVID-style flash crash sends your portfolio down to $600,000. Now your equity is just $100,000 ($600k - $500k). The bank requires $180,000 (30% of $600k). You are now $80,000 below the maintenance requirement. This triggers a margin call.
You have three options, and all are terrible: 1. Deposit cash: Immediately wire $80,000 to the brokerage. 2. Sell securities: The bank has the right to sell your stocks, without your permission, to bring the account back into compliance. They will sell your holdings at fire-sale prices. 3. Pay down the loan: Use other funds to reduce the loan balance.
For a long-term investor, the second option is a nightmare. It forces you to sell at the absolute worst time, locking in losses and destroying the compounding engine you spent years building. It’s the ultimate violation of the "buy and hold" philosophy.
This risk is magnified a thousand-fold if your collateral is a concentrated position in a single stock. Using company stock as collateral is incredibly common but dangerously risky. If that company faces bad news—a weak earnings report, a regulatory investigation, a CEO scandal—its stock can plummet rapidly. This creates a "double jeopardy" scenario: your net worth is collapsing and it’s triggering a massive margin call on your loan. The very event that hurts your wealth also triggers the mechanism that forces you to liquidate what's left of it.
SBLs typically have variable interest rates, often pegged to the SOFR or Prime Rate. The past few years have been a brutal lesson in the danger of variable rates. An loan that cost 3% a few years ago could easily cost 8-9% today. This rising cost of carry can quickly erode the benefits of the strategy. If the interest payments start to exceed the dividend yield and projected growth of your portfolio, you are effectively in a slow bleed, paying to own a depreciating asset.
This doesn't mean all Securities-Based Loans are inherently evil. For a sophisticated, risk-aware long-term investor, they can be a powerful tool. The key is to implement brutal safeguards.
The industry will lend you 50-70%. You should lend yourself far less. A conservative rule of thumb is to never borrow more than 10-20% of your portfolio's value. This creates a massive buffer against a market downturn. Even a 30-40% market crash would unlikely trigger a margin call if your loan-to-value is this low. This is about liquidity, not leverage.
Never, ever use a single stock as your only collateral. The safest collateral is a broad-based, diversified ETF like the SPY or a basket of blue-chip stocks across different sectors. Diversification protects the value of your collateral from company-specific risk.
This is not free money for speculative bets. The best uses are for short-duration, high-certainty needs: bridging a gap before another liquid asset matures, funding a real estate down payment where you have immediate equity, or paying a tax bill. The worst use is to reinvest the money back into the market—a strategy known as "double leverage" that magnifies losses exponentially in a downturn.
Before signing, run the numbers. What happens if the market drops 40%? What if it drops 50% like in the Great Financial Crisis? What if your concentrated stock falls 80%? If the outcome of those models forces you to sell at the bottom or requires a cash infusion you can't provide, your loan amount is too high.
Maintain a separate pool of highly liquid assets—cash in a savings account, unused HELOC, short-term Treasuries—that is completely unrelated to your pledged portfolio. This is your margin call insurance policy. It ensures that if the market tanks, you can meet a margin call without being forced to sell your stocks.
The modern financial landscape offers tools of incredible power to the long-term investor. A Securities-Based Loan is one such tool. It is not inherently safe nor inherently dangerous. Its safety is determined entirely by the discipline, conservatism, and foresight of the investor wielding it. Used recklessly, it is a lever that can pry apart a lifetime of savings. Used wisely, with extreme caution and ample buffers, it can be a scalpel that precisely accesses the wealth you’ve built without fracturing its foundation. In the end, the greatest risk is not the loan itself, but the hubris of believing that a long-term bull market is a permanent state of affairs.
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Author: Loans Austin
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