The Daily Dow
Wednesday, August 20, 1997
by Robert Sheard

LEXINGTON, KY. (Aug. 20, 1997) -- Every once in a while, you have to get scared for some people when you hear what they're doing. That happened to me today when I heard a story about a couple in their 30s taking out a $50,000 home-equity loan in order to invest the money in mutual funds.

The issue of investing in funds aside (it's no secret I'm not a fan of them, given that more than 80% of stock funds lose to the S&P 500 over time), my heart leapt right into my throat at the thought of putting one's home on the line in the stock market.

Yes, I understand that if one can generate returns that are higher than the interest rate being charged, it's a profitable move. Yes, home-equity line interest payments are generally tax deductible, but what happens if interest rates soar and stocks plunge? Will they (you?) be able to make the increasingly larger payments as the floating interest rate (now at 9% or so) creeps higher? Will they (you?) be able to sit tight with the investments to ride out any market drops, or will they be forced to sell out at a loss to pay off part of the debt, exacerbating the loss?

This is, of course, a form of margin investing, but think of the consequences of not being able to meet the "margin call." I am a big fan of using a conservative level of margin leverage to boost one's returns over the long haul, but margining one's portfolio (borrowing a maximum of 20% or 25% of the total investment) is much less daunting than putting a huge chunk of one's home equity on the line at a floating and fairly high interest rate compared to what one can expect in returns (remember that funds have trouble beating the market averages). A modest level of margin isn't likely to trigger a market call under most circumstances, and if you choose the broker carefully, the margin interest is likely to be a little lower than the home-equity line of credit (and also tax deductible).

Like any other financial tool, credit can be wonderful or it can be abused. It's simply my opinion, but I think it's too Wise to start risking one's home in order to plunk money into the stock market, especially through mutual funds with mediocre historical records. Don't let the great returns of the last 30 months blind you to the potential consequences of financial moves, Fools. I thought I was aggressive until I heard that feature today. I'm still twitching at the prospects.

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________


1997 Foolish Four Model
Stock  Change   Last
--------------------
T    -   3/16  40.25
GM   +   1/4   63.38
CHV  +  13/16  79.75
MMM  +   1/4   93.25

            Day   Month    Year
        FOOL-4   +0.32%   3.91%  10.05%
        DJIA     +1.30%  -2.45%  24.39%
        S&P 500  +1.44%  -1.57%  26.81%
        NASDAQ   +1.75%   2.19%  26.15%

    Rec'd   #  Security     In At       Now    Change
   1/2/97  153 Chevron       65.00     79.75    22.69%
   1/2/97  179 Gen. Motor    55.75     63.38    13.68%
   1/2/97  120 3M            83.00     93.25    12.35%
   1/2/97  479 AT&T          41.75     40.25    -3.59%


    Rec'd   #  Security     In At     Value    Change
   1/2/97  153 Chevron     9945.00  12201.75  $2256.75
   1/2/97  179 Gen. Motor  9979.25  11344.13  $1364.88
   1/2/97  120 3M          9960.00  11190.00  $1230.00
   1/2/97  479 AT&T       19998.25  19279.75  -$718.50


                             CASH   $1009.44
                            TOTAL  $55025.07