Borrow to invest now?

Question – I read your books. They have kept me out of a great deal of trouble. I rely heavily on your advice.

The problem is someone very close to me has money with a mutual fund company and I am worried about the advice they are receiving. They were asked recently to borrow a considerable amount of money on their house to buy mutual funds. They showed me their portfolio and asked me what I thought. They are 88% Equity, 12% fixed income (actually in a balanced fund), and 0% cash ! OUCH!!

They are being told that their pension plans will look after the fixed income and cash component of this portfolio.

Can they truly rely on people who give this kind of advice in these trying times? They are working and don’t have the time to study the markets and portfolio building.

Keep up THE GREAT WORK!! Thank you in advance. – I.W.

Answer – I can only assume this advice was given before the events of Sept. 11. I cannot imagine anyone suggesting such a plan subsequent to that.

Even prior to the terrorist attacks, this could hardly be considered as well-thought-out advice. Only an extremely aggressive investor would almost entirely in equities during what is the worst bear market we’ve seen in a decade. To even consider borrowing against a home to create even more exposure on top of that could only be described as foolhardy. The advisor should be asked how he or she would feel today if your friends had followed this strategy, which would have resulted in heavy losses in a very short time.

There’s a case to be made for overweighting equities when a good pension plan is in place that will provide regular income at retirement. But that does not extend to putting your home on the line at a time when markets are in turmoil. This is not a time for greed, it is a time for extreme caution. Your friends should tell their advisor as much and suggest that if he/she doesn’t get a better grip on reality they’ll take their business elsewhere. – G.P.