The Problem with the Calculator: Liquidate to Buy vs SBLOC
Borrowing against your investment portfolio—often through a Securities-Backed Line of Credit (SBLOC)—has become a popular strategy. The sales pitch sounds appealing: instead of selling investments and triggering taxes, you simply borrow against them, pay a low interest rate, and let your money keep growing.
Billionaires do this all the time to avoid taxes (“Buy Borrow Die”). Then there are illustrations like the following that I found from a very well known financial firm with over $150B in assets and is one of the largest insurers in the country.
It compares the cost of liquidating a portfolio to cover an expense (like a home purchase) to taking out a loan instead against your portfolio.
Looks pretty compelling. Liquidating has a funding efficiency of -551.7% compared to an SBLOC of -41.4%. Who wouldn’t be convinced by this?
Well with all sales pitches, this one comes with it’s own set of errors. Let’s fix this.
The Issues with the Calculations
Cost of Liquidating
This section actually is sort of accurate. What they are doing here is taking what you pull out of the portfolio $400,000 and projecting future growth on it. In this case, the growth rate is 10.54% per year for 20 years and subtracting $400,000 from the result. That yields $2,567,900.
Then they are taking that and adding capital gains tax then dividing by $400,000 to get the funding efficiency. In this case, $2,567,900/$400,000 = 551.7%.
What they don’t show is the growth of the remaining portfolio which would have grown to $4,451,800 during this time.
SBLOC and HELOC Cost of Financing
Rather than liquidate, you instead take out an SBLOC (Securities Based Line of Credit) for the amount needed. That amount is non-taxable because it is a loan against your assets. You keep the $400,000 invested.
In their calculation, they use a 7.07% interest rate. An SBLOC and a HELOC are both variable rates which means the rate changes based on a stated short term interest rate.
You are charged interest on a daily basis based on the annualized rate. In their calculations, the “Interest Expense” of $565,600 is calculated as the interest payments for an interest only loan for 20 years. That comes out to $28,280 per year in interest payments.
They then take that total and divide it by the $400,000 to get -41.4%.
Here is where things go awry.
- In the liquidation scenario, at the end of 20 years, you don’t have a loan. In the loan scenarios, with interest only payments, you still have a $400,000 loan at the end of the 20 years!
- The calculation doesn’t account for where the interest payments will come from. It doesn’t generate it from the portfolio and is presumed to just happen. And there are no capital gains on paying these!
- The interest payments do not include growth on the payments. Assuming they came from somewhere, you could have been invested at 10.54% and should have some future growth ending value just like the original $400k did.
Fixing the Calculations
I rebuilt this to fix the calculations by doing the following:
- The entire system is closed meaning that every dollar in the calculation has to come from the original portfolio ($1,000,000 in this case). Any liquidation, taxes, interest payments, and principal payments come from the portfolio.
- Any liquidation pays capital gains based on the portfolio value and embedded gains.
- At the end of the term, the loans will be paid off. If interest only payments have been make, this will result in the full outstanding balance being paid.
- I use the same capital gains rate of 15%.
Lastly, rather than adding up interest vs a projected value. Since I’ve closed the loop, I can calculate the final portfolio value (net of any outstanding loans) to create a true comparison.
After fixing all of that, the numbers still favor taking a loan against the portfolio though it’s not nearly as dramatic as saying taking the loan is 510% more efficient!
If we compare the final portfolio values, taking a loan against the portfolio is just 14% better than liquidating and paying cash.
This is largely due to the delta between the loan rate of 7.07% and the flat assumed growth rate of 10.54%. And that brings me to the final issue…
Two Final Issues
First, while the above results still ended up favoring the loan options, it ignores a significant issue – RISK.
I wish markets moved in a straight line at a nice 10% per year. That would make my job so much easier. But they don’t.
By choosing the loan options, you’re taking on leverage in your portfolio. These loan provisions have requirements as to how much account value must support a loan. If the account value drops, rather than grows at a steady 10.54% per year, than it is possible that you will have to come up with cash to deposit to the portfolio.
Running monte carlo analysis using these same assumptions, I calculated 10% to 12% chance of our baseline scenario above having to make additional contributions!
Lastly, when you use an SBLOC, the rest of the portfolio is not fully available. The lender will require you to hold a certain level of assets above the loan amount. For securities based lending, it’s typically 50% to 70% loan-to-value (LTV) but can go lower for extremely risky positions.
For example, if the LTV requirement is 50%, you are required to maintain the portfolio level above $800,000 ($400,000/50%) on a $400,000 loan. If your portfolio dips below this, you will have a capital call as discussed previously. While the official line in the sand is $800,000, most people would keep more than this to reduce the chances of contributing more cash which means you’re locking up even more. So rather than having $600,000 free as in the sell scenario, you have almost nothing available due to the loan requirements. But you did save some taxes…
Summary
When modeled accurately—with principal repayment, growth on cash flows, and taxes applied consistently—the supposed “advantage” of an SBLOC almost always shrinks or disappears.
Borrowing against investments can make sense in specific cases—like short-term cash flow needs, bridge financing, or tax-timing flexibility—but it’s not a wealth-building tool on its own.
If you ever see a chart showing how “borrowing beats selling,” ask:
- Does it include the loan balance at the end?
- Does it show lost growth on the interest payments?
- Does it include taxes when paying back the loan?
If not, it’s not analysis—it’s marketing. The best financial strategies don’t rely on half-truths or hidden math.
That’s why working with an independent advisor who isn’t incentivized by products can help you cut through the noise.