Borrowing that results in an investor being forced to sell assets to make a loan repayment is almost never a good idea. There are usually two main culprits that can lead to this scenario materializing: market risk and spending commitments.
Market risk. If the value of your loan collateral falls, breaching agreed loan-to-value ratios, and you lack alternative funds, you might be forced to sell assets to meet a margin call or repay debt. To assess this risk, we recommend looking at historical "maximum drawdowns." Any estimate of potential haircuts should also account for illiquidity. Stocks, bonds, and many investment funds tend to be fairly liquid, while property, private business interests, and other illiquid assets could fetch far less if you needed to sell in a rush.
Spending plans are equally important. If you expect to tap your portfolio for large expenditures, such as university tuition for children or a home purchase, you need to consider the implications for your portfolio's overall loan-to-assets ratio. If your assets will still hold enough value to avoid a margin call in a worst-case scenario, and after making your planned expenses, your plan can be considered robust. If, however, your plan leaves little margin for error—or there is a projected shortfall—you may need to reduce leverage.