Debt May Not Always Be a Bad Thing

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BOSTON (TheStreet) -- Debt has become a four-letter word. Americans, shocked and shamed into a new frugality, are paying off credit cards and shunning new financing.

This well-intentioned trend may not be as prudent as it seems, says Morrison Creech, head of private banking and executive vice president for Wells Fargo Private Bank. Creech touts taking advantage of historically low interest rates to improve liquidity, diversify portfolios and mitigate risk.

"You can look at debt in two different ways," he says. "One might be lifestyle-related, where you are using debt to finance a home, a second home or something that enhances your life. Then you've got strategic debt, which might be debt that could be used to purchase investments, maintain your liquidity and existing investment portfolio and, in essence, allow you to stretch out a little bit, but still participate in the great market we see ahead of us."

Investors need to carefully review their financial plan, Creech says.

"Do you feel pretty good in terms of how you've positioned yourself in terms of having a liquidity number that allows you to sleep at night and handle any emergencies and near-term needs?" he says. "When you look at the rest of your balance sheet, have you been maybe ultra-conservative given the events of the last two or three years, or might you have room to leverage part of your balance sheet and continue to diversify your portfolio?"

Creech uses the example of a corporate executive with "a huge amount of his or her net worth in the company that they work for" through stock options and equity grants they have accumulated over the years.

"Maybe they feel like their stock continues to have a lot of upside, or they can't sell it because it is restricted, or maybe they don't want to sell it because they might be signaling to the market something that they don't believe -- that they are selling the stock because they think it is over-valued," he says. "The question could be whether that client should take on some amount of debt, some amount of leverage that is reasonable, and use that to diversify into other equities, or into real estate, bonds, emerging markets or alternative investments to actually reduce risk in their portfolio."

Creech says smart investors may take their cue from corporations that have taken advantage of persistently low interest rates to issue debt and preserve cash reserves.

Creech says interest rates could rise as fast as they fell.

"While I don't see rates increasing over the near-term horizon, there is probably not going to come a time where they are going to get much, if any, lower. As rates start moving up they will do so pretty fast. There will be some signs of economic growth then, all of a sudden, monetary policy will change and they will start tightening and it will move pretty rapidly. There is no upside in waiting, but there is a lot of downside."

Creech suggests that if you have debt maturing in the next 24 months, you probably should consider extending that out to a five- or 10-year horizon and taking advantage of the current interest rate environment. If you are contemplating additional debt over the near term again, locking in a rate now would be advantageous.

Though there can be cost savings and liquidity benefits to rethinking the role of debt in your financial plan, Creech warns that it may not be for everyone.

"You do have to balance the trade-off of what the costs are to consummate the transaction, versus paying off current debt, versus the cost savings from the interest rate," he says. "In most cases, it does make sense but make sure you are looking at your own individual situation and run an analysis with your adviser."

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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