Don't Bet the House on a Market Recovery

Two of those three conditions apply today: Home prices are down, but we are in a period of low interest rates and many argue the market is ready for a recovery.

But while the stock market is a proven performer in the long term, there are plenty of ups and downs along the way. You must be able to ride out the inevitable downturns in the market if you want to reap the full benefits of a diversified investment portfolio. This is hard to do if you are relying on your investment to pay for your monthly loan obligations.

What's more, your investment returns have to cover your borrowing costs before you can make a profit -- and that's not easy to do.

Imagine this scenario: You only have some equity in your home, but you find yourself a little strapped for extra cash. The stock market is poised for a big rally (or so you have heard), and you decide that putting a little of that hard-earned home equity to work in the market is a good idea. You refinance at today's low rates, and take out an extra $100,000 in cash.

Now let's say that you buy stock with that $100,000. You'll need to earn enough to pay your interest on the loan just to break even. And what if the market heads south instead of rallying? If you were depending on pulling money out of your flourishing portfolio to make your monthly payments, you might have a problem.