How would you invest money?

In My Humble Opinion
41

It’s pretty clear you don’t understand what most people are saying. I assume your original response was at least partially in response to my own thoughts. A couple of things. First off, I didn’t advocate buying ‘stocks’…I said I’d put the money into one of the several funds I’m in, several of which have been at the 10%+ mark since 2008. While 2008 was certainly an issue, overall my portfolio has performed very well by and large for over 30 years now. Secondly, no one is going to take out a second mortgage to buy stocks unless they are either an expert (and confident) or an idiot…and no one is advocating doing that either. From my perspective, why would I pay off my home mortgage when I’m paying just a bit over 3% instead of invest the money in something that is getting me a minimum of 6%? How does that make sense? Third, in my case I’ve moved a large percentage of my money to funds that have guaranteed fixed rates of return (6%) because I anticipated, since Trump was elected actually, a downturn in the market. While the amount the OP is talking about falls short of the required initial investment, I could still get it into one of my other funds relatively easily.

Next up is you are comparing apples to oranges. You can’t look at the average of the entire stock market since no one invests across the board…hell, most don’t even invest across the board in fortune 500 companies which something like the DJIA is based on. Most people don’t invest in direct stocks as a large part of their portfolio unless they know what they are doing or have a financial adviser that does (in theory). We don’t know exactly what Omar was describing…could be a fund of some kind, or could be direct stock and his overall portfolio. 8-10% isn’t unreasonable or even that difficult to achieve to be honest.

In the end, if you think it’s best to invest your money into your mortgage, well, no one is stopping you. For my part, that would be a waste, especially since my house has only recently climbed back of the losses my entire region took when the housing bubble burst and I’ll be happy to just get back the money I put down plus renovation costs I’ve put in…IOW, I’ll be happy to break even. Paying off the loan would have no upsides for me and a number of downsides, even with the changes in the tax code. YMMV and all that. But you should understand what folks are saying before ragging on them and tossing out numbers that have nothing much to do with the points they are making.

42

Funds with 6% guaranteed fixed rate of return? There is no such thing.

For the record I’m in a similar situation as the OP describes most years and I’ve been paying down my 2.75% (fixed) mortgage. I’m still somewhat confident that I could beat 2.75%, but I have no need to take that risk. However that’s just me, other people might want to take those risks.

43

Interesting…I seem to be in several. :stuck_out_tongue: The downside is they are very long term investments and they have a very high initial investment ceiling to get into them. They do exist, however.

Well, as I said, it’s your money and no one is stopping you. Some people are very risk adverse. Hell, even if you are willing to take some risks you will want to diversify…I have some of my money in very secure low risk investments. I just don’t see an upside to spending a windfall investment such as the OP is talking about by paying down a mortgage at such low interest rates.

44

I’m very curious about your investment, particularly the duration, the quality of the guarantee, the payment stream, and the liquidity. I would like to know what this investment is. Humor me and assume that I have the money to get into it.

Can you get your money out if you need it soon? A “very long term investment” may lack liquidity. Low liquidity is a risk.

Who guarantees the rate of return? AIG issued lots of credit guarantees before the financial crisis. It didn’t work out exactly as planned for the people who bought them.

Is it a fixed interest rate? If so, you may have considerable interest rate risk. For example, a 30-year Treasury bond is paying 3.04% per year as I type this and the interest and principal are guaranteed by the U.S. government. But, if interest rates increase by 0.25% today, I will have lost $47,215 in just one day. If they go up 1% over the course of a year, I will have lost $171,000. That’s not a guaranteed rate of return if I need my money soon.

What is the duration (or maturity and coupon if you prefer)? Longer term instruments have more interest rate risk.

Is it a floating interest rate? You face reinvestment risk from declining interest rates.

What is the coupon? Low or no coupon investments have greater interest rate risk but less or no reinvestment risk during the term of the instrument.

There is no getting away from risk when you invest.

45

They are not roughly the same thing. You said yourself you have a 2.75% loan. Show me where I can borrow against my house, today, at 2.75%.

Who says they aren’t?

46

I didn’t say there was no risk…I said the rate of return was guaranteed. I have other investments that are low risk, mostly bonds and the like. I can not get the money out soon if I need to without paying substantial penalties. Basically the terms are 15 years. The company selling the fund to me guarantees the fixed rate of return, and THEY have to pay fairly substantial penalties if they don’t meet it. This was something we did through our financial adviser…he vetted it and went over the details with us. We also asked my folks financial adviser to give us a second opinion (different firm), and they came to the same conclusion. I am not a finance person myself, but based on our statements it seems to be doing exactly what they said. We get a fixed 6% (it’s not a floating rate). I honestly would have made more had I left it in the funds I was in before this over the last 10 years, but was worried after the 2008 crash when I lost quite a bit of money, and I have other investments that are more moderate risk (no high risk stuff for me anymore). If, as I expect, the stock market tanks at some point in the next few years (maybe sooner with Trumps trade war) I’ll certainly come out ahead.

As for getting the money out sooner, I have other investments if that becomes necessary. These investments are basically going to form the core of our retirement once they mature, paying us out something like $11k per month (I have other investments designed to lighten the tax burden on that when it happens). Even if social security completely tanks and we get nothing from it, we will be set. If social security doesn’t, well, that will pay for some other things. I expect it will still be there, but planned in case it isn’t.

Sorry if the details you are looking for aren’t there. I pay other people to know this stuff and I trust them. My adviser tells us what we should do after we tell him what we want/need and we double check it with some other folks we trust. I’m just a network engineer and don’t pretend I understand all of it…just the big picture.

47

For retirement, mostly index funds - probably a selection of Vanguard Admiralty funds. Something dividend producing. Something stable. Something international, something growth. That’s what my retirement funds are in.

I’ve also invested in an “ease into retirement” business - I’m semi retired running the thing, which brings in a few thousand a month for a few hours of work. I did, at one time, have about $60k in it, most of that is paid back now.

Kids college funds are in 529s - index funds based off age (which since they are now college age, means very stable investments that don’t get much return)

There is risk, but if you loose it all investing in index funds, that means that the economy has completely collapsed and we are looking at a Mad Max world - in which case, you’ve got bigger problems that your income stream.

48

If you don’t mind me asking, what is the minimum investment? You already said more than $100K. I’m not interested because I’m old enough to make a 15 year lock not useful to me. Does it pay $11k after the 15 year period? For how long?
But this shows why the rich get richer. When you have enough money you can make investments not available to someone with $100K

49

Become suddenly debt free.

There is no better investment.

50
  • Pay off my student loans in full
  • Get a real education learning a practical skill, while using the remaining cash to pay room, board, and tuition.
51

I wouldn’t characterize myself as ‘rich’ by any stretch. But the minimum investment when we started was $500k. It doesn’t pay out like an annuity but the last numbers I saw was that it would pay us approximately $11k per month until we were something like 107 and still leave us (or I guess our kids) the initial investment. There were all sorts of charts and graphs explaining all of this, but it’s been years now since we got into this so I might be mis-remembering some of it, though we meet every 4 months with our adviser to discuss this and our other investments and where they are at. I’m actually surprised everyone seems so disbelieving of this…it didn’t seem all that out of the ordinary when we were discussing this with various financial groups.

52

I’m currently just under 19k away from being debt free, it’s those dammed student loans.

I despise debt, and think it’s best to never get into it. Or if you must, get out of it as quickly as possible

53

A really big and complicated topic debated by people from highly serious researcher theoreticians to individual investors of a wide variety of knowledge levels. With the simple answer being we don’t know future realized returns of stocks. We might be able to estimate the expected return, meaning basically the centroid of the big distribution of all possible future returns not ‘what’s probably going to happen’. Rather, one point in the (correctly, leave aside the details) weighted middle of a wide distribution of possible future returns, we don’t even know how wide.

If we never heard of stocks and a debate arose whether the expected return was 1% or 20% I agree it would be useful to look at past returns to get some idea which estimate might be closer. However within the range of numbers people somewhat familiar with stocks debate, past returns are IMO practically useless to estimate the expected return (as just defined above, again, ‘what the return will be’ is impossible to predict).

One aspect of the number you gave is that it’s for world stocks. Many US investors still invest almost or entirely in US stocks where the past century’s return is more like 8% real. Not that 8% is a good estimate of the expected return of US stocks now, but how does the historical return of one thing determine the expected return of another? One might ask.

Also, we do know the expected return of US govt bonds out to 30 yrs: it’s basically their yield, assuming we rule out a default. 30 yr US inflation indexed bonds yield ~1%. Most other developed country long term inflation indexed bonds yield less. If the expected return on bonds is lower than historical (as we know) it’s probably prudent to assume the expected return on stocks is also. In fact, considering the evolution of financial markets and perceived risk as of now, the extra expected return on stocks is probably also less than (5.2%-2%)=3.2%, so less than 4.2% real for stocks adding back in the real inflation adjusted US 30 yr yield

An alternative simplistic way to estimate the real expected return is the earnings yields, the inverse of the price/earnings ratio. Using an averaged price/earnings ratio like the Schiller CAPE, that would give around 3% real expected return for US stocks. It’s less than historical because stock prices relative to earnings are higher now than historical.

I personally assume 4% real return, pre tax, on a balanced portfolio of US and foreign stocks (based on foreign stocks now being cheaper by valuation than US but I’m still majority US). As a very rough measure obviously.

Some people might not save if they were convinced stocks weren’t go to make them a boat load (huge difference between 3-4% real and 8-10% real over a long time). So maybe it’s better if they believe the higher numbers. But the huge run up in valuation of assets (generally worldwide) strongly implies lackluster returns from here on. It doesn’t mean the sky will fall tomorrow, or ever, or that anyone can reliably predict the realized return. But assuming the expected return is the historical return, especially US historical, is probably too optimistic. It ignores increased valuation as a component of return, which has given such a tailwind to US stock returns in recent yr/decades and which can’t go on forever.

54

The last is doubly a reason to stick to simpler things. I can guarantee you, absolutely, that you are taking more risk to get that 6% than we would with simpler strategies we could do right this minute.

How about let’s make 8%+, right this minute. We’ll buy $600k of the HYG (popular junk bond ETF) at a 5.75% SEC yield. We’ll use $300k of our own money and borrow $300k from Interactive Brokers as a margin loan at 3.06%*. That’s 5.75% on ‘our’ half and 5.75-3.06 on ‘their’, half 8.44% total. If junk bond prices don’t fall. If they do fall the loss will be magnified 2:1 over buying junk bonds for 100% cash, which is risky to begin with as ‘junk’ issuers are more than usually leveraged companies to begin with. But this strategy would have generally worked since the bottom of the last crash as junk bond spreads generally contracted and default rates were historically low. So does this structure tell us the market expected return for risk is higher than we thought? No, it’s just more risk, so more expected return.

It’s not a matter of ‘risk’ and ‘no risk’ it’s how much risk. For all I know there might even be more risk to get the 6% in that product than we’d be taking to get the 8.44%**. I don’t know that of course, because you won’t give the details of what the investment actually is. I hope you know more details of what it is though. There’s leverage in your product somewhere either in the entity that’s borrowing or within the product. That’s basically how you get buy and hold fixed returns in USD greater than the longer term US govt bond yields (call it 3% now roughly). Either the issuing entity is leveraged (it borrows to buy productive risky assets like plant and equipment), aka ‘credit risk’, or else you use borrowed money to buy its debt instruments, or both, like my idea. There’s a little liquidity premium on top, my idea and your product both, ie you expect a little more return on money you agree to tie up for years, or in the doubtful foul weather liquidity of the public junk bond market, v the super-liquidity of the US govt bond market.

*IB allows dynamic portfolio margin so 50% isn’t the limit, more like 75% borrowing, hell we could get much more aggressive and start using futures and options, want to aim for 10%? :slight_smile:
** because my idea has low transactions costs, IB’s profit on the margin loan already included in the 3.06%, the expense ratio of 0.49% on the ETF already subtracted out of its yield, only the comparatively tiny trade commissions on the ETF are not subtracted already. Whereas people don’t work for small fees to devise and face to face sell retail investor black box products.

55

Thaler and Sunstein wrote about the Swedish retirement plan, which lets people invest in a variety of funds. They found that they tended to invest in those with the highest historical returns - which underperformed the other funds after they invested in them. So that is some more evidence for you.

And the market so far this year has been basically flat.

56

Thanks. Having lived through the inflation of the early 1980s, this would make me nervous. But to each his own.

57

I think the implicit assumption most people are making when they read the OP is that they are being handed a pile of $100,000 in cash. Most people seem to understand that a pile of cash (or a balance in a savings account) isn’t doing much good for them, and so they are opting to either buy equities or pay down their mortgage, or some combination of the two.

To the people who would pay down/off their mortgage: what if, instead of receiving $100K in cash, you inherited an S&P 500 index fund with $100K worth of shares? In the US, inherited investments usually have their basis reset to their current value at the time of inheritance: you could sell these shares without paying any tax if you wanted to. But would you?

58

Yup, sell the shares and pay off debt. There literally is no investment you could make that has a better return. If I had taken on a standard $100k mortgage just before my windfall, and paid it off, it would return around $80k on that investment in avoided costs and increase my monthly liquidity by around $500.

59

Careful with that one. You need good cash flow-tenants don’t wait for repairs. You have to know your market-how much can you get for your rental? Rental income is taxable, and sometimes not only by the Fed and States, but by local municipalities. And chances are good your property tax will be higher on an income property. Also look into you rcap gains on investment properties.

And of course, no one can even imagine the mischief that tenants can get up to when it comes to destroying your property.

60

I subscribe to this view as well.