Which safe and liquid investments are you talking about, specifically, that earn more than 5%? We’re talking about something with very little volatility, obviously.
Just parking it in a mutual fund?
Sure. Here’s the S&P 500 annual returns over the past 50 years:
2010 14.32
2009 27.11
2008 -37.22
2007 5.46
2006 15.74
2005 4.79
2004 10.82
2003 28.72
2002 -22.27
2001 -11.98
2000 -9.11
1999 21.11
1998 28.73
1997 33.67
1996 23.06
1995 38.02
1994 1.19
1993 10.17
1992 7.60
1991 30.95
1990 -3.42
1989 32.00
1988 16.64
1987 5.69
1986 19.06
1985 32.24
1984 5.96
1983 23.13
1982 21.22
1981 -5.33
1980 32.76
1979 18.69
1978 6.41
1977 -7.78
1976 24.20
1975 38.46
1974 -26.95
1973 -15.03
1972 19.15
1971 14.54
1970 3.60
1969 -8.63
1968 11.03
1967 24.45
1966 -10.36
1965 12.45
1964 16.59
1963 23.04
1962 -9.20
1961 28.51
1960 -0.74
Sure there are plenty of down years in there but if you’re talking long term investment (same period as a 15,20,25,30 year mortgage) you have to take your average return over those years. I think you’ll beat 8% every time.
He was talking about investments that are liquid. Presumably, you wouldn’t just buy something as volatile as an index fund if you may need to pull money out of it on short notice.
At this point, can we go ahead and stop posting average market returns over x period? Even if I
didn’t work in the business, it’s been pointed out more than once in this thread already.
Sorry, our financial records are buried in a box in our Pod until we finish our new floors. I’m thinking funds concentrating on stable, dividend returning stocks. Our generally higher returning but more volatile funds went down quite a bit, (like almost everything) but have recovered nicely.
An advantage is that in a volatile interest rate market you can lock in a reasonably good mortgage rate (assuming you have good credit) and keep that locked to the low even as general rates of return increase. I can’t think of another investment you can do that with. If you have a high interest rate mortgage you can refi into a lower one, and assuming you have reasonable equity the market price of the house isn’t important. If you have a low interest rate bond and want to get a higher one, you are probably going to get a bad prices for it. So, over time, your chances of beating your mortgage interest rate are better and better.
If you’re investing in liquid investments, you’re giving up a great many of the tax advantages associated with long-term investments. As a matter of fact, this whole scenario pretty much falls apart if you’re talking about the short term, since your risk is increased even more.
If your retirement goals are already on track, then there isnt an advisor worth his salt who would recommend taking money out of a paid-off house to invest in the market. The level of risk involved is too high to justify the puny difference in return. Debt is a terrible way to try and increase wealth in the world of personal finance.
OK, reiterating yet again: This is not investment advice for uncle Joe, and Aunt Petunia. This is spiritual advice for sudden windfall multimillionaires. Why do you want to invest? You’re already rich. Spend part of it on a few long term security assets, like a home, and a business that does something useful locally. Find a couple of historically resiliant companies in your neighborhood, and a few somewhere on a different techtonic plate. Bury a bag of overpriced gold coins. Spend the rest on your hobbies, and fast women.
You can stop even thinking about money! Isn’t that the best part of being rich?
Tris
$200,000 is hardly rich, and that’s the putative windfall amount that’s thrown around in this thread.
The point that I and several others were trying to make is that all else being equal (you keep your job, you continue to pay on your mortgage, etc…) that it makes more financial sense to invest that 200k instead of paying your mortgage off outright, assuming that you can make a higher return on the investments than you’re paying in interest.
I found it kind of baffling that people would be so risk-averse as to essentially throw away many times their mortgage’s financial worth just for the perception of security, especially when the invested money is hardly lost.
Because taking on 30 years of debt and additional risk for 1.5-2% is financially stupid. Maybe your opinion is based on the faulty math from your above post, I’m not sure. But nobody in this thread has added risk to a single calculation thus far, and that’s wrong. You can’t assume that you’ll always have a job. You can’t guarantee a specific return, etc.
True. Which I why I say you make your own risk assessment. I think the risk is low enough to justify this course of action. Plus, if I came to a $200K windfall, I feel better with it in the market in an ETF or other financial instrument, where it is liquid and easy to get at, versus tied up in the house, where it isn’t as easy to get at. But, different strokes and all that.
The problem is, there is risk in your “all else being equal”. We can’t all be sure that we will keep our jobs. Most of us are weighing your 1.5-2% savings against the possibility of large bills or job loss. There have been a couple of times in the last 5 years when I watched 10-15% of the people doing my job get laid off.
Paying off the mortgage is basically insurance. I’d be giving up a couple percent in my return rate, for the assurance that if the shit hits the fan, I will still own my house.
No, two hundred thousand was the amount of the mortgage being paid off by the winner of a Lottery. I mentioned the figure 97 million dollars in my first post, because that was the amount of the current lottery in my state. But, even assuming that the base amount was a paltry 12 million dollars, the minimum amount the winner would get in my state, that works out to 3.84 million in cash, after taxes, and 10% to charity. Yes, in that case, I would buy a three hundred thousand dollar home for cash. I would probably buy another couple of hundred thousand in durable items like landscaping, home decor, a nice car, probably not a lot of clothes, but that is just me. I would probably spend another couple of hundred thousand on stuff for my rather large family. The other 140 thousand would probably go to a very spiffy home computer/networking/entertainment system.
That leaves me with three million dollars, no mortgage, no car payment, and 100,000 dollars a year for the next thirty years before I ran out of money. (I will be 94 by then, and can probably sell the now Classic Car.)
If I only won 200,000, the specifics would change, but I might spend the entire amount on a house, and live on my retirement without a mortgage. I don’t need to get richer. I especially don’t need to worry about getting richer. I plan on not being rich now, and I already have investments, a retirement plan, and social security. I am not rich, but two hundred thousand would certainly not make me suddenly feel the need to get richer.
Tris
Remember, though, that if shit hits the fan and you lose your job in the scenario, you still have that $200K that’s invested that you could convert to cash rather easily. Granted, it’s very possible you’ll have less money than you started with. And it’s very possible you’ll have more money than you started with. Either way, I personally don’t think it’s a particularly dire situation. The way I see it, you have a lot more financial flexibility with the money in investments vs. locked up as home equity.
If you have that much money, buying a home for cash (or paying off a mortgage) is a reasonable part of a diversification strategy. I was addressing an either/or situation.
Of course, the fear of losing your home kind of vanishes also.
You’ve already got the debt! You took out the mortgage before the windfall.
Not taking that 1.5 or 2% is monumentally financially stupid. That 200k after 30 years is worth 2 million some-odd bucks, assuming the historical rate of return on stocks. Your 200k house would not be worth that much. Even if it quadruples in value, we’re still talking less than half.
It’s not 2% per month, it’s 200k at 8%, compounded over 30 years, vs. 200k sunk into a mortgage that will likely not appreciate very much at all.
Plus, the invested income is relatively liquid; it’s not like it’ll be so tied up that if you got worried, you could pay off the mortgage at some future point.
It’s like you’re so risk averse that you’d rather pay it off now rather than invest in the meantime, then be able to pay it off when you need to AND have some extra cash left over for whatever else may come to pass.
You’re basically passing on a lot of free money out of a faulty assessment of risk and the impact of the various alternatives. It’s extremely unlikely that you’d lose all of your 200k if you’d invested it wisely and diversified it. Even people who had that in 2007 have more than that now. (I know a few; the values of their portfolios took a temporary hit (15-20%) and have since rebounded beyond that)
It just flat-out doesn’t make sense unless you’re so blinded by being so timid that you’d rather take what seems to be the safe course without thinking it through and realizing that the safest course might actually entail a small amount of risk.
There are no safe and liquid investments that will earn more than 5% consistently.
Anybody who says, or “thinks” otherwise, is not experienced enough or else they just dont know enough to understand. They are like teenagers who “know” everything. They will not even accept that they dont know what they are talking about, even though virtually none of them are self-made rich. Its all talk.
I have been successfully investing in stocks, bonds, mutual funds, real estate, businesses, rental properties, precious metals, collectibles, for over 50 years, and I can tell you that, today, there is no “safe” place to put your money to get a 5% return and also get your principle back. Especially today, even the smartest most experienced rich investors are in a quandary as to what to do now, given that America is losing its manufacturing capacity and is spending and borrowing so much that it cannot be paid back. When the end comes, probably sooner than most realize, the US dollar will be worthless, bonds will default, a worldwide Great Depression bigger than the last one, real estate values will decline, and stocks will fall and companies will go bankrupt. More importantly, when the new Great Depression comes to America, there will also be political upheaval which will endanger most investments. It is coming, there is just no way out of this impending doom if we continue to spend, borrow, and overpopulate.
There is no shortage of whipper-snapper “know-it-alls” who parrot what some government paid professor told them long ago. Very few, none?, of these “know-it-alls” are self made millionaires who have managed to create, keep, and increase their wealth over the decades.
Lastly, these “know-it-alls” use selective statistics, and they dont tell you that half the companies that people bought stock in back in 1929, dont even exist today. They “backtrack” from companies/current stock averages “today” that are still in business. They dont give you the total final returns if you had owned GM stock, or Kmart stock, or Bethleham Steel, or Blockbuster stock, or Pan Am Airlines just a few years ago and whose stock is now worthless. They also dont tell you that if stocks go down 50% one year, and then go back up 50% the next year, that you have a SUBSTANTIAL total loss!!! Furthermore, they dont include state, federal, and local income taxes, nor do they include inflation.
(No thanks, I don’t care to spend my days cowering in fear of the doomsday that may or may not ever arrive.)
Listen, nobody ever got rich playing it safe. Any person or company that ever built themselves a substantial fortune did it my taking on some risk.
You want to be 100% safe and feel good about paying off your mortgage and sitting in a paid off house and that makes you sleep better at night, be my guest.
You want to take on a bit of risk and in return have the possibility of a boatload of cash + a paid off house in 30 years, then investing a $200K windfall in the market while continuing to pay off your sub 5% mortgage is your opportunity.
Why is this an important point? None of the “know-it-alls” here are telling you do something as financially risky as investing in individual stocks. Invest in broad, diverse funds or diversify yourself if you’ve got the energy for it. I don’t. I just do the boring thing and stick money every two weeks into various diversified funds.
Because this is completely irrelevant to the discussion. Nobody here (I don’t think) would tell you to stick all you invest in individual companies.
Well, of course. That’s just basic math. Do I also have to point out that 8% annualized return does not mean I make 8% per year every year?
Sure we did. See calculations early in this thread.
Listen, I understand the risk is considered too much for some people, and if I had your outlook on the American economy, I, too, would be wary of the market. If you really think it’s all gloom and doom, why don’t you just short the crap out of the market and make your millions that way? (I’m not actually advising anyone to short. I’m a conservative buy-and-hold, long term kind of guy.)
It’s not about being a “know it all.” There are two practical considerations here: one is the interest, the second is the liquidity of the asset. If you’re risk averse, do what basic investing tells you: diversify. Pay down $100K of the mortgage, put the other $100K in an investment vehicle that carries the risk-to-return profile you’re comfortable with, and now you have a small, monthly mortgage, as well as access to cash you can quickly and easily get to, should you need it. To me, both are very sensible strategies.
How? This doesn’t make sense unless you’re selling all of them and buying the shares back at reduced value.
If I own 100 shares of X-Corp today, and each share is worth $100 bucks today, I have $10,00 invested, and I own 100 shares.
If next year, the stock price goes to $50, then I still own 100 shares of X-Corp. It just happens that the worth of the stock at this point in time is $50 per share, and my 100 shares can be sold for $5000. No profit or loss has been realized at this point.
If a year later, the stock price goes back up to $110 per share, I still own 100 shares of X-Corp, but they could be sold for $11000.
It’s all about when you sell the stocks, not what you do in the meantime. You don’t gain and lose money when the market goes up and down; the portfolio gains and loses value IF YOU SOLD THE STOCKS RIGHT THEN.
So over the 3 year period I describe, you’d actually have made 10% on your stocks. If you sold over the first 2 years, you’d have lost 50%.
You forgot that if you pay off the mortgage, that means that there’s some part of your salary, perhaps a substantial part, that doesn’t have to pay the mortgage bill every month. That part can go towards investments at the same 8% compounded over 30 years. That’s why the difference is not all that much.
Actually the difference is about a million dollars.
Starting with an initial $200K over 30 years compounded annually at 8% will give you about $1.8 million.
Taking the same $200K and slowly investing it a month at a time ($200K / 30 years = 360 monthly payments of $556) at the same 8% will give you about $827K.