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pay off house vs stock market investment
Old 10-04-2008, 12:28 PM   #1
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pay off house vs stock market investment

I have a goal of retiring in 5-8 years. I do have significantly extra cash flow just from living below our means. I can use it to pay off our mortgage in as quickly as 3 years vs dollar cost average into the market, where we have invested approx 1.2 million already. We need about 2 million for me to retire. I'm looking for opinions as to which may be the best strategy in light of the current economic situation. Thanks ahead of time.
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Old 10-04-2008, 12:33 PM   #2
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DCA! I know there are a ton of people here who advocate paying off the mortgage, but I'm thinking we're going into a (possibly long term) buying opportunity. If you can pay off your mortgage that quickly I'm assuming you are a good way into it already. Maybe the best solution would be to increase the principal payment somewhat, thereby speeding up the payoff, and DCA the rest. Maybe 25/75. That way you can be entering retirement with the mortgage mostly paid off, without missing the opportunity to buy while the prices are low.
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Old 10-04-2008, 12:45 PM   #3
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I'm with harley on this. We were paying extra on our mortgage but now with the market down ~30% have shifted that to equities every month. I've also taken on a moonlighting job and the extra $'s are also buying stocks.

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Old 10-04-2008, 12:50 PM   #4
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Its been discussed a few times:

http://www.early-retirement.org/foru...ney-30644.html

Arbing your mortgage hasnt been particularly profitable over the last 8 years.

I'm completely unconvinced that this market wont go lower still. The bailout bill doesnt really fix any of the problems that are effecting the economy. It just keeps a bunch of banks from going broke.
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Old 10-04-2008, 01:09 PM   #5
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Pay off mortgage.
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Old 10-04-2008, 01:14 PM   #6
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In the past I have been a believer in DCA too, but when I look at the last year, I would have been better off paying down the mortgage. The only reason I am questioning DCA now is the concern we might have a painful 5-10 years in the stock market.
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Old 10-04-2008, 02:11 PM   #7
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Quote:
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The only reason I am questioning DCA now is the concern we might have a painful 5-10 years in the stock market.
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I have a goal of retiring in 5-8 years.
I think you just answered your own question. If you DCA for next 8 years you'll be RE'ing into a rising market.
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Old 10-04-2008, 02:53 PM   #8
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And if you pay off your largest monthly bill, it wont matter very much whether the market is rising or not...
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Old 10-04-2008, 03:17 PM   #9
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Elsewhere on this board folks are decrying the use of leverage and seem to be calling for a cash only society . . . Not long ago, in better times, the board seemed to lean pretty heavily toward using real estate leverage to boost portfolio returns. Oh well.

My advice then, and my advice now, is to keep paying down the mortgage. As CFB said, eliminating a large fixed monthly cost provides a lot of financial flexibility (more so, in my opinion, then a larger portfolio of potentially depreciating assets). The outcome is also certain, whereas high future stock market returns are merely "expected".

But it doesn't sound like you have to choose one or the other, you can do both. I'd make extra payments on the mortgage so as to eliminate it just prior to my targeted retirement date. I'd put whatever cash that is left over into the market.
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Old 10-04-2008, 03:19 PM   #10
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Not long ago, in better times, the board seemed to lean pretty heavily toward using real estate leverage to boost portfolio returns.
A poll I ran about 2.5-3 years ago showed that the vast majority of ER.org users had no mortgage or planned to pay it off before or shortly after retiring. Only a small percentage of people say they planned to arb their mortgage in retirement.
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Old 10-04-2008, 03:19 PM   #11
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A poll I ran about 2.5-3 years ago showed that the vast majority of ER.org users had no mortgage or planned to pay it off before or shortly after retiring. Only a small percentage of people say they planned to arb their mortgage in retirement.
My bad then . . .

Vocal minority :confused:
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Old 10-04-2008, 03:23 PM   #12
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I had to try out this poll thing...Mortgages

Mortgage from a different perspective

Most have none or plan to get rid of it. Most said they'd only keep it if they got a rate <5%. Good luck with that.
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Old 10-04-2008, 03:27 PM   #13
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Odd, I've been saying and writing about paying off your mortgage ASAP for many years now ... it used to be that I could only get those words published as the "wierd counter-culture guy" (real quote) ... but now the pundits who used to say otherwise seem to be the ones facing foreclosure.

Debate away about the pros and cons of the issue, but this I can say with absolute certainty: I've never lost a nights sleep over my decision ... and I seem to be one of the few folks sleeping really well these days.

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Old 10-04-2008, 03:29 PM   #14
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I say do a little of both.
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Old 10-04-2008, 03:30 PM   #15
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My bad then . . .

Vocal minority :confused:
Nope, just me.
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Old 10-04-2008, 03:38 PM   #16
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now the pundits who used to say otherwise seem to be the ones facing foreclosure.
Yep, we used to have a guy that posted here who was a fanatic about having a mortgage and arbing it in the stock market. He once said that the idea of losing your home as a negative in the equation was ridiculous. Hardly anyone ever faced foreclosure!

The other thing that goes wrong with this argument is comparing the mortgage to stock market returns. No risk adjustment. How has everyone felt about their equity investments over the last 2 years? Anyone feel the urge to change something or bail out? How about in 2000-2003?

Thing is, a mortgage arb since 1999 went badly when using equities. Whats stupider is that most people paid more in mortgage interest than they got from their cash and fixed income investments during the same period. You loaned money out for less interest than the money you borrowed.

So even adjusted for risk, it was a loser and compared with comparable risk investments, it was still a loser.

I take care of all the finances in the household, my wife just spends what she wants when she wants, and she's pretty reasonable about it. When things get dicey like they have recently, I give her an update of whats going on, and of course we talk about the daily headline news and its pretty obvious that there are some major financial problems going on.

When I talked about the impacts and what could happen in the next few years, first words out of her mouth were "At least we dont have to ever worry about making the mortgage payment".
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Old 10-04-2008, 03:57 PM   #17
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Yep, we used to have a guy that posted here who was a fanatic about having a mortgage and arbing it in the stock market. He once said that the idea of losing your home as a negative in the equation was ridiculous. Hardly anyone ever faced foreclosure!

The other thing that goes wrong with this argument is comparing the mortgage to stock market returns. No risk adjustment. How has everyone felt about their equity investments over the last 2 years? Anyone feel the urge to change something or bail out? How about in 2000-2003?

Thing is, a mortgage arb since 1999 went badly when using equities. Whats stupider is that most people paid more in mortgage interest than they got from their cash and fixed income investments during the same period. You loaned money out for less interest than the money you borrowed.

So even adjusted for risk, it was a loser and compared with comparable risk investments, it was still a loser.

I take care of all the finances in the household, my wife just spends what she wants when she wants, and she's pretty reasonable about it. When things get dicey like they have recently, I give her an update of whats going on, and of course we talk about the daily headline news and its pretty obvious that there are some major financial problems going on.

When I talked about the impacts and what could happen in the next few years, first words out of her mouth were "At least we dont have to ever worry about making the mortgage payment".

Amen, my Cheapskate brother. And, you know, that's the sure thing about taking the sure bet: Even if the other guy is up (or, these days DOWN) by X amount, you always know EXACTLY what you have when you own the most valuable asset you can own today: NO DEBT.

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Old 10-04-2008, 04:26 PM   #18
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I have a goal of retiring in 5-8 years. I do have significantly extra cash flow just from living below our means. I can use it to pay off our mortgage in as quickly as 3 years vs dollar cost average into the market, where we have invested approx 1.2 million already. We need about 2 million for me to retire. I'm looking for opinions as to which may be the best strategy in light of the current economic situation. Thanks ahead of time.
It's all been said, but I also vote for paying off the mortgage, just not in 3 years. Like Yrs to go said, if you want to retire in 5 years, set the extra payments to have it be paid off in 5 years, in 8, then 8. Sock the rest each month into the stock market. No one knows where the market will go, but DCA over 5-8 years into index funds is probably as safe a long term move as any other. Just don't do what a coworker did and buy a bunch of bonds that pay lower than his mortgage interest rate.
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Old 10-04-2008, 04:47 PM   #19
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Hmmm - how does the 1.2 mil plus paid off mortgage compare to 2 mil with a mortgage?

Then insert your most sensitive forefinger into belly button and read your emotional temperature.

As for me - do not take my advice - age 65, 30 yr mortgage post Katrina, I can live off portfolio yield(Target Retirement 2015) plus a few Norwegian widow stock dividends in hard times(at least I think so).

I've been entertained with market fluctuations since 1966 - I don't have nerves of steel but I have a modest faith in RTM.

heh heh heh - The Huskies are in the cellar in the Pac 10 and I've been a Saint's fan since the 70's. After the little 1965-1983 flat if I were young/accumulation phase - I'd be dollar cost averaging.
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Old 10-04-2008, 04:57 PM   #20
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I a normal market I'd say it's close to a wash. In this market I'd say DCA now and pay off the mortgage later. I'm keeping my mortgage.
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