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Thinking of switching new cash inflows to the mortgage
Old 09-17-2008, 08:03 PM   #1
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Thinking of switching new cash inflows to the mortgage

I'm a young guy in accumulation mode. I've watched everything I've accumulated over the last three years get wiped out, and its now substantially negative. Not interested in selling now, but for new cash that comes in, I'm thinking of putting it into the mortgage instead of continuing to buy crappy stocks that only go down. When you lose an entire year's worth of 4% dividends in one day, or markets can be "mispriced" 10% from week to week, that's not investing, that's just throwing money away. I know the invest/payoff mtg question has been discussed elsewhere on the board.

Of course, if the economy continues to deflate asset prices, whether they are stocks, bonds, or houses, nothing I do will make much of a difference.
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Old 09-17-2008, 08:25 PM   #2
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I understand the frustration. I started my stock market investing a couple of years before Black Monday in '87 and felt totally betrayed when the small amount of profit I had made was wiped out, plus a lot of what I had put in myself. But I stayed the course, mostly out of not knowing what else to do. And in about 3 or 4 years I was up significantly. Since then of course there was the 2000 meltdown. Again, I'm in far better shape by staying put. And even more so by continuing to BUY LOW during the down times. Don't give up, this is your chance to get a real jump on the future. I'm buying, DCAing over the next 6-12 months, to take advantage of the opportunity to grab the growth when things recover. Next year or in 5 doesn't mater. Buy low.
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Old 09-17-2008, 09:05 PM   #3
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I echo Harley's comments. I've only been in the market since '95 but t the start of 2000 I had ~250k invested 70/30 and went through through 3 straight losing years, re-balancing each year to maintain 70/30. I'm pleased I held my nerve and intend to do the same now.
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Old 09-17-2008, 09:24 PM   #4
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soupcxan, I know how you feel, and there's nothing wrong with paying down your mortgage. But do think about it -- if the market ever rises again, and it always has, you will have missed out on the opportunity to buy when prices were down. You can buy now for 79 cents what you were happily paying $1 for a year ago. And you're young. Think what that 79 cent purchase might be worth in 10 or 20 years.

Best wishes.

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Old 09-17-2008, 09:45 PM   #5
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Also echo harley, in 87 after black Friday FIL asked me in a panic if I noticed the big drop I said no but it sounds like a good time to buy, kept at it and it's all good. Tomorrow I am doing a little rebalancing and increasing my buying.
You probably do want to consider your AA as that is step 1, you want a plan you will stick with and if you're frustrated or anxious you probably didn't accurately assess your risk tolerance. Honestly assess where you want your AA and work it to target. I'm a Dave Ramsey baby step believer 15% to retirement then the extra goes to kid's college funding once that's paid for the extra goes to knock out the mortgage, so maybe your AA is okay but your pushing 40 or 50% to retirement with no kids maybe holding your current AA and pushing everything over 15% at the mortgage would solve the anxiety.
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Old 09-17-2008, 10:55 PM   #6
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And also dont forget...

...you havent lost anything until you sell...you still own the same number of shares in everything...

But, if you've got a 5.5%+ mortgage rate, its pretty tough to find a risk free investment right now that turns in a number like that.

I paid mine off in 2000. I was pretty dang happy with that decision.
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Old 09-18-2008, 09:05 AM   #7
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I paid mine off in 2005 and I'm also pretty happy with that decision. But I knew I was planning on retireing soon. The market was also doing well. I also have been investing since before 87 so I know how it feels.

It never has to be one or the other. I always tried to pay extra on my mortgage because it was easy. But I would also continue to dollar cost average in stocks if your are in the accumulation phase.

Its' time like these that I wish I was still in the accumulation phase. But that would mean I would have to go back to work, and that aint happening.
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Old 09-18-2008, 09:09 AM   #8
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Paid mine off last year after 7 years {we're in our 40's} and it feels really good to be able to tell the world to stick it if I want to. Still saved too. Now, we just save even more.

The mortgage versus investment thing can be talked about til we're blue in the face and over long periods of time, they can prove over and over again that stuffing it in the stock market makes you come out ahead but to me, this is an emotional decision and the emotion of watching that mortgage balance go down like a rock trumped the theoretical "you're only getting 5.5% while the stock market will get you 10%" argument.

If you can swing it, keep putting a little in the stock market to give you the feeling that you're buying low while paying down some on the mortgage to make you feel emotionally good about the sure thing investment.
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Old 09-18-2008, 09:28 AM   #9
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I suppose it depends on what your mortgage rate is. But if you are buying stocks for the long term, then now seems to be the best time in the last 3-4 years to be buying.

It is bizarre sometimes watching people buy like crazy when prices go up and then when everything is on sale (some of it half off, mainly last season's hot stuff), nobody wants to shop.

I believe you are in your late 20's or so, right? So you will probably hold these investments you are buying today for six decades maybe? A little price volatility probably won't mean much in the long term.

I'm thinking 2008 (or maybe 2009) will be a great year to come out of college and start working and contributing to a 401k, much like 2002 and 1988 were good times.

I will add that I'm in my late 20's as well and I did refinance into a 10 year mortgage in this past year to take advantage of low rates and increase the paydown a bit, so just a little caveat. But that has more to do with my goal of being mortgage free by FIRE-time in hopefully around 10 years.
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Pay off House or invest ?
Old 09-18-2008, 09:30 AM   #10
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Pay off House or invest ?

The recent market turmoil brings a whole nuther' perspective to the ongoing pay off the house or invest diatribe. This topic gets lots of ink on this forum as well as every other financial forum.

Where are those die-hard investors now ? And perhaps now even they can see, that though they may come out ahead in a decade or three, that they are taking on much more risk. Just maybe it wasn't such a great idea to take out that second on the homestead to invest in equities.

This never-ending ongoing discussion needs to consider risk-normalized returns. That's the only way to look at it rationally.

Still, if you have the fortitude, the real-money is made (or lost) at times such as these. The actual risk just may be inversely proportional to the perceived risk.
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Old 09-18-2008, 09:40 AM   #11
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It always seemed to me that anyone who is buying stocks with money that could have been used to pay down a mortgage is essentially buying the stocks with borrowed money. That's the classic definition of leverage - which is great when the market goes up and lousy when it goes down. Leverage increases your total volatilitiy. A young person might want to do this, and older person probably doesn't. (For most of us, we need to recognize that the after tax cost of the mortgage interest is quite a bit less than the before tax cost.)

Whether or not you want the extra leverage, you shouldn't change your mind just because the market went up or down sharply in the last couple years. A good strategy is one that you can live with in both up and down markets.
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Old 09-18-2008, 09:43 AM   #12
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Thus giving more credence to the idea that stocks are the one thing that no one seems to want to buy when they go on sale...

I'm not going to say it's a bad idea to prepay the mortgage, but adding to your investment portfolio when stocks are high -- and stopping when they are much lower -- seems very backward in terms of successful wealth-building in the long term.
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Old 09-18-2008, 09:43 AM   #13
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Hang in there, soupxcan. I'm a relatively young investor like you, but I've been around long enough to have been right about where you are back during the 2000 bear market.

Here's what I've always done: I stuck with my asset allocation (one that I planned out during a time of rational, calm thinking, rather than in reaction to fear/greed) and continued to invest the maximum in all of my tax-favored retirement plans. Basically, maxed out my 401(k), maxed out my Roth, maxed out my wife's Roth. I figured these tax-advantaged plans have two things going for them (1) the obvious tax benefits and (2) the extra bit of protection, perhaps from creditors but more importantly from me being tempted to touch that money.

For savings above and beyond that, I was faced with the question you are asking. First I built up a 12 month emergency fund, with enough expenses to take care of my monthly expenses (plus COBRA health insurance) in case of a layoff. After that, I hedged my bets, and invested some in paying down debt (mortage/student loans) and some in the market, again with my asset allocation in mind.

I figure, no matter what the "right" answer was, at least I will only be half-wrong.

;-)
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Old 09-18-2008, 09:57 AM   #14
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Seems like the good decision would have been to pay down/off the mortgage when equities were way overpriced, like in 2006 or early 2007.

Then your rate of return this year on that money would have been your mortgage rate (averaging almost 6%) plus the 20-something percent the markets are down by.

You'd have a lot more cash to throw into the markets every month while they're down this much.

But when things are good, people get greedy and forget about risk.

Told my wife yesterday that we had another bad day on the market. She said "So? We dont have a mortgage or any big bills to pay. Big deal. Wanna go out to lunch and take Gabe to the zoo?"
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Old 09-18-2008, 12:37 PM   #15
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Previously posted on this board. I think we're around point 10, but it's hard to tell:
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Old 09-18-2008, 12:40 PM   #16
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Originally Posted by cute fuzzy bunny View Post
But, if you've got a 5.5%+ mortgage rate, its pretty tough to find a risk free investment right now that turns in a number like that.

I paid mine off in 2000. I was pretty dang happy with that decision.

Uh, oh......now you've done it!
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Old 09-18-2008, 02:23 PM   #17
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Originally Posted by Abreutime View Post
Previously posted on this board. I think we're around point 10, but it's hard to tell:

Absolutely brilliant!!

I have only one thing to say: Buy Low and Sell High

Ok maybe two. 10, 15, 20 years from now we will be looking back wishing we bought more in 2008 and 2009.
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Old 09-18-2008, 02:26 PM   #18
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Originally Posted by Abreutime View Post
Previously posted on this board. I think we're around point 10, but it's hard to tell:
Great post.
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Old 09-18-2008, 02:36 PM   #19
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I forwarded this graphic to the other members of my employer's pension investment committee for their review and consideration.
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Old 09-29-2008, 04:42 PM   #20
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That is a great graphic and it accurately describes the emotions that go with a market plunge.

I'm still glad I put my most recent bundle of excess cash into the mortgage rather than the market. I will contine to be smug until the market starts a serious rally.
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