Pre-paying Mortgage Perspective after the "Crash"

[Scrapr]

Sep 74 Loss 41.4%

wow. I hardly noticed. I was starting college, drinking beer and trying to find loose wimmen

I knew that was a brutal Bear market but wow.

Just wow

 

[rayvt]

Top gain: Jun 1983, 52.9%
Top loss: Sep 1974, -41.4%

Are these the 12 month periods ending on the month and year mentioned?

Ha

Yes.

More info:
If you use Faber's 10 month SMA in/out strategy, the average gain (ignoring both dividends and interest on cash) was 8.0% vs. 8.3% for B&H.

BUT!!!!
The top loss was -27.0% vs. -41.4%.
The top gain was 49.1% vs. 52.9%
The average of the top 10 gains was 40.1% vs. 43.9%.
The average of the top 10 losses was -17.9% vs. -31.8%.
So you reduce the top gain(s) and the overall average gain only a little, while reducing the top loss(es) by a lot.

 

[BunsGettingFirm]

This is certainly true. But it's also true that draining liquidity can be a dangerous move, especially when the economy stinks.

Over a very long period of time, plowing a pile of cash into the market is likely to "beat" prepaying a mortgage or holding a lot of cash. But not *all* of financial planning is about maximizing returns; some of it is about securing what you have as well.

If one prepays a mortgage with a lump sum of cash today, I only hope they either (a) can honestly and confidently state that they have a VERY secure income stream and (b) they still have a sound emergency fund. The worst thing one can do is take most of their liquid cash, prepay the mortgage, and then lose their job while the roof leaks and the car breaks down.

We're living in a time when liquidity is crucial to financial security for most people. And even if stockpiling cash at 2% stinks, it stinks less than having almost nothing in the bank when a pink slip heads your way.

If the OP's house is about 10% of his NW, and he has a cash emergency fund, plus stocks and bonds outside of investment funds, then that's a different scenario than someone taking 70-80% of his NW and dumping it in a house. The first scenario does not present a liquidity problem. I think it's time for the OP to present some numbers. Otherwise, we'll be talking in generalities forever.

We're also forgetting that a person willing to make some money can always find some work. Heck, you can probably work the closing shift at a McDonald's. I haven't worked there in years, but I recall being able to get at least two meals covered a day. Yeah, granted, your CV is going to look kind of weird with a string of professional jobs followed by a job at McDonald's, but what Zig and Haha are talking about are really dire scenarios involving going hungry, so having a weird-looking CV is probably not a big worry.

The other thing you're forgetting is that there is always some severance pay and unemployment insurance. Depending on the OP's monthly minimal budget, he may last close to a year just on that.

Of course, very few plans, ER or temporary unemployment, is going to survive an unfortunate combination of major disasters, but if you can't even stomach the thought of being out of work for a few months to a year, then what are you doing on an ER board?

 

[FreqFlyer]

The market turmoil and declines in money market rates are making me rethink my mortgage.

I have a second mortgage (got an 80/15) at 9.125% (ouch) and the difference compared to money markets yields has encouraged me to pay it down. The conventional mortgage is much better and I'll leave it alone for now.

In my opinion the decision rides on 1) what rate you are paying and 2) where you are in your career. High-rate equals early payoff (or refi) and young person = keep the mortgage and take the risk. If I was retired I'd want the house paid for.

 

[Gromit33]

Paid it off

I paid my mortgage off last May when my 3 year average return for my portfolio dropped to 12.8 percent. Had a three year ARM at 5.125 percent which was to end in July. Best decision I ever made. Now putting $1500 per month back into the market. I ERed 5 years ago.