Alan Roth Discusses Various Vanguard Funds

[mickeyd]

Not all of the comparisons are concerning funds that I like or plan on investing in, however I like his simple logic for making his point.

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My discussions with Vanguard were driven by the logic and math of our viewpoints. As is always the case, only time will tell who’s right.

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Where I Disagree with Vanguard | IAG Blogs

[pb4uski]

While I agree with Mr. Roth on many points, I thought this interesting:

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Point: Paying off a mortgage is better than a bond fund or opening a CD. I regularly tell my planning clients that a mortgage is merely the inverse of bond. When you own a bond or bond fund, you are lending money to an entity that pays you interest and your principal back. When you take out a mortgage, it’s the reverse. Paying off or paying down the mortgage is better than owning a bond in the taxable account as it’s always at least tax-neutral, and typically tax-advantaged, to jettison the bond and pay down the mortgage, as long as one has enough liquidity. I question the wisdom and practicality of lending money out at 2.28% (the rate of the Vanguard Total Bond Fund) and borrowing it at a higher rate. Counterpoint: I’m missing the point, Kinniry insisted. Consider a hypothetical of an individual with a $1 million portfolio (60% stocks/40% fixed income) and $1 million home with $400,000 mortgage at a 3.2% interest rate. He argued one could likely make a greater return with that 60/40 split than the low mortgage rate. I pivoted the hypothetical to viewing the situation this way: The investor actually had a home worth $1 million and a portfolio worth $600,000 that was 100% invested in stocks). As I see it, the $400,000 mortgage and the bond fund cancel out. One shouldn’t borrow the money at 3.2% only to lend it out at 2.28%. While Kinniry and I weren’t on the same page on the comparable bond fund to use (he advocated for corporate and muni bonds), we both agreed that it’s not a good idea to borrow money at a higher rate than one expects to receive from a comparable investment.

Would he actually recommend that a client with a $1 million home, $400k mortgage at 3.2% and a $1 million 60/40 portfolio pay off their mortgage and end up with a $1 million owned home and $600k all in equities? I don't think many early retirees would be comfortable with a 100% equity portfolio even if they had a paid-off house. I know I would not be.

[Sunset]

As a retiree I would not be comfortable with a $1 million home and total of $600k invested in anything.
I would hope they were talking about pre-retiree folks still accumulating rather than a retired person.

[DrRoy]

When I paid off my mortgage I looked at it as the same as making an investment at that rate of interest. It was higher than market rates so I did it. The new cash flow was very nice.

[pb4uski]

But did you change the AA of your investment portfolio because you paid of your mortgage? I suspect most people do not.

[DrRoy]

No, I didn't. I was underweight stocks at the time and didn't want to make a change.

[gerntz]

Quote:

Originally Posted by pb4uski While I agree with Mr. Roth on many points, I thought this interesting: Would he actually recommend that a client with a $1 million home, $400k mortgage at 3.2% and a $1 million 60/40 portfolio pay off their mortgage and end up with a $1 million owned home and $600k all in equities? I don't think many early retirees would be comfortable with a 100% equity portfolio even if they had a paid-off house. I know I would not be.

You wouldn't need to stay in that financial position; i.e., get a cheaper house or invest some of the $600K in bonds. That said, a) what you were spending on the mortgage can now be added to your investments/reduced withdrawals, and b) I would rather have the $1.6M assets/zero debts, than $2M assets/$400K debts regardless of how the $1.6M is distributed.