The "perfect storm"?

[Mr._johngalt]

I don't know what I'm supposed to think about, but the differences are:

1) I know exactly what my upside/downside is at any time.

2) I can stop playing the game at any time without the possibility that I may have to sell securities at a loss.

I'm getting a sense of deja vu as I ask you this, but what do you do if you decide for some reason that you need to pay off your mortgage, and your leveraged stock holdings are 50% below where they were when you decided to play the leverage game?

I never run into that scenario (as long as I'm using CDs, i-bonds, or some other instrument that is guaranteed against principal loss).

Hi wab! As you probably know, I am in a position now where I can't sell
a lot of my stuff as the NAVs are down. However, I knew that would happen going in.
Unfortunately, I have no guarantee "against principal loss" on most investments. However,
I do have multiple "fallback" plans. I don't forsee any condition
where I would need to sell "at a loss" in order to stay ERed. As I have posted
before, even a 100% loss of my entire portfolio (excluding real estate)
would not force me back to work.

JG

 

[Jarhead*]

Hi wab!  As you probably know, I am in a position now where I can't sell
a lot of my stuff as the NAVs are down.  However, I knew that would happen going in.
Unfortunately, I have no guarantee "against principal loss" on most investments.   However,
I do have multiple "fallback" plans.   I don't forsee any condition
where I would need to sell "at a loss" in order to stay ERed.  As I have posted
before, even a 100% loss of my entire portfolio (excluding real estate)
would not force me back to work. 

JG

JG: I remember a short time back when you were purchasing a long term bond, and thought to myself, "Don't do that", for crying out loud.

Of course, that's from my own feelings that we are headed for a long period of time with our old "inflation" buddy.

As I am sure you know, holding a long term bond bought early on in an inflationary cycle, is like being "nibbled to death by ducks". The opportunity dollars are being overwhelmed by short term instruments paying more, and selling at that point is going to result in a massive loss in NAV. (Not a pretty picture).

Wabs approach to continue to hold a low interest mortgage, and allow the market to come to him with his other investable funds is (if one believes as I do), a classic defensive strategy to survive a long period of inflation.

If it were me, JG, and it's not. I'd consider taking a small hit now, while you could get out somewhat whole.

Of course if we go the other way, you'd have something to crow about.

 

[sgeeeee]

. . .

1) I know exactly what my upside/downside is at any time.

So do I.

2) I can stop playing the game at any time without the possibility that I may have to sell securities at a loss.

So can I.

I'm getting a sense of deja vu as I ask you this, but what do you do if you decide for some reason that you need to pay off your mortgage, and your leveraged stock holdings are 50% below where they were when you decided to play the leverage game?

I use i-bonds and CDs.

I never run into that scenario (as long as I'm using CDs, i-bonds, or some other instrument that is guaranteed against principal loss).

Me either.

I simply keep my low interest mortgage because the down side potential is very small and if I begin to get behind, I can stop the bet at any time. My investments are still in a balanced portfolio.

 

[wabmester]

I can stop the bet at any time.  My investments are still in a balanced portfolio.   

If I remember your manifesto correctly, you argued for looking at the historical odds of your portfolio beating your mortgage interest rate (via FIREcalc), right?

Now, you seem to be saying that you match the size of your mortgage with i-bonds and CDs, and you'll sell those if you want to unwind, right?

Errhm, won't that unwinding "unbalance" your portfolio?

And, would you like to amend your manifesto to say "kids, don't try this at home unless your guarantee-principal fixed income component >= mortgage size."

What would you say to poor helpless Nords who bought into your idea with a 100% stock portfolio?

 

[Nords]

If I remember your manifesto correctly, you argued for looking at the historical odds of your portfolio beating your mortgage interest rate (via FIREcalc), right?

Now, you seem to be saying that you match the size of your mortgage with i-bonds and CDs, and you'll sell those if you want to unwind, right?

Errhm, won't that unwinding "unbalance" your portfolio?

And, would you like to amend your manifesto to say "kids, don't try this at home unless your guarantee-principal fixed income component >= mortgage size."

What would you say to poor helpless Nords who bought into your idea with a 100% stock portfolio?

FIRECalc gives our 5.5% mortgage a 62% chance of making money by investing the funds in the stock market.  Since those numbers we've refinanced to a 5.375% loan, and when I run FIRECalc the results give a bit over 63%.

A larger portfolio (swollen by the amount of the mortgage) is also more survivable, so FIRECalc gives it a higher success rate despite the higher withdrawal rate.

I'm neither helpless nor hapless, and I do my own due diligence before I invest our money according to the ideas of total strangers I've met through the Internet.  You know, kinda like your idea of catching a falling MOVI.

 

[wabmester]

FIRECalc gives our 5.5% mortgage a 62% chance of making money by investing the funds in the stock market.  Since those numbers we've refinanced to a 5.375% loan, and when I run FIRECalc the results give a bit over 63%.

And there's nothing wrong with making that kind of bet if you're a risk taker and can afford to lose the bet.   My point was that my approach is different.   I'm not making that kind of bet.    I didn't side with SG (or TH) in the Great Mortgage Debate because I thought they were both nuts. 

 

[Nords]

I didn't side with SG (or TH) in the Great Mortgage Debate because I thought they were both nuts. 

That may be possible but it's irrelevant. The math works out the same whether they're sane or not!

 

[laurence]

So, just so I have it straight, SG and Nords are 100% equities with mortgages they could pay off because odds are they will come out ahead with the mortgage. Wab is taking advantage of the spread between his mortgage and i-bonds, and TH has a paid off mortgage and enjoying his reduced volatility, right?

Me, I locked in a 5% 20 year mortgage for no cost last year and max the retirement accounts (401k and Roth IRA) with near 100% equity holdings (I have some Wellington, otherwise pure equity). I guess I want it both ways. The reason I plan on having the house paid off in retirement is I fear future tax rates and the lessoning of deductions. I'd rather plan for a low withdrawal rate, because this debt burden will come home to roost.

 

[Nords]

So, just so I have it straight, SG and Nords are 100% equities with mortgages they could pay off because odds are they will come out ahead with the mortgage.  Wab is taking advantage of the spread between his mortgage and i-bonds, and TH has a paid off mortgage and enjoying his reduced volatility, right? 

Me, I locked in a 5% 20 year mortgage for no cost last year...

Damn we're all smart.

In the tradition begun by my FIL with his 1964 5.5% mortgage, I'm going to save my latest mortgage paperwork and show it to my adult children-in-law when (at least 30 years from now) we see these low-low mortgage rates again...

 

[Mr._johngalt]

Damn we're all smart.

In the tradition begun by my FIL with his 1964 5.5% mortgage, I'm going to save my latest mortgage paperwork and show it to my adult children-in-law when (at least 30 years from now) we see these low-low mortgage rates again...

I'm pretty sure I could have a mortgage (or 2) and make a little money
on the interest rate spread. Don't want to. I like having no mortgage
and am willing to give up the "spread" in order to remain mortgage free.
It used to be called "psychological income". Whatever..........works for me.

JG

 

[Mr._johngalt]

JG:  I remember a short time back when you were purchasing a long term bond, and thought to myself, "Don't do that", for crying out loud.

Of course, that's from my own feelings that we are headed for a long period of time with our old "inflation" buddy.

As I am sure you know, holding a long term bond bought early on in an inflationary cycle, is like being "nibbled to death by ducks".  The opportunity dollars are being overwhelmed by short term instruments paying more, and selling at that point is going to result in a massive loss in NAV. (Not a pretty picture).

Wabs approach to continue to hold a low interest mortgage, and allow the market to come to him with his other investable funds is (if one believes as I do), a classic defensive strategy to survive a long period of inflation.

If it were me, JG, and it's not.   I'd consider taking a small hit now, while you could get out somewhat whole.

Of course if we go the other way, you'd have something to crow about.

Well, that would be okay and I'd try not to "crow". Here is the deal.
I asked myself if I could live with a NAV nosedive as long as I kept getting the
checks, long term. The answer was yes. Thus, I am in for the long pull
and own some bonds where I fully expect to be long dead before they mature.
This is "forever money" and I expect to hold it "forever". My inflation
protection is elsewhere.

JG

 

[education]

JG:  I agree with you 100% about not having a mortgage.  In preparation for an early out, I wanted no outstanding debts.  I lost my deduction and paid almost $19,000 in income taxes, but it was worth it.  Just the interest savings alone over the remainder of the 30 year loan far surpassed what it cost me.
Besides, I am of a firm belief that if the kids are grown, the house and cars are paid for, the credit card debt is paid off each month, and the health insurance is 3/4ths paid by the former employer one can retire on very little and still maintain a lifestyle that doesn't include dumpster diving.

 

[brewer12345]

Hmmm, I've been a little of column A and a little of column B. I have a 15 year mortgage (13 years left) because I want the house paid off when I am ready to check out and because I find the forced savings helpful. Historically, Ihave been all equity. Now that rates have risen a bit and I have become a bit more risk averse and a bit more sophisticated, I have been edging into other asset classes. I bought unhedged foreign bonds, and I have recently decided to start investing in exchange-traded bonds and preferreds. I am a credit analyst by trade, and I think I can do pretty well. I will of necessity be taking on some interest rate risk, since ET bonds and preferreds are generally long maturity with embedded call options, but I can afford a little interest rate risk because of the mortgage and because I think I can pick bonds that are very likely to be called or sold at a gain in the future.

 

[sgeeeee]

If I remember your manifesto correctly, you argued for looking at the historical odds of your portfolio beating your mortgage interest rate (via FIREcalc), right?

I argued that you could use FIRECalc to look at the probability of coming out ahead by keeping your mortgage vs paying it off. The results would depend on a lot of things that you could examine -- interest rate, time remaining on the loan, ratio of your loan to your portfolio, . . .

Now, you seem to be saying that you match the size of your mortgage with i-bonds and CDs, and you'll sell those if you want to unwind, right?

No. I didn't say any such thing. I have a lot more portfolio than mortgage and my bond allocation is signifiantly larger than my mortgage. But that doesn't change my "manifesto" as you put it. You can still use FIRECalc to evaluate the financial probability of beating the mortgage payoff whether you were invested 100% in bonds or 100% in equities. The probabilities would be very different is all.

Errhm, won't that unwinding "unbalance" your portfolio?

Not in my case. Like I said, I have much more portfolio than mortgage. But I honestly don't see a need to pay off the mortgage as even a moderately high probability event. I expect to keep the mortgage for a long time.

And, would you like to amend your manifesto to say "kids, don't try this at home unless your guarantee-principal fixed income component >= mortgage size."

No. Because I never tried to sell anyone on keeping a mortgage -- despite the repeated claims of TH. My "manifesto" was "Don't blindly assume that mortgage payoff is the best financial option. Run the simulations for your situation and weigh the results against your own risk and comfort level." I still stick by that manifesto. As I said repeatedly in those posts, if you just don't feel comfortable with a mortgage no matter what the numbers say, then pay it off.

What would you say to poor helpless Nords who bought into your idea with a 100% stock portfolio?

He followed my manifesto. He ran simulations, evaluated his risks, and made a decision. I think he's likely to make a lot of money from it. But his plan is more risky than I would feel comfortable with.

 

[wabmester]

I argued that you could use FIRECalc to look at the probability of coming out ahead by keeping your mortgage vs paying it off.

That's fine, but in the end you're still suggesting borrowing against your home to leverage your portfolio, and we all know that leverage can either work for you or against you.

Let's imagine that two years from now, interest rates for the 10-year treasury hit 8% (not a prediction) and you have 10 years left on your 5% mortgage and enough cash to pay off your mortgage.

In that situation, I think we'd both agree that paying off the mortgage would be nuts regardless of what FIREcalc said.

And what I would suggest in that situation is to simply buy a 10-year treasury the same size of your mortgage and enjoy the 3% spread. No need to look into your rear-view mirror with FIREcalc, and no need to take on any extra risk.

In my case, I'm simply taking that one step further and buying short-term instruments to offset my mortgage interest until I see where interest rates are headed. It costs me little or nothing to wait.

That's why I like to view mortgages as short-sold bonds, and I just offset my short with a long position on a different bond.

 

[sgeeeee]

That's fine, but in the end you're still suggesting borrowing against your home to leverage your portfolio, and we all know that leverage can either work for you or against you.

You can look at it that way. But if you run the numbers, you are likely to find pretty minimal downside potential to the leverage. This is the scary story that TH kept telling: "You could lose your house, or if inflation is low and investments tank for 2 decades, it could cost you more than paying it off." But if you have enough money to retire, you must have enough to pay off your mortgage -- any time you want. You would have to be a fool, asleep at the wheel to actually suffer much downside from keeping the mortgage. So the question for me is which move offers the highest probability of return. If you have a low interest loan, the odds are it is keeping your mortgage. It is highly likely to cost me more to pay it off. And since I believe that high inflation is more likely to hurt me in the next several years than some repeat Great Depression, keeping the mortgage is actually the lowest risk option too.

. . . And what I would suggest in that situation is to simply buy a 10-year treasury the same size of your mortgage and enjoy the 3% spread. No need to look into your rear-view mirror with FIREcalc, and no need to take on any extra risk.

Well . . . if I could buy additional bonds at 8%, I probably would. But unless my whole portfolio was paying more than the mortgage rate, I would be reluctant to justify one bond purchase against the loan. I only have one portfolio. I don't have a separate mortgage rationalization portfolio and a retirement portfolio. Heck, if holding a single 8% bond is the rationalization for keeping the mortgage, all I have to do is find one investment each year that outperforms my mortgage rate and separate it from the rest of my portfolio to rationalize the mortgage. Of course the remainder of my portfolio may perform more poorly. I like my method better. I consider all my investment decisions under one umbrella -- stocks, bonds, CDs, mortgage, . . . Each one contributes to overall return and to my risk. I try to optimise the whole.

 

[haha]

Well, that would be okay and I'd try not to "crow".  Here is the deal.
I asked myself if I could live with a NAV nosedive as long as I kept getting the
checks, long term.  The answer was yes.  Thus, I am in for the long pull
and own some bonds where I fully expect to be long dead before they mature.
This is "forever money" and I expect to hold it "forever".  My inflation
protection is elsewhere.JG

JG, I am hoping you are a troll, and that you do not believe and are not acting on this "thesis". Because it makes no sense. You may be long dead, but your wife likely will not be. Anyway, your parents are still alive, so that should suggest to you that you may have another 25 years or so anyway.

Next point- you seem mesmerized by the idea that these checks will keep coming. Likely true, but there is a non-zero possibility of default with the GM bonds. Also, since we do not know what inflation will be, but it is hard to imagine it not being a meaningful factor, your checks that buy groceries this year may only buy chewing gum 15 years from now.

As for your inflation protection being elsewhere, you have 2 homes. One you must live in, one could be sold. But that is more of a speculation than a provision to offset CPI inflation. It may work, but it may not. Also, the size of the “inflation resistant” asset may not be large enough to do much.

Actually, I do believe you are a troll, and I have just fed the troll. So shame on me.

Ha.

 

[Mr._johngalt]

JG, I am hoping you are a troll, and that you do not believe and are not acting on this "thesis". Because it makes no sense. You may be long dead, but your wife likely will not be. Anyway, your parents are still alive, so that should suggest to you that you may have another 25 years or so anyway.

Next point- you seem mesmerized by the idea that these checks will keep coming. Likely true, but there is a non-zero possibility of default with the GM bonds. Also, since we do not know what inflation will be, but it is hard to imagine it not being a meaningful factor, your checks that buy groceries this year may only buy chewing gum 15 years from now.

As for your inflation protection being elsewhere, you have 2 homes. One you must live in, one could be sold. But that is more of a speculation than a provision to offset CPI inflation. It may work, but it may not. Also, the size of the “inflation resistant” asset may not be large enough to do much.

Actually, I do believe you are a troll, and I have just fed the troll. So shame on me.

Ha.

Everything "may work but may not" and I don't own any GM bonds.
I found your post a little silly.

JG

 

[Mr._johngalt]

JG:  I agree with you 100% about not having a mortgage.  In preparation for an early out, I wanted no outstanding debts.  I lost my deduction and paid almost $19,000 in income taxes, but it was worth it.  Just the interest savings alone over the remainder of the 30 year loan far surpassed what it cost me.
Besides, I am of a firm belief that if the kids are grown, the house and cars are paid for, the credit card debt is paid off each month, and the health insurance is 3/4ths paid by the former employer one can retire on very little and still maintain a lifestyle that doesn't include dumpster diving.

Works for me, although I do a little "upscale" dumpster diving
just for recreation.

JG

 

[unclemick]

Heh heh heh

Turncoat here - or perhaps a poster child for 'talk's cheap.'

After many a post (old and new forum) extolling rent - post Katrina - after picking a location and a cursory look at rentals availible:

20% down and 30 yr mortgage.

And and - didn't even run FireCalc.

Three women, dog and cat.

60k mortgage is not unlivable - perhaps - even in a big market drop.

Great forum for debate though - even though my credibility is shot.

Sigh! - but the rent vs buy numbers may work for other ER's in different situations/locations.

 

[Mr._johngalt]

Hi wab!  As you probably know, I am in a position now where I can't sell
a lot of my stuff as the NAVs are down.  However, I knew that would happen going in.
Unfortunately, I have no guarantee "against principal loss" on most investments.   However,
I do have multiple "fallback" plans.   I don't forsee any condition
where I would need to sell "at a loss" in order to stay ERed.  As I have posted
before, even a 100% loss of my entire portfolio (excluding real estate)
would not force me back to work. 

JG

Here is a PS on this one..............

Before I made such a heavy commitment to "bonds", I considered
the possibility that I would never be able to sell because interest
rates could go up and stay up. But, with my SS (2006) and DW's
SS (2011) plus the real estate (and a reverse mortgage if needed).......
the income looks adequate to me. Now, I know this amounts to
"chasing yield" but I only locked in on a little less than half our net worth
and an even lower portion of our income stream going forward. Another
way to look at it is I asked myself if the income thrown off by
my bonds (fixed) added to the rest (all of which has some built in
inflation protection) would be sufficient. The answer was yes.
And, don't forget that I have been getting 7 to 8% for quite some time now
while CD rates were mostly stuck in the 2-3% range. I will admit it will be a lot
less fun when 5 year CDs go to 9%

JG

 

[uncledrz]

And, don't forget that I have been getting 7 to 8% for quite some time now
while CD rates were mostly stuck in the 2-3% range.  I will admit it will be a lot
less fun when 5 year CDs go to 9% 

JG

JG, we don't need an exact time, but sure would be nice if you could tell us when that's going to happen!
Uncledrz

 

[brewer12345]

JG, we don't need an exact time, but sure would be nice if you could tell us when that's going to happen!
Uncledrz

Easy: when foreign gummints tire of buying our bonds and the USD drops.