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Old 12-09-2018, 08:31 PM
 
7,904 posts, read 3,920,661 times
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Excellent summary looking at both sides of the coin. Just a few notes. In comparing the mortgage interest saved versus the gains in equities, you didn't factor in the home appreciation anywhere. And if you lose the home because you can't make payments, you don't lose your equity unless you're upside-down.
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Old 12-09-2018, 08:46 PM
 
2,273 posts, read 1,225,624 times
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Quote:
Originally Posted by oceangaia View Post
Excellent summary looking at both sides of the coin. Just a few notes. In comparing the mortgage interest saved versus the gains in equities, you didn't factor in the home appreciation anywhere.
Why would you? Appreciation on your property has nothing to do with how high your mortgage is or how fast you pay it off. The only factors at play is what you are paying out for the mortgage vs the opportunity cost of investing in equities.
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Old 12-09-2018, 08:53 PM
 
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Lets dis spell some of the bull**** in this thread with some quick math.



200k mortgage @ 3.5%

$898.00 payment, total cost of the loan over 30 years is $323,312

If you paid an extra $200 per month on the mortgage, you would cut $37,656 in interest costs over 30 years. Add to that 8 years @ 1098 that you don't have a mortgage. We will invest that.

8% - 146k (lets go best case but keep in mind 8 years is relatively short term so the risk on not meeting 8% is much higher)
Plus the 37k in interest
Total 183k

____________________________________

If you invest $200 a month in the S&P500 index you could expect 8% over the long term of 30 years but lets play with a range.

$200/month for 30 years @ 8% = $298k

$200/month for 30 years @ 6% = $201k

$200/month for 30 years @ 4% = $139k


No feels. That is the math. Generally speaking you are always better off keeping the debt and investing long term (based on the scenario variables).

Apples to apples there is a 115k advantage in favor of investing long term vs paying it off

/thread

Last edited by aridon; 12-09-2018 at 09:37 PM..
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Old 12-09-2018, 09:15 PM
 
7,904 posts, read 3,920,661 times
Reputation: 10789
Quote:
Originally Posted by aridon View Post
Lets dis spell some of the bull**** in this thread with some quick math.



200k mortgage @ 3.5%

$898.00 payment, total cost of the loan over 30 years is $323,312

If you paid an extra $200 per month on the mortgage, you would cut $37,656 in interest costs over 30 years. Add to that 8 years @ 1098 that you don't have a mortgage.

8% - 146k (lets go best case but keep in mind 8 years is relatively short term so the risk on not meeting 8% is much higher)
Plus the 32k in interest
Total 178k

____________________________________

If you invest $200 a month in the S&P500 index you could expect 8% over the long term of 30 years but lets play with a range.

$200/month for 30 years @ 8% = $298k

$200/month for 30 years @ 6% = $201k

$200/month for 30 years @ 4% = $139k


No feels. That is the math. Generally speaking you are better off keeping the debt and investing long term.

Apples to apples there is a 120k advantage in favor of investing long term vs paying it off

/thread

You've paid off the morgage at 22 years and saved all the interest by then, why are you letting the clock on S&P run to 30 years? Recalculate S&P at 22 years. And really, since interest is not paid linearly, you could stop the clock at 15 years and have saved 80% of the interest expense.
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Old 12-09-2018, 09:17 PM
 
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Because the term is 30 years and if you don't pay off the mortgage early you are invested for 30 years.

Comparisons are better when fewest variables get changed. I normalized the two by investing the mortgage payment over 8 years which actually greatly improves the appearance of the payoff scenario. That is the better way to compare the two options but let us do it your way, it won't matter one bit.

22 years you would save 37k paying the mortgage off early

22 years at $200 a month @ 8% is 143k

6% 109k

4% 84k


So even if returns completely suck, it is still better to invest over pay off. The two are not even close. Which is why it is really humorous but scary how many people think the opposite.

Last edited by aridon; 12-09-2018 at 09:38 PM..
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Old 12-09-2018, 09:39 PM
 
4,369 posts, read 1,625,658 times
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Quote:
Originally Posted by oceangaia View Post
But in that example, investors are not responding soly to the earnings but to the projections. The company is not just reporting that they did well last quarter but will continue doing well in upcoming quarters. In fact, the forward guidance often has a bigger effect than the actual earnings.
What the researchers did was build huge databases of stock price movements and earnings announcements. They did rigorous statistical tests and found that more stocks drifted upward than downward after earning surprises, and on the whole buying earnings surprises beat the overall market. It's strictly a mathematical exercise and the numbers convincingly prove that the investor has better odds than the house if the PEAD strategy is followed.

Quote:
Originally Posted by mathjak
show me where as a group small investors do better then the investments they were in did in any study involving timing of any sort where they are in or out of the market . . ...
do you really think the typical small investor is going to pull off trading strategies ??? NONSENSE !!!

The math behind the PEAD study is irrefutable. These are not small sample size studies. All they do is prove, over time, following the PEAD strategy will beat the market. Most academics agree that PEAD is a legitimate exception to the efficient market theory.

That said, I have no doubt that disciplined small investors can win with PEAD over time. "Typical" investors, probably not.
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Old 12-09-2018, 10:05 PM
 
Location: Dude...., I'm right here
1,056 posts, read 614,305 times
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Most people are forgetting that the tax code has just been over hauled. With the current standard deductions, there will be fewer people itemizing their deductions. If you are going to take the standard deduction then you will no longer take the mortgage interest deduction. I think the current standard deductions will be very generous especially for those don't live in a high property tax state. This will become clearer once people start filing their taxes next year.

Personally I plan to pay off my current mortgage within 5 yrs. My plan was to take a 5 yr ARM when rates were dirt cheap in 2015 and make extra payments towards the principle. Paying off my house will give me the independence to undertake other ventures without having to worry about not paying my bills. Currently, all our cars are paid off or bought cash and we pay our credit card bills in full.

Although I used to be active in the stock market, I no longer have the time to focus on individual stocks. Individual stocks carry with them a lot of risks and you may be better off investing in index funds. Keep in mind, there is not much upside in stocks as we've had a very long bull market. I think stocks will swing side ways for a while though there are downside risks from the trade wars, rising interest rates and unwinding of fed balance sheet.


Quote:
Originally Posted by inquisitive2 View Post
I'm about 4 years into my mortgage. Am I better off to make some extra payments on my mortgage or invest in some stock?
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Old 12-09-2018, 10:09 PM
 
Location: Paranoid State
13,039 posts, read 9,735,577 times
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Quote:
Originally Posted by oceangaia View Post
The "expert"s warn against "market timing" because the ignorant will misundertand what timing is. It is not daytrading. It is not catching the exact top or bottom.



What exactly do you think those fund managers are doing? They are deciding when is the right "time" to buy or sell positions within a basket. While they are constrained by the fund's directives they have flexibility within a range and they use that range to lighten or load their holdings.
Oceangaia, to be a bit more accurate, active fund managers attempt to do what you describe in the sentence in bold above. Some active fund managers succeed. Others fail.

The important question is -- Is fund manager success the result of skill? Or is it the result of plain old dumb luck?

Economics Nobel Laureate Gene Fama, along with his long-time collaborator Ken French, studied this in detail, and published their findings here: https://papers.ssrn.com/sol3/papers....act_id=1356021. It is an academic paper with lots of technical detail - frankly, beyond the attention span of most of us.

Fortunately, they wrote a short white paper summarizing the results that are important for investors like those of us on this forum. It is here: https://famafrench.dimensional.com/e...rformance.aspx.

The imperfect but extremely short answer: when you add up the results of all of the active managers, their collective results are essentially the same as passively owning the entire market (no timing). In fact, investors in active funds collectively lose to the market rather than beat the market, because active managers charge higher fees than do passive all-market funds.

At the same time, the fact that the aggregate portfolio of wealth invested in active mutual funds shows no evidence of manager skill does not mean no individual fund managers have skill. It simply means that if there are good managers who produce positive alpha, they must be balanced by bad managers who produce negative alpha.

Can we find evidence of good and bad managers? That's the crux of the problem - when you find the good ones, are they good because of luck, or because of skill?

Fama & French, studying it in detail, show that it is almost all luck. There appears to be some skill among a very, very, very tiny number of managers (think: Jim Simmons of Renaissance Technology) but you and I cannot put money into them.
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Old 12-09-2018, 10:11 PM
 
Location: Silicon Valley
2,989 posts, read 1,312,922 times
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Quote:
Originally Posted by oceangaia View Post
Excellent summary looking at both sides of the coin. Just a few notes. In comparing the mortgage interest saved versus the gains in equities, you didn't factor in the home appreciation anywhere. And if you lose the home because you can't make payments, you don't lose your equity unless you're upside-down.
Thank you, I hope it helps the OP.

I'm a little confused on how home appreciation would influence the decision. Whether a home has debt or not will not influence if they have home appreciation or not. It's a wash either way, right? I know what my neighbor's home is, but I have no idea how much they owe the bank.

As for home losses, positive equity will absolutely not save a lender from a forced sale. If money is owed, secured by a property, and not being paid to terms, the lender will eventually move to foreclose upon the property. Once title is obtained and restitution rights have passed, the holder of title (lender) will move to evict the (now) illegal tenants. The property will then be sold and any proceeds remaining after the leverage and legal costs are returned to the former owner....but there's no obligation for the bank to be nice about it. The bank will charge the property with any/all attorney and collection fees, and will then likely sell it at auction, bidding the price up to the point where they collect all and then not caring from there.

The entire system is based upon the owner taking actions to prevent the loss of their equity. I have a bank that would lend me 50% of the value of any property if I was putting up the other 50%. No questions, no worries. They and I both know that they'd have no problem foreclosing to get their money returned with some very healthy fees. The expectation is that the owner would proceed with the sale if they could no longer afford the fee. Make the banks jump through hoops to do it for you, and you'll pay some wild prices for that service. The only time the bank is in trouble is when a property is upside down on a fire-sale basis.

But here, the OP has new money and is looking to place it. I introduced liquidity as I don't know the situation. Liquidity is precisely to make sure the bank situation does not happen.

Let's say I make 10 a month. Of the 10, 1 goes to my 401K and 4 goes to various taxes. My check is 5. Of the 5, Each month I pay 3 on home mortgage, 1 on auto loan and expense and 1 on insurance and other expenses.

My liquidity improves by 0 each month. I'm running very tight.
Yet my savings rate, arguably, is very good. I save 1 for 401K + 3 for home(less interest) + 1 for car (less interest). That's a 50% savings rate....but I can't sell my 401K without massive fees and home/cars are not liquid stores of value...with cars being a terrible investment most of the time.

I gain no liquidity. If I think it will take 2-3 months to get a new job that pays the same, I should really have at least 10-15 in my checking.

If this person gets a raise to 11 and starts bringing home an extra .5 (after tax) I would encourage them to let it simply build in their checking account until they have that savings level. Now, it will take them 2.5 years to achieve that 15 mark. That's a long time, but despite the high savings, they don't have liquidity.

However, if at the end of year 1, that auto loan is now paid off, their liquidity target figure may fall from 15 to 12 as their cost to live has fallen by 1 per month (x 3 months) if the entire amount is saved. If it is instead reinvested into other things (savings or otherwise) that figure may need to stay at 15.

Hope that clarifies.
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Old 12-09-2018, 10:43 PM
 
Location: Paranoid State
13,039 posts, read 9,735,577 times
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Quote:
Originally Posted by RosemaryT View Post
1) The market ain't done dropping. Of that, I am sure.


2) Why is it, when women make a financial decision, it's "emotional" and when men make a financial decision, it's the result of good, hard research. LOL.
There is an entire field known as "behavioral economics" https://en.wikipedia.org/wiki/Behavioral_economics. Richard Thaler won the Nobel Prize in Economics for his pioneering work in this field. There doesn't appear to be any gender differences, but the field is young.
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