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A couple things what they s&p is up is somewhat meaningless one because you can't directly invest in it and two investors normally don't even come close to the performance of the s&p
If you go into an S&P 500 index fund, the expense ratio is usually very low especially one of the big ones like Vanguard's 500 index fund, so how does this not count?
If you go into an S&P 500 index fund, the expense ratio is usually very low especially one of the big ones like Vanguard's 500 index fund, so how does this not count?
What do you mean how does it not count? VOO/spy typically doesn't outperform the index and then compound that problem by the fact that the average investor doesn't even come close
That's why I'm puzzled when people refuse to borrow even at 2%. If nicole1 can borrow at 2%, I'll borrow from him at 3%.
Assuming I could borrow at 2% - which would only apply to collateralized debt such as against my savings or investments, and maybe not even then. I could probably get a passbook loan under 2% if I borrowed a small amount against a CD at the same bank, but I haven't asked.
At any rate WHY would I loan you money at 3% with no collateral? How will you convince me that I'll get paid back even if things go south?
If there were a magic way for you to guarantee me zero credit risk with no additional costs on my part, I would happily lend you $20k of my own money at 3%.
Unfortunately, there ins't, because from my perspective you could always just choose to run off and not pay. The only way to eliminate this credit risk, from my perspective, would be to put up collateral. If you had $80k in stocks you wanted to put up I might consider making the loan - although without me having a brokerage license it's doubtfully even legal.
What do you mean how does it not count? VOO/spy typically doesn't outperform the index and then compound that problem by the fact that the average investor doesn't even come close
Imagine a relative offers you a $1000 loan, to be fully repaid one year from today, but no payments due before then. You take the loan and invest in an S&P 500 index fund. You then sell at year end to repay the loan.
Is the NPV positive or negative?
It should be obvious that the answer is - if the return during the year was greater than the loan interest, then NPV > 0. Otherwise not.
Yup. As long as the discount rate (annualized rate of return) is greater than the interest rate you're paying, it is positive. That's not how NPV is calculated but I'm with you.
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Now let's say, instead, the offer is a 2-year loan instead, again no payments due until maturity. What now?
Similarly, NPV > 0 if the 2-year compounded growth rate, expressed as an annualized figure, exceeds loan interest. It's just like in the first case, except the period is 2 years, not one. Similar answer for the same reason.
Are you with me so far? (#2)
Same caveat. That's now how NPV is calculated but NPV would be positive if the annualized rate of return over the two-year period is greater than the annualized interest rate.
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But there is an alternate way of viewing this. Put together, you have a single $2000 loan, with two payments due - one after 1 year and the second after another year (2 years from origination).
No, you have two loans, not one. That's important because the discount rate would be different.
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The NPV of this two year loan is the sum of two terms - NPV(1) and NPV(2). The first term depends on the 1-year return of your S&P 500. The second term depends on the two-year return of the S&P.
Incorrect.
A basic example:
Assume 0% interest rate, no inflation
Year 1 -50% return
Year 2 +100% return
NPV 1 is -$500 (your 1-year loan)
NPV 2 is 0 (your 2-year loan)
If you want to talk about a third loan that's structured with the same payments, a two-year loan with 50% due at the end of year 1 and 50% due at year 2, that's a third loan, NPV3. It would have the same discount rate as NPV2, the two-year loan since like NPV2 it's dependent on the annualized discount rate over two-years. NPV3 would be 0. -$500 + 0 is not 0. NPV3 is not NPV 1 + NPV2.
If you're trying to make payments out of the investment, you'd have a problem. That's not NPV however.
NPV would be normally you'd contribute $1,000 a year but now are making your loan payments instead and foregoing your contribution.
Situation A:
$2000 in investment account. Pay cash.
Contribute 1000 at end of year 1, => $2,000
Contribute 1000 at end of year 2, => $3000.
As expected, regardless of what happens in any given period you end up with the same amount, $2000, the expected resulted with a NPV of 0. NPV3 is, once again, not NPV1 + NPV2. It's NPV3.
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So the NPV of the $2000 loan is positive or negative depending on not only the two-year return of the S&P, but also the 1-year return, because that 1-year return appears explicitly in Equation 1.
Incorrect. See above.
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There is of course no limit to how many payments we can add. If we have a loan with 1 payment due in 1 month, another payment due in 2 months, and another in 3 months, etc. all the way to 60 months (as the car loan example), then your NPV is a sum of 60 terms. The first term depends on the 1-month return of the S&P, the second term on the 2-month return, etc.
Thus the mere fact that the 60-month CAGR exceeds the loan rate is not sufficient for NPV > 0 for the whole loan.
Yup. As long as the discount rate (annualized rate of return) is greater than the interest rate you're paying, it is positive. That's not how NPV is calculated but I'm with you.
Same caveat. That's now how NPV is calculated but NPV would be positive if the annualized rate of return over the two-year period is greater than the annualized interest rate.
No, you have two loans, not one. That's important because the discount rate would be different.
Incorrect.
A basic example:
Assume 0% interest rate, no inflation, $2000 loan
Year 1 -50% return
Year 2 +100% return
NPV 1 is -$500
NPV 2 is 0
If you want to talk about a third loan that's structured with the same payments, a two-year loan with 50% due at the end of year 1 and 50% due at year 2, that's a third loan, NPV3. It would have the same discount rate as NPV2, the two-year loan since like NPV2 it's dependent on the annualized discount rate over two-years. NPV3 would be 0.
If you're trying to make payments out of the investment, you'd have a problem. That's not NPV however.
NPV would be normally you'd contribute $1,000 a year but now are making your loan payments instead and foregoing your contribution.
Situation A:
$2000 in investment account. Pay cash.
Contribute 1000 at end of year 1, => $2,000
Contribute 1000 at end of year 2, => $3000.
Ok. So the loan makes you $1000 poorer in the first case ($3000 total NPV paying cash, rather than $2000 NPV having loan). In the second case the loan makes you $500 richer ($1500 NPV paying cash vs. $2000 taking loan).
In both cases the 2-year CAGR is 0%.
Yet the impact of the loan depends on what happens during the interim, not the CAGR alone. Both cases have the same CAGR yet the financial impact of the loan, relative to paying cash, depends on what happens during the 2 years.
Same with the car loan. Whether you are better off with the loan than you are without it, or vice versa, depends not only on the 5 year CAGR, but also on the returns during the intervening time.
And this is exactly what I was getting at earlier. Your 88% statistic applies only to the 5-year CAGR, but that is not sufficient to tell you whether the NPV of the loan is higher or lower than without the loan.
So the risk that the loan makes you worse than you would be had you paid cash, is not 12%. It's more than that.
Ok. So the loan makes you $1000 poorer in the first case ($3000 total NPV paying cash, rather than $2000 NPV having loan). In the second case the loan makes you $500 richer ($1500 NPV paying cash vs. $2000 taking loan).
No. The NPV is the NPV. Again, you don't seem to understand what NPV is. NPV is "Net Present Value."
Notice how in either case where you take the loan with an NPV of 0 you end up exactly where you started?
That's because it just doesn't matter what it does in this month or that month or this year or that year. The only thing that matters is the discount rate, which if you're investing in the S&P should be the CAGR adjusted for dividends and inflation. The loan in the first cast makes you $0 poorer. $2000 is $2000. The loan in the second case makes you $0 richer. $2000 is $2000. That's all NPV tells you.
What you're arguing is market timing. And that's great and all, but I don't do it. My crystal ball is sadly broken in that way. If you did, you could make a ton of money off of negative NPV!
Example:
10% simple interest, no inflation.
year 1 market goes up 100%
year 2 market goes down 50%.
Borrow money at the beginning of year 1. Invest it. Profit. Sell. Sit on proceeds.
NPV is -20%. Borrow $100, pay back $120. Come out $80 ahead.
Assuming I could borrow at 2% - which would only apply to collateralized debt such as against my savings or investments, and maybe not even then. I could probably get a passbook loan under 2% if I borrowed a small amount against a CD at the same bank, but I haven't asked.
At any rate WHY would I loan you money at 3% with no collateral? How will you convince me that I'll get paid back even if things go south?
If there were a magic way for you to guarantee me zero credit risk with no additional costs on my part, I would happily lend you $20k of my own money at 3%.
Unfortunately, there ins't, because from my perspective you could always just choose to run off and not pay. The only way to eliminate this credit risk, from my perspective, would be to put up collateral. If you had $80k in stocks you wanted to put up I might consider making the loan - although without me having a brokerage license it's doubtfully even legal.
Sorry.
The point is, you take a 2% auto loan (because the entire discussion has been about auto loans), and let me borrow just that amount.
No. The NPV is the NPV. Again, you don't seem to understand what NPV is. NPV is "Net Present Value."
Notice how in either case where you take the loan with an NPV of 0 you end up exactly where you started?
That's because it just doesn't matter what it does in this month or that month or this year or that year. The only thing that matters is the discount rate, which if you're investing in the S&P should be the CAGR adjusted for dividends and inflation. The loan in the first cast makes you $0 poorer. $2000 is $2000. The loan in the second case makes you $0 richer. $2000 is $2000. That's all NPV tells you.
You are completely misconstruing what I am saying. When I say "the loan makes you $x richer", what I mean is that "If you take the loan, your NPV is $x higher than it would be if you paid cash".
Please go back and re-read my comment in that light.
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