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ncole1, I realized how this would all make sense. I have excellent collateral. Would you consider it a good deal to loan me a few hundred thousand for 30 years at a fixed 3.75% interest rate? You could get a nice, safe return with no worries about the future bond and stock yields.
If I had 3mm+ in assets, I would see it as a good idea to lend $200k or $300k at 3.75%, because this beats the return I can expect on bonds going forward. The rest can go into equities in a diverse portfolio.
And I know exactly what you're thinking - "But I've made 8-10% (or 4-5%) on my bonds!"
The problem with this argument is that, if you account for the relation between yield changes and capital gain/loss of bonds, then you must either admit (A) that you do not expect this to continue, in which case it's moot because only forward returns are relevant to current decisions, or (B) you do expect this to continue, in which case I still would make a loan, because the note will be valued at a premium when yields fall further!!!!
And I have covered all the possibilities regarding future rates, so you cannot accuse me of looking at worst cases - I just considered all the cases.
You beat me to it. I was going to ask them them which they preferred. $500,000 cash or 360 payments of $2684 (5%). It's one thing to do "what if " figgering and quite another to put your money where your mouth is. I can take it in $100,000 increments.
Do you own any bonds or bond mutual funds, at all?
If I had 3mm+ in assets, I would see it as a good idea to lend $200k or $300k at 3.75%, because this beats the return I can expect on bonds going forward. The rest can go into equities in a diverse portfolio.
And I know exactly what you're thinking - "But I've made 8-10% (or 4-5%) on my bonds!"
The problem with this argument is that, if you account for the relation between yield changes and capital gain/loss of bonds, then you must either admit (A) that you do not expect this to continue, in which case it's moot because only forward returns are relevant to current decisions, or (B) you do expect this to continue, in which case I still would make a loan, because the note will be valued at a premium when yields fall further!!!!
And I have covered all the possibilities regarding future rates, so you cannot accuse me of looking at worst cases - I just considered all the cases.
I am sure you are very aware that there are huge differences between bonds and bond funds including different returns under different conditions and different reasons to own them. Trying to equate either of them with owning a 30 yr fixed mortgage makes even less sense.
I am sure you are very aware that there are huge differences between bonds and bond funds including different returns under different conditions and different reasons to own them. Trying to equate either of them with owning a 30 yr fixed mortgage makes even less sense.
I wasn't equating them - I was arguing that unless rates change drastically, mortgage notes can be a better investment than bonds of the same effective duration, and I believe they will be.
The extreme cases of very high and very low future rates are the exception - mortgage notes are said to have negative convexity for this reason. To compensate for the negative convexity, a premium is charged, which means the investor comes out ahead on mortgage notes compared to bonds if rates remain modest.
ncole1: I suspect that if we had this conservation a couple of years ago when I was taking out a mortgage, I would have heard the same predictions from you. Stocks are too high; bond returns will remain low. You would have been wrong. It is very likely that we can have this same conservation a couple of more years from now. You will be making the same comments about poor returns going forward. You probably think you will be right at some time in the future. I don't. You will always be wrong. If at some point in the future your worst cases become true, the bad times will not last. We are talking a 30 yr mortgage. If we have a period of 30 years with bad returns and a disastrous economy, you should indeed look for the bomb shelter and become a survivalist.
ncole1: I suspect that if we had this conservation a couple of years ago when I was taking out a mortgage, I would have heard the same predictions from you. Stocks are too high; bond returns will remain low. You would have been wrong.
I did not say stocks are too high. I am saying bonds are too high, and that stocks fluctuate a lot in value.
Quote:
Originally Posted by jrkliny
It is very likely that we can have this same conservation a couple of more years from now. You will be making the same comments about poor returns going forward. You probably think you will be right at some time in the future. I don't. You will always be wrong.
Nope. I considered all the possibilities, so it is logically impossible for me to be wrong.
You will be making the same comments about poor returns going forward. You probably think you will be right at some time in the future. I don't. You will always be wrong. If at some point in the future your worst cases become true, the bad times will not last. We are talking a 30 yr mortgage. If we have a period of 30 years with bad returns and a disastrous economy, you should indeed look for the bomb shelter and become a survivalist.
Straw man after straw man after straw man, it just never ends, does it?
I am making an epistemological claim, not one about whether you will come out ahead.
I will say it once and hope I don't have to say it again: I never, ever, even once, said you will lose with your strategy. And I do not say that now, and I will never say it in the future.
I am simply saying that I don't know, and you don't know either.
I guess you are right. You cannot be wrong if you just consider possibilities but never arrive at a conclusion or take any action.
None of us has a crystal ball. What we have is (a) a set of possibilities to consider; (b) An individual risk tolerance level; and (c) An overall financial picture.
The decision that one makes on allocation and types of capital must be based on these factors; (b) and (c) differ from one person to another.
The way one arrives at a conclusion does not require that one insists that a given market event will occur, or will not occur.
Rather, I am saying something more like "The risk is this, the benefit is that, if the benefit is worth the risk, take the risk, and if it isn't, don't."
Now are you complaining that I don't describe what I think an appropriate risk tolerance is, and why? If this is the issue you have, then all I really think needs to be said is that it varies from person to person because it depends on both individual preferences and individual comforts. Other unknowns also may have indirect effects, which can be minimized with appropriate insurances (health, long-term disability, home, car, etc.)
And I don't really know how you are assuming I take no action - I have a few passive, unleveraged, investment portfolios, to which I add more every year. I am always allocating capital in some way or another, just as you.
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