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[fisher]

I guess you glanced over my post and missed words like "not being a day trader" or when "mortgage rates are low". My definition of conservative is they did not have any credit debt or car payments. They took fixed rate mortgages, usually 15 year terms.
In full disclosure, I am a mortgage broker by referral only with a large percentage of those referrals coming from Financial Planners.
I am not sure where you are getting your numbers from but also they do not appear to be taking into account the mortgage tax deduction.

Since 1927, the S&P 500 stock index has gained 10.4% a year on average. But in any given year it could be up 29.9% or down 9.0% or somewhere in between, says IFA.com. The trick is understanding that risk is a fact of investing. And it's also knowing you can manage risk intelligently by deciding how much risk you want to take and tailoring your portfolio to generate the top return for your level of acceptable risk.
To do that, it's important to understand the power of diversification and the benefits of owning many types of stocks, from large value-priced stocks to small value-priced stocks. Diversification lets you minimize the risk posed by a single stock or type of stock and lets you still get your share of the market's return. You must also understand that to claim your 10% return, you need to be invested for a number of years and ignore short-term stock movements.

The Borrowers I had take mortgages who didn't need to understood these principles, were not overweighted in anyone one investment and also had cash reserves. They also had low loan to values on their homes, so no risk of losing it if the economy tanks.

The decision to do such is obviously not for everyone. A good financial planner obviously would not recommend this to people reaching retirement where risk should be lessened or those who will do the freak out everytime the market blips. Some people also just like to know they have no mortgage, that's cool, but there are those who have proven themselves to be financially savvy and it has worked out well for them.

You wouldn't also have a screen name of Little Fish too would you Fisher?

I answered your point directly. I was not assuming these folks were day traders. I assumed they were long term investors in my analysis. I didn't cut and paste an article that quotes a 10% average return. I actually went back and did the math. Niether the DJIA or the S&P 500 have gotten anywhere near 10% over the long term. In very short term bursts, maybe, but over the long, long term, no.

And, no, not little fish.

 

[Mango]

I answered your point directly. I was not assuming these folks were day traders. I assumed they were long term investors in my analysis. I didn't cut and paste an article that quotes a 10% average return. I actually went back and did the math. Niether the DJIA or the S&P 500 have gotten anywhere near 10% over the long term. In very short term bursts, maybe, but over the long, long term, no.

And, no, not little fish.

Fisher, I did view your numbers and I also googled the bejeesus out of the numbers as well. Here is a Yale Study done in 2001 that examined 6 different methods of decomposing historical returns from 1926-2000. The historical return the study shows is 10.6% from Data obtained from Wilson and Jones.

But setting that aside, I will not debate S & P returns since it is not my topic of expertise, but lets examine if someone bought or refinanced in 2004, took a 15 year fixed rate mortgage, where rates ranged between 4.50-5% or so. I will use 5% for this scenario. Using a 33% tax bracket. The effective rate is then 3.35% with mortgage deduction. If I used your lowest rate of return since 1927 which was 6%, would you not argue that fiscally it made sense at that time to put money into an investment vehicle where those funds will be compounding?

I want to be pointed that not all need apply for the above.
The people who did this had a certain level of financial maturity, monitored their investments closely and may have also had other tax/estate pressing reasons for doing such.

 

[fisher]

Fisher, I did view your numbers and I also googled the bejeesus out of the numbers as well. Here is a Yale Study done in 2001 that examined 6 different methods of decomposing historical returns from 1926-2000. The historical return the study shows is 10.6% from Data obtained from Wilson and Jones.

But setting that aside, I will not debate S & P returns since it is not my topic of expertise, but lets examine if someone bought or refinanced in 2004, took a 15 year fixed rate mortgage, where rates ranged between 4.50-5% or so. I will use 5% for this scenario. Using a 33% tax bracket. The effective rate is then 3.35% with mortgage deduction. If I used your lowest rate of return since 1927 which was 6%, would you not argue that fiscally it made sense at that time to put money into an investment vehicle where those funds will be compounding?

I want to be pointed that not all need apply for the above.
The people who did this had a certain level of financial maturity, monitored their investments closely and may have also had other tax/estate pressing reasons for doing such.

Mango, don't forget the taxes you must pay on the returns you get. You must compare pretax to pretax or after tax to after tax. I am keeping it simple by comparing pretax to pretax on both the mortgage and investment side. Also, remember that the mortgage rates quoted above are conventional loans. Many of the folks financing homes along 30A are taking out jumbos that have a higher rate making it an even better deal to payoff the mortgage. ;-)

As for your example above. If you had taken out a 30 year mortgage in January 2004, you would have paid roughly 5.7% plus .7 points making your APR closer to 6%. In January 2004, the DJIA stood at about 10600. The DJIA now stands at about 12100. Your return since 2004 on the DJIA would stand at a mere 4.5% with no day trading--we are talking long term investing here in a diversified portfolio. Paying cash still would have been a much better deal in your example. You would be saving yourself a guaranteed 5.7% annually versus making 4.5% annually on a risky investment. Hands down a better deal to pay cash for the house.

 

[Mango]

Mango, don't forget the taxes you must pay on the returns you get. You must compare pretax to pretax or after tax to after tax. I am keeping it simple by comparing pretax to pretax on both the mortgage and investment side. Also, remember that the mortgage rates quoted above are conventional loans. Many of the folks financing homes along 30A are taking out jumbos that have a higher rate making it an even better deal to payoff the mortgage. ;-)

As for your example above. If you had taken out a 30 year mortgage in January 2004, you would have paid roughly 5.7% plus .7 points making your APR closer to 6%. In January 2004, the DJIA stood at about 10600. The DJIA now stands at about 12100. Your return since 2004 on the DJIA would stand at a mere 4.5% with no day trading--we are talking long term investing here in a diversified portfolio. Paying cash still would have been a much better deal in your example. You would be saving yourself a guaranteed 5.7% annually versus making 4.5% annually on a risky investment. Hands down a better deal to pay cash for the house.

Explain your definition of long term to you because based on your example of 4 years, I am assuming this is what you mean by long term. It's not what I was comparing to. You also are making the assumption that people used funds in the market that generated taxable capital gains as opposed to maximizing their contributions to pension plans, ie; self employed persons, which are not subject to taxes. You're also using 4.5% in your above example, but 4.5% of what amount? The amount initially invested, or the compounded balance. We are also just using S&P figures as well. The people who were successful with our conversation invested in International stocks, bonds, tax free AAA muni bonds, in general have well rounded portfolios and pay close attention to them varying the mix based on market conditions.
Interesting topic, glad it was raised. Hopefully someone who has experience in financial planning will chime in with their opinions.

 

[fisher]

Explain your definition of long term to you because based on your example of 4 years, I am assuming this is what you mean by long term. It's not what I was comparing to. You also are making the assumption that people used funds in the market that generated taxable capital gains as opposed to maximizing their contributions to pension plans, ie; self employed persons, which are not subject to taxes. You're also using 4.5% in your above example, but 4.5% of what amount? The amount initially invested, or the compounded balance. We are also just using S&P figures as well. The people who were successful with our conversation invested in International stocks, bonds, tax free AAA muni bonds, in general have well rounded portfolios and pay close attention to them varying the mix based on market conditions.
Interesting topic, glad it was raised. Hopefully someone who has experience in financial planning will chime in with their opinions.

I was simply responding to your example of taking out a mortgage in 2004. In addition, you eventually pay taxes on virtually all investments including those made into retirement plans. In every example I gave, paying off the mortgage would have been the best long term or short term bet. AAA bonds and tax free munis will never beat the risk free rate of paying off your mortgage. International stocks may work in the short term snapshots, but not over the long term. Again, paying off your mortgage is risk free. There are no risk free rates that exceed mortgage rates at any given point in time that I am aware of.

Again, conservative financial planners (not those who are also selling investment vehicles or taking a cut of investable dollars from their clients) will almost always tell you to pay off the mortgage.

 

[Bob]

And don't forget that even though the iPod says Apple on the box, it is made in China, same as the cheap toaster.

Consumer purchases, comprise roughly three quarters of our economy. Giving back a little of the income already earned by the taxpayer is not a free money giveaway. Those tax dollars spent in the short term will have some beneficial effect.

 

[Bob]

I was simply responding to your example of taking out a mortgage in 2004. In addition, you eventually pay taxes on virtually all investments including those made into retirement plans. In every example I gave, paying off the mortgage would have been the best long term or short term bet. AAA bonds and tax free munis will never beat the risk free rate of paying off your mortgage. International stocks may work in the short term snapshots, but not over the long term. Again, paying off your mortgage is risk free. There are no risk free rates that exceed mortgage rates at any given point in time that I am aware of.

Again, conservative financial planners (not those who are also selling investment vehicles or taking a cut of investable dollars from their clients) will almost always tell you to pay off the mortgage.

Those conservative financial planners must have been hiding the last 20 years.

 

[beachmouse]

How's the disclaimer go? Past returns are not necessarily an indicator of future performance.

My concern over the next 20 years comes from the baby boomers- a lot of them are going to be selling off investments in order to have cash for retirement. Who's going to come along to increase the number of buyers for stock to keep it somewhat in equilibrium with the growing number of sellers?

I'm tending to see it as yet another way the Gen Xers are going to get the demographic squeeze put on them, and that we're looking at lower return rates in the medium-long term unless there's a significant increase from somewhere in the number of people buying American stocks, or the boomers start dying off in large numbers.

 

[Mango]

Again, conservative financial planners (not those who are also selling investment vehicles or taking a cut of investable dollars from their clients) will almost always tell you to pay off the mortgage.

Fisher, frankly I do not feel that there is any one right answer. It all depends on the level of risk aversion one has.
Here's an interesting article that vocalizes multiple opinions.
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[SHELLY]

Fisher, frankly I do not feel that there is any one right answer. It all depends on the level of risk aversion one has.
Here's an interesting article that vocalizes multiple opinions.
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Excellent article...there is no one-size-fits-all when it comes to investing. If someone writes in an article "this is the ONLY/BEST way/time to invest/buy" your BS alarm should be blinking red....or better yet, appear on a BIG BLUE SIGN.

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