Are we strapped in and ready? OK, here it goes.
Yesterday I went fishing with my father. We didn't get a single bite in 4+ hours on the lake and we didn't consume a drop of alcohol, yet we had a wonderful time. There, that's it. Be sure to take a blood pressure reading and lie down if you have to. I know the thought of having fun fishing with no fish and no booze is against all the laws of God and Man, but there you have it.
In any case, I brought up the discussion we had earlier about paying off your mortgage early. My father, the man who has been my financial mentor and the savviest investor I have ever met, had one telling point to make.
He himself had split his resources between paying off his mortgages early and investing. In addition to the reasons discussed previously, he pointed out that paying your home off early frees you from the stress of having to time the sale of your investments.
The argument in favor of investing vs. paying down your mortgage boils down to this: on average, you can get a better rate of return investing in stocks than you can paying off your loan. Stocks, however, do not behave on average, they bounce all over the place. At any point in time, you may be in a bear market and your investments may be depressed. The timing of such things is not under your control. Your home mortgage has a known, constant rate of return and does not require you to exert any effort tracking or timing it.
If you are a parent or have a stressful career or just feel like devoting your time to interests other than watching your portfolio, the absence of such a demand on your time is a payoff that cannot be measured in dollars. If money were the goal of life, then yes, investing would be the answer. For most of us, money is one tool we use to achieve our goals. Other tools are our time and intellect.
While investing may generate more money, it costs more in time and effort. That cost needs to be factored in to the decision to invest or pay down the mortgage. Personally, I want to spend more time with Momma Daisy, sunsets and our Maximum Leader and less time worrying about my money. I may end up with less money, but I'll end up with more of the things I love.
Update: The outstanding blog, Secular Apostate, weighs in on the matter. He asks this crucial question (and answers it in his post):
If my mortgage were gone today, would I get another one to fund my investing activity?
KT - I have really appreciated these posts. They are well thought out and clear. However, I think there is another point to be made.
ReplyDeleteThe only thing I actually remember from my college Economics class (other than how incredibly boring the professor was), was that in order to determine how to spend your money, in a rational way, you merely need to "maximize your Utils". Now that's not much help until you know what "your Utils" are. Sadly, the economists can't tell you.
That's because a Util is defined as an items utility (measured in dollars) to the buyer.
They are saying that a maximally efficient decision depends on the investor. So although I agree with you that paying down a mortgage early has great utility, others will decide that having liquid assets has more utility, and therefore they should not pay down their mortgage. I hate to admit it, but I actually think this is right. Some people are risk takers, and want to maximize the probable return on their investments. Some want a liquid position. Some of us want security. These are all legitimate rational decisions.
The only irrational decision is to not save. To hold maximum debt. Sadly, many Americans are doing this. And sooner or later the bill comes due, with potentially devastating consequences.
Absolutely correct. As you say, those people that disagree with me are avaricious, greedy monsters whose idea of beauty is to sell their grandmothers in Rio for $40 so they can have a few more dollar bills to knit into a quilt under which they will sleep.
ReplyDeleteWell said.
Hey, all I know is that we're all goin' fishing and... your Dad is buying. ;)
ReplyDeleteKT,
ReplyDeleteThere is a way to have your cake and eat it too. You can hire a financial planner to manage the investments. You lose 1-2% in fees, but will still have a rate of return that beats your mortgage interest rate over the long haul. A good planner will also get you to shift to more conservative investments as you get close to retirement or other life goals.
For myself, since my kids are nearing the end of their time in the house and I missed a big chunk of their lives while at sea, I want to spend quality time with Mrs.
Daddy and the boys, not fretting over the portfolio.