Case in point: paying down your mortgage is a subject that always gets a rise out of my readers.
I see it very simply:
If mortgage rates are currently 5%, what investments can give you 5% + whatever margin you feel you need to compensate you for risk?
How ‘risky’ is that risk? And, what do you stand to lose?
Some people, like Executioner, look at the 100% risk/loss scenario:
Although I’ll concede that it is unlikely that a broad index fund would ever drop to zero, it’s not outside the realm of possibility.
Sure, it’s not outside the realms of possibility, but has it EVER happened?
What’s the worst 30 year return that the stock market (as represented by, say, the entire S&P500), a basket of ‘blue chips’ (say, Coke + Berkshire Hathaway + GE + IBM etc.) have returned, or any solid piece of real-estate (be it residential or commercial)?
I’m betting that it’s not zero … not, by a long-shot!
But, maybe the rules have suddenly changed?
Neil thinks so, at least when it comes to house values:
House appreciation used to be a sure bet, but it isn’t any more.
But, I can’t help wondering … we used to say: “the market is going UP, blue sky everywhere … the rules have changed, it’s going to keep going UP”.
And, that thinking, of course, lead to ridiculously high valuations of both stocks and RE … and, a correction had to come.
And, it did. Big time!
Now, we seem to be saying: “no 8% returns for next 30 years [Executioner]” or “House appreciation used to be a sure bet, but it isn’t any more [Neil]” … “the risk/reward balance is different now [I made this one up]”.
So, I can’t help wondering:
If this is really the case … if things really weren’t different BEFORE (i.e. the market couldn’t keep climbing) are they really different NOW (or, can the market really keep falling?) …
… or, are we just guilty of doing more ‘rear mirror’ personal financial management?
I can’t give you the answer … only 30 years of ‘future history’ can do that!
But, if things haven’t suddenly changed PERMANENTLY – if the fundamental principles really haven’t changed – then, isn’t a ‘down market’ a GOOD time to buy?
Or, is that just the way that Warren Buffett thinks?
And, I know one which side of this coin I’ll be betting on 😉