Stock Market is the bottom in?

[FarmerDan]

Let's see what type of response we get to this scneario:

1. You have currently have 200k in a CD drawing 3% that you can pull any time for any reason. No penalty. You have had the money sitting there 2 years to buy a farm and have not found one suitable.
2. You have an additional 50k that could be easily added to this for a total investment of $250k looking for a new home.
3. You are 40 years old
4. Already have a SEP IRA and contribute maximum annually for the past 3 years. It gained 39% last year and made you feel like an idiot cause you have 212k in the bank drawing 3% and being outpaced by the printing of new money.
5. Wife already has a healthy 401k
6. Combined income disqualifies the couple from ROTH IRA in most years.
7. Record high stock market
8. High economic uncertainty and a jobs killing administration
9. No vehicle loans, no CC debt, 10k (no interest) medical bills. 15 year mortgage at 2.1%.


Lets start there.

The question is, do you know what you want? Financial well-being is a two-edged sword. It can give you independence - or it can make you a slave to always needing more.
Are you looking for this be a means to and end or an end if-and-of-itself?

1. Cash is king. Cash presents a lot of opportunities - especially when you have it and few others do. Personally I think a 3% risk free return isn't so bad - given the alternatives.
2. It depends on your aversion to risk. Me, I'm looking at commodities, gold, foreign ETFs. Most of you don't agree with me, but there's a big market correction just simmering below the surface.
3. I remember being 40.
4. Never feel like an idiot when you gain 39%. That other money earning 2% is for other purposes...and history tells us that a portfolio of investments performs better over time than a single position. When the sands shift, as they will, you'll still have your $200k.
5. I too have a healthy 401K, and now that I'm about to start withdrawals I wonder if it was such a great retirement vehicle. See your item #4. The idea was throw high tax bracket money into a deferred account and withdraw it in retirement when you are in a lower tax bracket. I wonder how that's going to work out.
6. No sweat.
7. How high - or how low can it go? I've been thru a couple of recessions in my life...and have studied them. Maybe this time it's different - but I don't think so. The Fed is playing with marked cards in my opinion.
8. I'll give you the high economic uncertainty, but we'll have to debate the influence of either political party in economic outcome. Again, in my opinion neither party has done the American public any great favors, not ever. It might feel good now, but, the hangover is awful.
9. Good for you. Debt isn't always bad, but many are looking over the edge of a cliff. Stay the course.

 

[FarmerDan]

That's not exactly true. You should definitely pay off your credit cards, but a mortgage can be an excellent way to build wealth. If I could borrow 100,000 dollars at 3% I would do it in a heartbeat. Likewise, if I had a paid-off mortgage I would go right back to the bank and take a home equity loan. Even a HELOC could have been used to build wealth this year.

A mortgage is an excellent way to build wealth? I assume we're talking about buying and living in a house - complete with taxes, insurance, and repairs? Historically, and that's all we have to go on, the nominal return on land and housing is 4%. Assume a 3% rate of inflation and your back to the traditional 1% return over inflation. Some people have defied the averages, but I could never recommend housing or land as an investment vehicle - although prime farmland is, perhaps, an interesting possibility.

 

[yoderjac]

A mortgage is an excellent way to build wealth? I assume we're talking about buying and living in a house - complete with taxes, insurance, and repairs? Historically, and that's all we have to go on, the nominal return on land and housing is 4%. Assume a 3% rate of inflation and your back to the traditional 1% return over inflation. Some people have defied the averages, but I could never recommend housing or land as an investment vehicle - although prime farmland is, perhaps, an interesting possibility.

Here is an example of how a mortgage can be inexpensive leverage. I own a home with a mortgage. I needed some place to live while I was working in the city. I could either rent or buy. I decided to buy with a mortgage. Over the years, a small fraction of my mortgage payment went to the principle slowly increasing over the hears. The lion's share of the mortgage payment went to interest and becomes a significant tax deduction. There was no guarantee that the house would appreciate over time, but it did.

I will be selling in the next couple years. If real estate values hold, I'll be able to pay off the mortgage and build my retirement home with the equity in my current home. So, I will not need a mortgage for the retirement home.

However, depending on rates at the time, I may get one. It will continue to provide a significant tax deduction. Raw market averages are about 6% or 3% inflation adjusted. So, if I can get a mortgage, invest the money and earn on average over the long term more interest than I'm paying on the mortgage, it can be a way to leverage investment.

Keep in mind, you always have the risk of dumping a large sum into the market near a bubble, but that can be addressed by cost averaging from cash into stocks. This all only makes sense to me because of the favorable treatment afforded to first mortgages. Rates are about the lowest of any financing. Interest payments are tax deductible. You've got to live in the house for it to all work.

Thanks,

Jack

 

[FarmerDan]

Here is an example of how a mortgage can be inexpensive leverage. I own a home with a mortgage. I needed some place to live while I was working in the city. I could either rent or buy. I decided to buy with a mortgage. Over the years, a small fraction of my mortgage payment went to the principle slowly increasing over the hears. The lion's share of the mortgage payment went to interest and becomes a significant tax deduction. There was no guarantee that the house would appreciate over time, but it did.

I will be selling in the next couple years. If real estate values hold, I'll be able to pay off the mortgage and build my retirement home with the equity in my current home. So, I will not need a mortgage for the retirement home.

However, depending on rates at the time, I may get one. It will continue to provide a significant tax deduction. Raw market averages are about 6% or 3% inflation adjusted. So, if I can get a mortgage, invest the money and earn on average over the long term more interest than I'm paying on the mortgage, it can be a way to leverage investment.

Keep in mind, you always have the risk of dumping a large sum into the market near a bubble, but that can be addressed by cost averaging from cash into stocks. This all only makes sense to me because of the favorable treatment afforded to first mortgages. Rates are about the lowest of any financing. Interest payments are tax deductible. You've got to live in the house for it to all work.

Thanks,

Jack

Your in Northern Virginia where there is no average value. There are exceptions, but most markets don't work like the one you play(ed) in. Still, I think if you honest about it and consider all the costs associated with working "in the city" you got no windfall. You earned it! The best view of WDC and Northern Virginia is in my rearview mirror as I escape the insanity!
Best Wishes!

 

[Mortenson]

Gamestop. I had to have missed it here. Who's getting or going after a piece of the action? Reddit says going much higher. Will the exchange allow?

 

[bwoods11]

Rumor is the kids are going to bid up SiriusXM! If they do I’ll be loving it! Long time shareholder.

 

[Mortenson]

Rumor is the kids are going to bid up SiriusXM! If they do I’ll be loving it! Long time shareholder.

Is that the biggest darling ya think tomorrow? I've been tagging along for roughly 1 hour and see Nokia, Gamestop and Blackberry all as rollercoasters. Hmm... think I have $150 in cash in my etrade account, now if I can just remember my PW

Also learning a lot of reddit lingo tonight. They like to use references and memes. I think "tendies" refers to guys with neck beards.

 

[bwoods11]

That’s just what I heard from my son ...Who knows ?

 

[OakSeeds]

"Here is an example of how a mortgage can be inexpensive leverage. I own a home with a mortgage. I needed some place to live while I was working in the city. I could either rent or buy. I decided to buy with a mortgage. Over the years, a small fraction of my mortgage payment went to the principle slowly increasing over the hears. The lion's share of the mortgage payment went to interest and becomes a significant tax deduction. There was no guarantee that the house would appreciate over time, but it did."

Yoderjac .... I'd like to see you argue that position with Dave Ramsey ... looooong mortgage (e.g., 30 yr) with little principle reduction annually to get bigger interest tax deduction. Let's say your marginal tax rate is 25%; how much money did that strategy give you vs paying off the abode early and investing in vehicles that paid much bigger returns? And the first 10 years when the interest deduction was the greatest, your compensation may have been relativly low compared to that of the last 10 years (now) when the lions share of your mortgage eliminates principle.

While I'm no big fan/proponent of Ramsey, he does help a lot of folks who lack financial management skills. Currently, I feel most sorry for older retirees who may have a relatively small corporate pension and are trying to live off of supplemental income from savings. With the Fed's actions on interest rates over the past 4-6 years, banks can borrow all the money they need for a very insignificant cost. Makes CD rates on their savings suck and pushes many older folks toward more excpensive vehicles like annuities. Do any of you remember the CD rate of 15.9% on a 5 yr CD in 1981? Ya, i know that's a long time ago; however, I lot of folks would have locked their dough for life if they could (almost 16% annual return with no risk).

 

[yoderjac]

Your in Northern Virginia where there is no average value. There are exceptions, but most markets don't work like the one you play(ed) in. Still, I think if you honest about it and consider all the costs associated with working "in the city" you got no windfall. You earned it! The best view of WDC and Northern Virginia is in my rearview mirror as I escape the insanity!
Best Wishes!

I'm hoping to escape soon. Perhaps that market is somewhat more protected as you say, but our house still has not recovered to the previous highs prior to the bubble burst. We were fortunate enough to have bought long ago in a previous dip. My other option was to rent and would have been in much worse shape if I had.

Having said that, my point was not the increase in value of my current home over time. My point was to provide an example of a mortgage being used for investment leverage. Not my previous house, that was background information. It is my future retirement home where I may get a mortgage as "cheap money" for investment.

Thanks,

Jack

 

[yoderjac]

"Here is an example of how a mortgage can be inexpensive leverage. I own a home with a mortgage. I needed some place to live while I was working in the city. I could either rent or buy. I decided to buy with a mortgage. Over the years, a small fraction of my mortgage payment went to the principle slowly increasing over the hears. The lion's share of the mortgage payment went to interest and becomes a significant tax deduction. There was no guarantee that the house would appreciate over time, but it did."

Yoderjac .... I'd like to see you argue that position with Dave Ramsey ... looooong mortgage (e.g., 30 yr) with little principle reduction annually to get bigger interest tax deduction. Let's say your marginal tax rate is 25%; how much money did that strategy give you vs paying off the abode early and investing in vehicles that paid much bigger returns? And the first 10 years when the interest deduction was the greatest, your compensation may have been relativly low compared to that of the last 10 years (now) when the lions share of your mortgage eliminates principle.

While I'm no big fan/proponent of Ramsey, he does help a lot of folks who lack financial management skills. Currently, I feel most sorry for older retirees who may have a relatively small corporate pension and are trying to live off of supplemental income from savings. With the Fed's actions on interest rates over the past 4-6 years, banks can borrow all the money they need for a very insignificant cost. Makes CD rates on their savings suck and pushes many older folks toward more excpensive vehicles like annuities. Do any of you remember the CD rate of 15.9% on a 5 yr CD in 1981? Ya, i know that's a long time ago; however, I lot of folks would have locked their dough for life if they could (almost 16% annual return with no risk).

Don't get me wrong. I did not buy the home to get the interest deduction. My point was that the lower cost of first mortgage money and the interest deduction make it the cheapest money you can get. It is also very long term money. That allows one to have more confidence in average stock market returns over time. Rental cost were similar to mortgage cost. My monthly layout over the years would have been very similar rent vs buy for an equivalent property. Had I rented all those years I would have zero equity to show for it.

I must not have been clear with my post, because I was not trying to argue that the mortgage on my current home was a financial investment. You are not the only one to miss my point. My point was that if I choose to take out a mortgage on my retirement home (not needing one), and invest that money, it will be an example of a mortgage being used for investment leverage as very inexpensive money.

Dave Ramsey's arguments tend to apply most to folks using credit to live beyond their means. I is more of a lifestyle and priority argument than an investment strategy. I watched some of his videos when I was young and I've got a friend who teaches classes based on Ramsey's approach.

Thanks,

Jack

 

[yoderjac]

Rumor is the kids are going to bid up SiriusXM! If they do I’ll be loving it! Long time shareholder.

It is a fools game. Like a ponzi scheme. You really don't want to be the last man standing. Maybe like playing chicken. Eventually someone loses their nerve and veers off or the cars collide and explode.

 

[FarmerDan]

Don't get me wrong. I did not buy the home to get the interest deduction. My point was that the lower cost of first mortgage money and the interest deduction make it the cheapest money you can get. It is also very long term money. That allows one to have more confidence in average stock market returns over time. Rental cost were similar to mortgage cost. My monthly layout over the years would have been very similar rent vs buy for an equivalent property. Had I rented all those years I would have zero equity to show for it.

I must not have been clear with my post, because I was not trying to argue that the mortgage on my current home was a financial investment. You are not the only one to miss my point. My point was that if I choose to take out a mortgage on my retirement home (not needing one), and invest that money, it will be an example of a mortgage being used for investment leverage as very inexpensive money.

Dave Ramsey's arguments tend to apply most to folks using credit to live beyond their means. I is more of a lifestyle and priority argument than an investment strategy. I watched some of his videos when I was young and I've got a friend who teaches classes based on Ramsey's approach.

Thanks,

Jack

I get your point, Jack, but the original advice (not from you although you did jump on the pile) was that a mortgage is an excellent, well, I forget the rest of it.

This is just my opinion / advice for the uninitiated. Separate your normal living, consumer-driven expenditures from your investment objectives and actions. Sure one affects the other, but right from the beginning we should stop the discussion about mortgages and trucks and how to buy / finance those things from investments. You need a place to live? It costs money. You can build a case for buying. I can build a case for renting (until a hot market cools down - maybe, or maybe not). Need wheels to get around? We all do. Wheels are not an investment. They are a terrible expense. Choose what level of expense you want. Those things aside, we can start talking about investments.

 

[H20fwler]

I’m not up on the whole mortgage vs no mortgage debate…all I know from personal experience is it’s always been better for the wife and I as we bought homes to get as short term as we could possibly afford. And having a house or property paid for sure makes me sleep better at night!

 

[roymunson]

This is just my opinion

From you? An opinion?

I'm shocked...

 

[Tree Spud]

I get your point, Jack, but the original advice (not from you although you did jump on the pile) was that a mortgage is an excellent, well, I forget the rest of it.

This is just my opinion / advice for the uninitiated. Separate your normal living, consumer-driven expenditures from your investment objectives and actions. Sure one affects the other, but right from the beginning we should stop the discussion about mortgages and trucks and how to buy / finance those things from investments. You need a place to live? It costs money. You can build a case for buying. I can build a case for renting (until a hot market cools down - maybe, or maybe not). Need wheels to get around? We all do. Wheels are not an investment. They are a terrible expense. Choose what level of expense you want. Those things aside, we can start talking about investments.

Very good perspective on cost of living expenses vs investment $$. The lower you keep your living expenses to what you need vs what you want, the more $$ you will have to invest. The earlier you do this in life, the more flexibility & choices you have as you get older ... retire early, start a business, travel, volunteer work, etc.

 

[yoderjac]

I get your point, Jack, but the original advice (not from you although you did jump on the pile) was that a mortgage is an excellent, well, I forget the rest of it.

This is just my opinion / advice for the uninitiated. Separate your normal living, consumer-driven expenditures from your investment objectives and actions. Sure one affects the other, but right from the beginning we should stop the discussion about mortgages and trucks and how to buy / finance those things from investments. You need a place to live? It costs money. You can build a case for buying. I can build a case for renting (until a hot market cools down - maybe, or maybe not). Need wheels to get around? We all do. Wheels are not an investment. They are a terrible expense. Choose what level of expense you want. Those things aside, we can start talking about investments.

I think that is a hard thing for young folks to do. Oakseed mentioned Dave Ramsey. Before you can really invest, you need to have something to invest. Perhaps the physicians rule of "do no harm" is the place to start. When folks are starting out, understanding how to avoid the bleeding and making lifestyle choices that deplete resources is key. Things like not paying off credit cards monthly, leasing or buying new vehicles focusing on monthly payment rather than term and interest rate are important. Doing things like sending your car payments directly into savings after you pay off the car rather than expanding your lifestyle start the process of accumulating cash. Most assets we buy depreciate over time. The personal home market has been different over my lifetime, and understanding rent/buy decisions are important. This ties living expenses in with investment to some degree. Or at least it did for our generation. With higher mobility and shorter-term jobs, that may not be the same for the next generation.

After that, when a youngster has started accumulating cash, you can separate investing that cash from normal living.

Thanks,

Jack

 

[S.T.Fanatic]

When it comes to monthly payments and saving money by reducing interest paid, make your house and car payment twice a month instead of 1 time a month. Most people get paid twice a month anyway. If your house payment is $1000.00 per month pay $500 on the 1st and $500 on the 15. This will greatly reduce the amount of interest you pay over the lifetime of the loan.

Crazy how some people will buy a car and put it on their house loan. Who wants to pay for their car over 20 years?

 

[Chainsaw]

We got lucky with our house of many years ago. We were able to pay off the mortgage using no interest credit cards and then pay off those cards as the interest kicked in with more no interest credit cards and when the no interest cards stopped becoming available we were able to just pay them all off. Avoided paying a lot of bank interest.

 

[S.T.Fanatic]

DMTK Looking good today.