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Started By
Message
Do you under estimate risk when making investment decisions like paying off debts?
Posted on 4/20/20 at 9:28 am
Posted on 4/20/20 at 9:28 am
I have watched time and time again posters bash folks that want to pay down their home mortgage or pay cash for cars. They talk about opportunity cost of money used to pay down debt and act as if they are one of the few that understand the miracle of compound returns.
What they can never quantify is risk. Even though they can read that T-bills, the ultimate risk free investment in the USA I suppose, are trading at all time highs because other investors have bid them up they often times fail to understand and fail to try to understand the actual cost of risk.
One thing that I warn people about is looking at the average returns of the market. The DOW now has a historical 15 year yield of 6.02% before you pay taxes, a 10 year of 8.2%, a 5 year of 6.34%, a 3 year of 5.51%, a three month of -15.05%. You can see one has to be careful in using averages with making sure you are using comparable time frames.
Consider the guy with $10,000 in the DOW 90 days ago. He now has only $8495 having lost $1505. It will take three years at the 15 year average return of 6.02% to get back to $10,000. At the end of the three years his return will have been 0. During that three years his risk of an another crash are still there.
I invest quite heavily relative to my net worth in the stock market but I sleep well because I have no "cost of living" debt. No house note. No car note. No credit card debt. That has not always been the case (I have NEVER carried a debt on a credit card since I had my first one in 1975). I have had car notes and home mortgages but do not now and do not intend to get either ever again.
I can tell you it is good to feel secure--to not be beholding to any employer, any customer of my business or any bank to meet the day to day cost of my living.
I also invest in some home building and I invest the earnings of my main business primarily into my business. I have lived the last 25 or 30 years by a maxim an old rich guy told me---never borrow for your cost of living and never borrow for things that depreciate and borrow all you can for things that appreciate and/or produce income.
It doesn't bother me at all to borrow a million dollars to buy a machine we need at work. I would never borrow a million dollars for a house to live in.
There is safety in paying down your debts. Never feel bad about doing that.
What they can never quantify is risk. Even though they can read that T-bills, the ultimate risk free investment in the USA I suppose, are trading at all time highs because other investors have bid them up they often times fail to understand and fail to try to understand the actual cost of risk.
One thing that I warn people about is looking at the average returns of the market. The DOW now has a historical 15 year yield of 6.02% before you pay taxes, a 10 year of 8.2%, a 5 year of 6.34%, a 3 year of 5.51%, a three month of -15.05%. You can see one has to be careful in using averages with making sure you are using comparable time frames.
Consider the guy with $10,000 in the DOW 90 days ago. He now has only $8495 having lost $1505. It will take three years at the 15 year average return of 6.02% to get back to $10,000. At the end of the three years his return will have been 0. During that three years his risk of an another crash are still there.
I invest quite heavily relative to my net worth in the stock market but I sleep well because I have no "cost of living" debt. No house note. No car note. No credit card debt. That has not always been the case (I have NEVER carried a debt on a credit card since I had my first one in 1975). I have had car notes and home mortgages but do not now and do not intend to get either ever again.
I can tell you it is good to feel secure--to not be beholding to any employer, any customer of my business or any bank to meet the day to day cost of my living.
I also invest in some home building and I invest the earnings of my main business primarily into my business. I have lived the last 25 or 30 years by a maxim an old rich guy told me---never borrow for your cost of living and never borrow for things that depreciate and borrow all you can for things that appreciate and/or produce income.
It doesn't bother me at all to borrow a million dollars to buy a machine we need at work. I would never borrow a million dollars for a house to live in.
There is safety in paying down your debts. Never feel bad about doing that.
This post was edited on 4/20/20 at 9:38 am
10
Posted on 4/20/20 at 9:44 am to I B Freeman
My take away from your entire post which was way too long for your point is summed up by the quote below.
I want to emphasize an even smaller portion of the emphasized quote above.
Everything you brought up is about "feel". Most folks have brought up the psychological portion of personal finances. That is the portion that is very different from person to person. You brought NO quantitative argument to pay off debt versus investing. Your entire point is useless because you bring up 1 single lump sum investment in the middle of a recession or at the least downturn. The balance of a single $10,000 investment during a recession/downturn does not negate math. Do some math and get back to me.
Please provide the break even time period for investing versus paying off debt based on the annual rate of return and the interest rate of the debt. Your 6% returns that you are trying to make sound small are still larger than the interest rates on mortgages (3-3.5%) which is the general discussion on the board (mortgage vs market).
ETA: All of this is moot because everyone is making decisions based on speculating at future market returns. No one knows that answer but the best we can do is use historical performance with some educated "guesses" about where we are going in the future.
quote:
I can tell you it is good to feel secure
I want to emphasize an even smaller portion of the emphasized quote above.
quote:
feel
Everything you brought up is about "feel". Most folks have brought up the psychological portion of personal finances. That is the portion that is very different from person to person. You brought NO quantitative argument to pay off debt versus investing. Your entire point is useless because you bring up 1 single lump sum investment in the middle of a recession or at the least downturn. The balance of a single $10,000 investment during a recession/downturn does not negate math. Do some math and get back to me.
Please provide the break even time period for investing versus paying off debt based on the annual rate of return and the interest rate of the debt. Your 6% returns that you are trying to make sound small are still larger than the interest rates on mortgages (3-3.5%) which is the general discussion on the board (mortgage vs market).
ETA: All of this is moot because everyone is making decisions based on speculating at future market returns. No one knows that answer but the best we can do is use historical performance with some educated "guesses" about where we are going in the future.
This post was edited on 4/20/20 at 9:47 am
Posted on 4/20/20 at 9:51 am to I B Freeman
quote:
I have lived the last 25 or 30 years by a maxim an old rich guy told me---never borrow for your cost of living and never borrow for things that depreciate and borrow all you can for things that appreciate and/or produce income
You call that living?
People spend far too much time accumulating money and far too little enjoying life.
Posted on 4/20/20 at 10:05 am to I B Freeman
quote:
of my main business primarily into my business.
chinese trinkets
I B A CHYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYNA MAN
Posted on 4/20/20 at 10:11 am to I B Freeman
quote:
I invest quite heavily relative to my net worth in the stock market but I sleep well because I have no "cost of living" debt. No house note. No car note. No credit card debt. I have had car notes and home mortgages but do not now and do not intend to get either ever again.
#metoo
feels great
Posted on 4/20/20 at 10:31 am to TigrrrDad
I am not going to leave my estate with a 7 year car note to pay or a 30 year mortgage on a house that may not be worth the note.
There are very few toys I want that I do not have.
I dont want a lot of things and frankly would like to get rid of some stuff.
I am not going to buy a Rolex watch or big diamonds or a $20,000 UTV or a King Ranch truck. I just dont want them.
I did look at new boat and am looking to upgrade to another camp.
I am thinking of renting a beach house for the entire summer and fall so the wife can go over whenever she wants.
I don't think I am missing out on much that I really want.
I damn sure am not going to stay in debt to get such toys.
There are very few toys I want that I do not have.
I dont want a lot of things and frankly would like to get rid of some stuff.
I am not going to buy a Rolex watch or big diamonds or a $20,000 UTV or a King Ranch truck. I just dont want them.
I did look at new boat and am looking to upgrade to another camp.
I am thinking of renting a beach house for the entire summer and fall so the wife can go over whenever she wants.
I don't think I am missing out on much that I really want.
I damn sure am not going to stay in debt to get such toys.
Posted on 4/20/20 at 10:43 am to I B Freeman
quote:
had my first one in 1975
So you are 60+ years old preaching about “no cost of living” debt. The audacity.
Posted on 4/20/20 at 10:46 am to I B Freeman
everything in your post is correct as written.
the problem is mr 10,000 should continue to DCA over the next 3 years so when he gets his average returns over that time he makes money faster on the way up.
no one has ever advocated lump sum investments in the market, ever. that seems to be a laymans argument.
the problem is mr 10,000 should continue to DCA over the next 3 years so when he gets his average returns over that time he makes money faster on the way up.
no one has ever advocated lump sum investments in the market, ever. that seems to be a laymans argument.
Posted on 4/20/20 at 11:03 am to brokelikeajoke
Actually it is very split between DCA and lump sum. Statistically speaking the majority of the time you are better off lump sum.
LINK
The issue is that he is cherry picking a single time when the investment was not very good. Where will that $10,000 be in 10+ years and what if you lump sum invested on March 23rd.
LINK
The issue is that he is cherry picking a single time when the investment was not very good. Where will that $10,000 be in 10+ years and what if you lump sum invested on March 23rd.
Posted on 4/20/20 at 11:16 am to I B Freeman
quote:
Do you underestimate risk when making investment decisions like paying off debts?
People do and risk isn't absolute, it varies, and its "expensive" to eliminate risk.
There is a big difference of taking out a mortgage and two car payments that is 50% of your income vs. doing it when its 15-20% of your income.
quote:
Consider the guy with $10,000 in the DOW 90 days ago. He now has only $8495 having lost $1505. It will take three years at the 15 year average return of 6.02% to get back to $10,000. At the end of the three years his return will have been 0. During that three years his risk of an another crash are still there.
This is completely pointless anecdote, 3 years?
quote:
never borrow for your cost of living and never borrow for things that depreciate
limit the amount of depreciating assets you buy period, it doesn't matter if you finance them or not. Hell you drop 50k in cash for a new bmw or get a 2% or less loan, i'll take the optionality of having more cash flow. The financing loss is the only difference between the two scenarios and unless it limits how much you can take out to buy an appreciating asset, then it remains the only difference.
The whole concept revolves around buying things you cant afford, not financing.
Posted on 4/20/20 at 11:50 am to barry
What I do know is keeping at mortgage @ 2.5% - 3.75% and 0 to 0.9% interest on vehicles has enabled me to make a lot of money with excess cash to invest. My mortgage is approximately 20% LTV now and that is with some massive renovations during the years. I have never been one make poor judgement mistakes regarding money when things get challenging. Use borrowing when it is advantageous is a no-brainer with ongoing monetary policy. If I had to pay 6% or more for a mortgage it would be a different conversation. I recall the days when one could actually deduct interest costs on consumer vehicle loans, seems like 10 life spans ago.
Posted on 4/20/20 at 12:40 pm to bod312
quote:
Everything you brought up is about "feel".
Nope everything I brought up is about risk.
The feel comes from the reduction of risk.
One of you bashed me about not "living" thru debt.
You bash me as if one's investment time is infinite.
There is a risk that at the time you need money the market will be like it is today.
The risk premium should be larger for people in debt.
Me I can and do buy wild things that a person in debt would be a fool to do. I am sitting here right now trying to figure out how to buy 500,000 barrels of WTI that just traded for $1.25.
Posted on 4/20/20 at 12:43 pm to barry
quote:
Consider the guy with $10,000 in the DOW 90 days ago. He now has only $8495 having lost $1505. It will take three years at the 15 year average return of 6.02% to get back to $10,000. At the end of the three years his return will have been 0. During that three years his risk of an another crash are still there.
This is completely pointless anecdote, 3 years?
Are you saying you beat the market every year and that you "Barry" on TD can reliably beat the market over a 15 year period and are destined to be a billionaire because you can? You should buy options and buy at full margin if you can beat the 15 year average return of the DOW.
Posted on 4/20/20 at 12:46 pm to I B Freeman
(no message)
This post was edited on 12/3/23 at 12:41 pm
Posted on 4/20/20 at 12:47 pm to I B Freeman
quote:
Nope everything I brought up is about risk.
There is also risk in paying off low interest debts at the reduction of other investments. You presented a very 1 sided narrative that was not quantitative in nature. Please use numbers to back up your argument.
quote:
There is a risk that at the time you need money the market will be like it is today.
Imagine if that money was tied up in a mortgage in a poor sellers market.
Some of the other comments clearly weren't directed at me. In general you threw out some unfounded accusations that folks aren't adequately assessing risk. In your post if this was all-inclusive you clearly did not take into account many other risk factors.
Posted on 4/20/20 at 12:52 pm to I B Freeman
quote:
Are you saying you beat the market every year and that you "Barry" on TD can reliably beat the market over a 15 year period and are destined to be a billionaire because you can? You should buy options and buy at full margin if you can beat the 15 year average return of the DOW.
Such a terrible take. You are essentially saying you can time the market hence why you auto-assume that we bought at a terrible time. Also if we are looking only at a 90 day period of time then we should keep it in cash. When the total time perspective is 90 days it is poor to pay extra on a loan or invest it in the market.
If you invested that 30 years ago versus paying off a 3% loan where would you be?
Posted on 4/20/20 at 1:03 pm to bod312
quote:
bod312
Only here to say this: post more. Good luck fighting the good fight
Posted on 4/20/20 at 1:51 pm to I B Freeman
quote:
What they can never quantify is risk.
to piggy back on this subject, most of those that dont understand debt elimination priority don't understand how to quantify the value of stress and financial freedom.
Almost every person on this board would say they would be willing to take some amount of a pay cut for an increase in free time/less work. People that focus on debt elimination probably have a better idea of that value for themselves than those that don't understand the philosophy and only seek to increase gains.
Posted on 4/20/20 at 1:59 pm to I B Freeman
quote:
Are you saying you beat the market every year and that you "Barry" on TD can reliably beat the market over a 15 year period and are destined to be a billionaire because you can? You should buy options and buy at full margin if you can beat the 15 year average return of the DOW.
Beat the market? Who said anything about beating the market?
Posted on 4/20/20 at 4:08 pm to Boringaccountant
Debt is a great tool of business. I have a lot of it.
It should not be a tool of subsistence.
It should not be a tool of subsistence.
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