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Mortgage-Investment opinion needed

BmacNJBmacNJ 99 replies14 threads Junior Member
Currently have no mortgage on my home. If I borrowed $200,000 and invested it for 25 years at a conservative 7% it would be worth nearly $2 million

Monthly principal and interest would be just shy of $1100 month for 25 years at 4% adding up to about $360,000 being paid back. Would probably pay back much sooner, saving tens of thousands in interest.

Does it make sense to do this? or am I overlooking something?
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Replies to: Mortgage-Investment opinion needed

  • BmacNJBmacNJ 99 replies14 threads Junior Member
    without getting to far into it, there has never been a 10 year period of the Stockmarket that hasn't returned 10%. So a good diversified portfolio will/should return 7%
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  • BmacNJBmacNJ 99 replies14 threads Junior Member
    from 1921 til present, the average yearly return in the DJ has been over 7.75%
    not saying investing in the stock market is conservative, I'm saying based on historical performance, 7% is a conservative return guesstimate.
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  • doschicosdoschicos 21421 replies223 threads Senior Member
    Yes, but there are periods of time when it hasn't been positive, including 10 year periods of time.

    I'm not opposed to the idea of arbing a mortgage with investments. I do it myself as I have a mortgage, now small, that I could have easily paid off a long time ago but with a sub 3% mortgage, I don't because I know, more than likely, over time I will outperform that sub 3% mortgage. However, some of your claims above aren't valid and I'm just pointing that out - for you and anyone else reading these posts.

    I'd say a 4% annual return would be a "conservative" guesstimate, but not 7%.
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  • BmacNJBmacNJ 99 replies14 threads Junior Member
    edited October 12
    Even during the worst 10 year period in time, 1929-1938, the DJ returned 10%

    https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart
    edited October 12
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  • ucbalumnusucbalumnus 78600 replies697 threads Senior Member
    BmacNJ wrote: »
    Even during the worst 10 year period in time, 1929-1938, the DJ returned 10%

    https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

    That chart shows a loss of more than 50% from 8/1929 to 8/1939.

    More recently, 2/1999 to 2/2009 was also a substantial loss.
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  • anomanderanomander 1688 replies4 threads Senior Member
    edited October 12
    Even during the worst 10 year period in time, 1929-1938, the DJ returned 10%

    “The Best and Worst 10-Year Returns in Dow Jones History (since 1900)
    ...

    The worst years to buy were:

    1922: the return was 0.4% per year for the next 10 years
    1928: -1.3% annual return -- the only 10-year loss in my data; 1927 & 1929 were both just barely positive. All because of the 1929-1932 stock market crash.
    1964: annual return of 0.3%
    Note: FYI, the decades ending in 2008 and 2009 didn't make the above list, but they're next. The decade ending in 2009 is 6th at 1.3%; 2008 is 7th at 1.7%.

    In addition, there were a number of 10-year periods with returns of 5% or less. Remember, these returns have not been adjusted for inflation. If you assume that over this period inflation has averaged about 3% per year, then the less than 5% nominal returns become less than 2% in real terms, and the near-zero returns become negative.”

    http://observationsandnotes.blogspot.com/2009/04/best-worst-10-years-in-stock-market.html

    As a double-check you can use the calculator here: https://dqydj.com/dow-jones-industrial-average-historical-return-calculator/
    edited October 12
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  • doschicosdoschicos 21421 replies223 threads Senior Member
    BmacNJ wrote: »
    Even during the worst 10 year period in time, 1929-1938, the DJ returned 10%

    First off, be clear in what you are talking about. If you are going to quote returns, specify whether you are talking about a 10% annual return or 10% over a certain period.

    Second, the chart you posted clearly shows many 10 year periods of time when the stock market underperformed, sometimes markedly, the claims you've made on this thread. I'm confused by your insistence in stating otherwise.

    If we were in some sort of trough right now, I'd be more confident about thinking 7% annual returns would be likely over the next 10-20 year period but we're not. Is it possible? Certainly but not a conservative estimate or approach to investing.

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  • anomanderanomander 1688 replies4 threads Senior Member
    Does it make sense to do this? or am I overlooking something?

    Don’t forget taxes (capital gains and/or income taxes), fees, and inflation.

    Numbers always look great on paper until reality kicks in. Figure you’ll have a major medical or other financial calamity right when the market is at bottom....
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  • BmacNJBmacNJ 99 replies14 threads Junior Member
    LOL, obviously I'm not an economist and stand corrected.

    Now back to my original question, does it make sense to borrow $200k and invest it in a lump sum as opposed to investing $1100 monthly for the same period of time (assume 25 years)
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  • doschicosdoschicos 21421 replies223 threads Senior Member
    What kind of mortgage rate can you get? What's your overall financial position? Do you have substantial assets you can rely on should you have unexpected, potentially sizable, expenses?
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  • ChoatieMomChoatieMom 5301 replies246 threads Senior Member
    Invest. Don't borrow.
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  • busdriver11busdriver11 15266 replies28 threads Senior Member
    The problem is, if you invest a large amount in a lump sum, guess what? You might have put it all in at the top of the market for the next few years, and it could take all that time to come back. If you put it in, in small chunks, then you're paying interest on the loan for the entire amount, with very little in the market.

    I have no problem borrowing money if there's an obvious opportunity. For example, when the market plummeted down below 7,000 in 2008, I knew what an opportunity it was, but I was too scared to do much about it. At least I stayed put. There were some very stable companies whose stock had gone down a crazy amount, and I knew they were at bargain prices. But instead, we borrowed money and put it into short sale and foreclosure condos in a strong rental market. They all went up 3-4 times in value. But the stocks I was looking into went up at a much greater rate, and they don't call us in the middle of the night with water leaks.

    So my conclusion is that I'm willing to borrow money at a low interest rate for a fantastic opportunity. Borrowing to invest money now in the market, I don't see that as an opportunity.
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  • Data10Data10 3048 replies8 threads Senior Member
    edited October 12
    Even during the worst 10 year period in time, 1929-1938, the DJ returned 10%
    When the Dow Jones began in the 1800s, the 30 stocks composing the Dow were a decent representation of the market, and it was practical for people to calculate the Dow Jones average by hand, in an age without computers. The Dow is far less meaningful today, as key US stocks and relative weighting has changed. For example, why should Boeing be the most influential component of the Dow average with ~10% weighting, while Google and Amazon are excluded? I think larger stock market indexes are a more meaningful representation of the overall US market. For example, the S&P 500 uses 500 companies with weighting base on market capitalization. This drops Boeing from being the most weighted company at ~10% weighting in the Dow to ~25th most weighted at ~0.8% in the S&P 500, far below the weighting for Google and Amazon.

    The worst inflation adjusted 10-year period of the S&P 500 was the period ending during mid 1921 that encompasses WWI, with a 77% loss. The worst period since WWII was a 57% loss during the period that ended in mid 1982, which includes the stagflation of the 70s and recession of the early 80s. The original post mentioned 25 years. The worst 25 year period since WWII was a 35% loss during the period that ended in the same mid 1982.

    The average inflation adjusted return over this post WWII period was 4.8%. During most years, you'd probably make more than the cost of the mortgage payment, particularly after considering tax benefits. However, there is a chance of a substantial loss. This relates to why some choose to be the lender (includes bonds), rather than put everything in a stock index.
    edited October 12
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  • Twoin18Twoin18 1660 replies17 threads Senior Member
    edited October 13
    “The average inflation adjusted return over this post WWII period was 4.8%.”

    This is a key issue. You need to think about real returns when comparing to historical data. Today the inflation rate is much lower (one reason why interest rates are so low). Over a very long period of time the stock market should grow in line with nominal GDP if it is representative of the US economy. When inflation is low, that nominal growth is lower.

    Moreover in the last 35 years we’ve had an unrepeatable shift in inflation expectations, providing a one off boost to stock market multiples. That can’t happen again, with bond yields at current levels, but it can reverse in a stock market crash.

    And more broadly, why do you think the stock market offers compelling value right now? It seems pretty hard to make a convincing argument for that. If you can’t, then you should average into the market over time by investing the $1100 per month you would otherwise be using to pay the mortgage.
    edited October 13
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  • GourmetmomGourmetmom 2818 replies48 threads Senior Member
    This is an interesting question. I posted last week about almost everyone in my neighborhood having a fairly large mortgage, and it seems that many people would rather not have much tied up in a house and instead use that money for investments. This seems to be the norm rather than the exception. I don't have a mortgage for a few reasons - I don't want to deal with the bank and the hassle, mainly, and the small increased return, if any, that I would see investing the money isn't worth the bother to me. I am clearly an outlier, however.

    We have a diversified, conservative portfolio (bonds, index funds, etc.), and 4% net taxes annually over many years is a good rate of return. We also have some private equity that has done exceptionally well, but those investments are tied up for years and not available to many investors.
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  • doschicosdoschicos 21421 replies223 threads Senior Member
    I don't think this is the norm or that you are an outlier. Maybe in your neighborhood but not in general.
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  • SybyllaSybylla 3911 replies50 threads Senior Member
    edited October 13
    How old are you? What is your current 401K and savings status? HSA? ROth/backdoor roth? as you have had no mortgage payment, has that been invested? How many more kids than your current highschooler will you have to get through college? I would focus on these first. Is this for funsies or for actual needed funds? How much is your house worth? Is this your own idea for a self guided investment or do you have a paid financial sales guy? If your best mortgage rate is 4%? Why such a high rate?

    >>why do you think the stock market offers compelling value right now? <<<
    Right? Ditto housing market in your area.
    edited October 13
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  • GourmetmomGourmetmom 2818 replies48 threads Senior Member
    @doschicos I've done an informal poll, lol, and found that many upper middle class folks who can pay off their mortgage prefer not to and put that money into investments/savings instead. This is definitely the norm - among those who can pay off their mortgage.
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