4 ms·

It's worrying indeed how most people just take growth for granted and don't want to at least consider alternatives. Btw, here's a talk I found interesting rega

It's worrying indeed how most people just take growth for granted and don't want to at least consider alternatives. Btw, here's a talk I found interesting regarding growth and the future of the economy: https://www.youtube.com/watch?v=KKLDevYyE9I&index=13&t=0s&list=LL60XAnYR5NWk1eI9brmJ-jQ https://www.youtube.com/watch?v=KKLDevYyE9I&index=13&t=0s&li... One part I liked regarding the Madoff scandal: Obviously, you were like how could these people be so stupid to give this person all this money? Didn't they read the details? ... But one of the reasons it happened, psychologically, was because people thought 8-10% with 0 risk was perfectly normal. That's why nobody asked any questions. EDIT And regarding my Reddit rant, also scared me that many people don't pay off their mortgage because they get a better return from the stock market, something I find quite wrong unless you're living in a hyper-inflation economy (which is not the case in the developed world)

dgacmu 8y ago
But it's not wrong, in expectation given long term past trends. It's just leveraged investment using a vehicle for leverage that has some tax and refinancing advantages that favor the borrower, not to mention the liquidity advantages. There are very rational reasons to do this. For any investor, there is a point in the mortgage interest rate vs risk-adjusted returns space at which investing is better. That point may differ, of course.
samsonradu 8y ago
@dgacmu Cannot reply to your comment so I will here. > For any investor, there is a point in the mortgage interest rate vs risk-adjusted returns space at which investing is better. That point may differ, of course. I agree there always is a point, what I think is that the risk-adjusted return should be much bigger to be worth taking. The spread between the mortgage rate and the stock market return usually is not that big. There will always be missed investing opportunities but leveraging the house you live in to squeeze an extra 1-2 percentage point at the risk of going bust doesn't look optimal to me.
- dgacmu 8y ago
  Right - but what you just said was an expression of your risk/reward preference. :) But also, in the US, there's a pretty large contingent of mortgage holders who have <= 3.75% mortgages [1], which compare very nicely to the (expected / hoped for) 9.7% average return from a diversified total market fund. That's not 1-2%, that's an expected ~5%, depending on how things sit from a tax perspective. (You don't need to account for inflation in that return calculation, since the mortgage rate is also affected by inflation.) If you're me -- 42, great job security, relatively small mortgage relative to income, and in a high tax bracket that's unlikely to change soon -- it's a no-brainer: Take the risk and go for higher long-term expected yield. A recession just means I keep doing what I planned to do anyway - working and saving more money for retirement. If you're 60, planning on retiring in 5 years (and so about to drop into a lower top marginal tax rate), and in an industry with uncertain job prospects ... suddenly paying off the mortgage looks more attractive from a risk minimization perspective. Or at least splitting the difference. [1] Most people who took out or refinanced mortgages in Jun 2012 - Jun 2013, and 2016 https://fred.stlouisfed.org/graph/?g=NUh https://fred.stlouisfed.org/graph/?g=NUh The "or refinanced" is important, because when rates were that low, a lot of people had a strong incentive to refinance, so the actual distribution of outstanding mortgages is biased towards the lower rates. [2] [2] This is a study from 99, but the point remains: https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci5-4.pdf https://www.newyorkfed.org/medialibrary/media/research/curre...
  - samsonradu 8y ago
    > which compare very nicely to the (expected / hoped for) 9.7% average return from a diversified total market fund. Understood, guess it's hard for me to wrap my head around this. As a european this feels unsustainable and way too good to be true.
notjesse 8y ago
There are other reasons to not pay off you mortgage, especially in the US. The two most prominent being: 1. Usually a certain amount of equity in the house is protected by state law (varies from state to state). So if someone sues you and/or you go bankrupt, no one can touch your principal residence provided your equity in the home is below the state's threshold. That is assuming you stayed current on your repayments and the bank is still good with lending to you. 2. No recourse loans. If you pay off more earlier, you are just opening yourself up to further risk. I'd much rather lose a bit on super low interest rates (and maybe a little in lender's insurance, too), than lose out if the housing market crashes.

dgacmu 8y ago

But it's not wrong, in expectation given long term past trends. It's just leveraged investment using a vehicle for leverage that has some tax and refinancing advantages that favor the borrower, not to mention the liquidity advantages. There are very rational reasons to do this. For any investor, there is a point in the mortgage interest rate vs risk-adjusted returns space at which investing is better. That point may differ, of course.

samsonradu 8y ago

@dgacmu Cannot reply to your comment so I will here. > For any investor, there is a point in the mortgage interest rate vs risk-adjusted returns space at which investing is better. That point may differ, of course. I agree there always is a point, what I think is that the risk-adjusted return should be much bigger to be worth taking. The spread between the mortgage rate and the stock market return usually is not that big. There will always be missed investing opportunities but leveraging the house you live in to squeeze an extra 1-2 percentage point at the risk of going bust doesn't look optimal to me.

dgacmu 8y ago
Right - but what you just said was an expression of your risk/reward preference. :) But also, in the US, there's a pretty large contingent of mortgage holders who have <= 3.75% mortgages [1], which compare very nicely to the (expected / hoped for) 9.7% average return from a diversified total market fund. That's not 1-2%, that's an expected ~5%, depending on how things sit from a tax perspective. (You don't need to account for inflation in that return calculation, since the mortgage rate is also affected by inflation.) If you're me -- 42, great job security, relatively small mortgage relative to income, and in a high tax bracket that's unlikely to change soon -- it's a no-brainer: Take the risk and go for higher long-term expected yield. A recession just means I keep doing what I planned to do anyway - working and saving more money for retirement. If you're 60, planning on retiring in 5 years (and so about to drop into a lower top marginal tax rate), and in an industry with uncertain job prospects ... suddenly paying off the mortgage looks more attractive from a risk minimization perspective. Or at least splitting the difference. [1] Most people who took out or refinanced mortgages in Jun 2012 - Jun 2013, and 2016 https://fred.stlouisfed.org/graph/?g=NUh https://fred.stlouisfed.org/graph/?g=NUh The "or refinanced" is important, because when rates were that low, a lot of people had a strong incentive to refinance, so the actual distribution of outstanding mortgages is biased towards the lower rates. [2] [2] This is a study from 99, but the point remains: https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci5-4.pdf https://www.newyorkfed.org/medialibrary/media/research/curre...
- samsonradu 8y ago
  > which compare very nicely to the (expected / hoped for) 9.7% average return from a diversified total market fund. Understood, guess it's hard for me to wrap my head around this. As a european this feels unsustainable and way too good to be true.

notjesse 8y ago

There are other reasons to not pay off you mortgage, especially in the US. The two most prominent being: 1. Usually a certain amount of equity in the house is protected by state law (varies from state to state). So if someone sues you and/or you go bankrupt, no one can touch your principal residence provided your equity in the home is below the state's threshold. That is assuming you stayed current on your repayments and the bank is still good with lending to you. 2. No recourse loans. If you pay off more earlier, you are just opening yourself up to further risk. I'd much rather lose a bit on super low interest rates (and maybe a little in lender's insurance, too), than lose out if the housing market crashes.