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\"I know what the math says, but….\"

Home Personal Finance and Budgeting \"I know what the math says, but….\"

  • Zaphod Zaphod 
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    Joined: 01/12/2016

    With the new blog post there is a lot of the above line stated in one way or another. There are additional similarly baseless arguments like liquidity/cash flow and paying the mortgage due to state of the market. And of course the oldie but goodie “guaranteed return”.

    I am 100% okay with people choosing to pay debts or whatever they choose to do. I simply dislike the half-truths and outright misconceptions people use to do so. Whats the larger issue is that people who probably do totally understand the trade offs, like WCI, end up using above aphorisms and people that do not fully understand pick it up and use it as their justification unknowingly. I wish that werent true but lets be honest, it is.

    Paying off a debt either with larger payments or lump sum does not increase your liquidity. If lump sum it just reverses it from all at once to over time and changes where that money is located (both on the balance sheet and sometimes physically), ie, in a liquid place like a bank account into an illiquid one like your home. If the more aggressive approach it does nothing until the debt is fully paid. A more visual math example:

    Example Lump Sum

    Lump Sum=100,000

    Debt payment= 1,000/month. 100k principal.

    If you take your 100k and pay off the debt you do not “gain” any liquidity. You already have that liquidity in a big lump sum. You have 100 forward months of liquidity in the bank account right now. You are simply trading it for a payment of 1000/month going forward. You already have months/years of future liquidity on hand, youre simply trading off how its given to you. In the same comment stream people complain of escrow accounts of minimal value as giving “free money” to the bank, yet overlook the whole mortgage value as the obvious exact same kind of transfer.

    Net result is negative given inflation and time value of money. 100k right now is worth more than 1k/month for the next 100 months. This is like why its more valuable to take the lump sum winnings in the lottery or why lump summing money into the market almost always wins long term. Same principle. Not a good reason to pay down a debt.

    Money is fungible, simple vs. compound interest, and time value of money. These concepts cannot be stressed or learned enough, and even on this very enlightened forum we have seen it misunderstood time and time again.

    Paying due to market state and not being able to pay your mortgage/bills

    If being able to pay your mortgage is dependent on a typical bull/bear market state and not a depression/GFC level issue, than you cannot afford to own a home plain and simple or are too leveraged in general. This is simply a justification, not an argument.

    “The math says, but…”

    To me this is analogous to a pt saying, “I know what the doctor says, but…”. How is it different and what are your initial thoughts about your patient that says such a line?

    Why do we give ourselves such a pass and hold everyone else to such standards? How many people actually know the math they purport to have disregarded?

    Guaranteed return

    It is not a return. It does not grow. It is a fixed known quantity that is decreasing in value over time. You can only avoid the finance charge and only once. The best you can do is pay with cash. That comes with the standard opportunity costs that you would normally run. The difference with any debt is basically that same calculation plus the finance charge.

    Simple/Compound Interest

    Loans are simple interest. Market returns are compound. They cannot be compared straight across and when thats done it simply demonstrates a lack of understanding of the math and differences or willful spreading of such misinformation. Implications of this misunderstandings are huge.

    Short term thinking

    Comparing two long term issues like mortgage and retirement investing (if younger, obviously things change dramatically near retirement) to very short term issues like a correction or bear market. Its even more serious for short vs long term issues like student loans vs. retirement. Once the loan is gone that early choice to invest can compound for decades longer, decades.

    Unless retiring soon, none of this should matter at all, and definitely have zero bearing on any of your debt/invest decisions. If you put into the market instead of the mortgage and the market goes down shortly thereafter it does not mean it was a bad decision nor will it impact which turns out to have been more wealth positive in the future. Its a red herring and exactly the kind of thinking this site should be trying to teach its readers to stop doing. Any thinking like this should line up with your personal timeline, expenses, etc….We should be thinking about terminal wealth and long term goals, not justifying behavioral issues with short term explanations that are wholly incongruent to the rest of the message (long term, no short-termism, etc….) If we are not to be concerned with let alone sell stocks in a down turn, why do we worry about other such frivolities?

    Peace of mind, priceless

    AH! As I’ve tried to point out time and again this is nothing more than an aphorism that sounds nice. Its not true, they do have a cost and we can get near to the exact dollar of the price. Sure its easier if you simply dont look for it to work out as such. Dont invest or make big life decisions based on pithy quotes, its irresponsible.

    Click to expand…

    You and I had this back and forth a while ago specifically about student loan payoff.  As I’ve thought about it more, I’ve come around more to your way of thinking.  I have a couple of follow-up questions to what you’ve posted here.

    1) At what rate to you, if any, does it make more sense to prioritize loan payoff instead of investing?

    2) What about variable rate loans?  Does that change your thinking at all?

    In regards to #2 above, I had been aggressively paying off my 10-year variable rate loan with an interest rate that started at 2.63% almost 2 years ago but is now over 3.5%.  The rate cap was almost 7.5%, so I prioritized paying it off (balance now is around $2,300 from $145,000).

    My other 2 remaining student loans have interest rates of 4.25% and 2.875%.  I haven’t made a single extra payment to the 2.875% loan, but have been the 4.25% loan on occasion with production bonuses.

    Click to expand…

    Everyone has to find their balance that suits them, but it should just be with full knowledge, an informed consent if you will. And as I told you, it didnt matter because you’re crushing it on all fronts.

    1. For me Im more concerned about principal, term, etc…rather than just rate. I’ll take a 100% loan on a dollar if need be, who cares? That said its all relative to what can be had out there. I dont have anything over 4% and in this world thats pretty much my cutoff for doctor sized loans. I do pay over the minimums myself, but am not the “aggressive” over payer that you typically see. My renter is the over payer for the rental property, though this can be debated…

    2) I have a variable rate loan on about 40% of my student loans and it has a cap like yours. Since its the principal one Im throwing money to and its a shorter term, Im really not concerned about it as its already had a lot of principal reduction so the interest is capping itself in effect.

    I think you’re choosing wisely, Im always a high rate first person it makes the most sense.

    I think we all panic a bit when we see our student loans and may somewhat over react to that. I am really just saying if you dont go crazy, you will be fine.

    #54712 Reply
    Liked by adventure
    Zaphod Zaphod 
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    Joined: 01/12/2016

    But suggesting that things like cash flow, liquidity, peace of mind, and the idea of a “guaranteed return” are fallacies, baseless, or are otherwise untrue aphorisms is ignoring many realities to blindly put you at the latter end of the spectrum.  And Zaphod is by no means the only guy saying this stuff, it’s a common theme on the blogosphere and in the business world in general.

    Click to expand…

    Aphorisms are dangerous period, just like all the buffett quotes anyone with a passing interest in finance must endure. Whats the big deal there?

    I tried to explain cash flow/liquidity doesnt change in the manner people frame it and therefore it is basically a fallacious argument with faulty assumptions. Granted, I did not spell it out to the number, but hopefully the basic premise makes enough sense. If not, im sure someone has written a blog post on it and I apologize for being lazy.

    It certainly is no guaranteed return. Its avoidance of the financing cost, a nominal value that decreases in real value over time. It should be described as it is.

    Peace of mind does have a cost, thats what insurance is. I didnt say its stupid, just that its not priceless. You disagree? Even WCI admitted there was no “peace of mind” to his pay off.

     

    Surprised you are taking these pedestrian hot takes so to heart.

    #54713 Reply
    Craigy Craigy 
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    Okay, some clarification.

     

    By paying off your mortgage, your monthly income is more liquid because less of it is earmarked and committed to outflows such as the note payment, period 

    Click to expand…

    Your liquidity argument makes no sense. If you have 100k why not in cash? Its exactly what you are doing by paying the mortgage. If holding it in cash makes no sense, the same goes for the mortgage. A mortgage is a currency hedge and you are effectively short the dollar.

    Again, if you have 100k, you can cut it up to supply that liquidity monthly. It is functionally zero difference. Money fungible. Its also not liquid until paid off either, you’re actually decreasing liquidity until then. Unless you have a lump sum which brings us back to the start. Paying it off is going long the dollar, aka, holding cash.

    But that doesn’t magically mean that you miss out on some benefit of compound returns by paying off a mortgage. All the additional money you’ll have in your pocket compounds too, assuming you take the interest you’re not paying and the payments you’re not making, and roll that into the market. You can’t borrow money at X% and somehow make money getting a return at X%, even though your investment compounds while the loan does not. Please, I would love for you to show me the math where, due to “compounding,” you somehow split the baby with interest and returns at X%, roll it forward Y years, and put back together a bigger baby in the end. 

    Click to expand…

    If one has a finite amount of dollars and is choosing to put it towards say a mortgage than those dollars cannot go to the market. You do not reap the benefit of the decreased interest costs until that whole note is gone. Then one has to account for the opportunity cost in whatever time frame that was. If short, it doesnt matter, if a number of years than it needs to be considered.

    Debt is a tool. It can be used for good, or irresponsibly and lead to bad outcomes. There is a lot of in between in there. I am taking the other side of the coin mostly because everyone else is on the other side. Its a balancing thing, Im one of whatever personalities that at times enjoys taking the contrarian view to whatever is supposed to be a given.

    Dont get me wrong I dont have a single debt I dont pay more than the minimum amount on, and student loans are all on shorter than available terms. Im just saying the doctor, not the average joe mind you, should not worry excessively about what will ultimately be a rounding error in their life. All they have to focus on is income, expenses, shoveling it away and trying not to make big mistakes. I simply enjoy arguing.

     

    Click to expand…

    I think there is something lost in translation in the $100k example.  Forgive my bad quoting skills  😆 

    “Your liquidity argument makes no sense. If you have 100k why not in cash? Its exactly what you are doing by paying the mortgage. If holding it in cash makes no sense, the same goes for the mortgage. A mortgage is a currency hedge and you are effectively short the dollar.”

    The difference is, holding the mortgage costs me money (interest).  Paying the mortgage saves me the interest.  Holding the cash while I hold the mortgage gives me zero return on my cash, and I incur interest on the loan while I hold the cash needlessly.

    “Again, if you have 100k, you can cut it up to supply that liquidity monthly. It is functionally zero difference. Money fungible. Its also not liquid until paid off either, you’re actually decreasing liquidity until then. Unless you have a lump sum which brings us back to the start. Paying it off is going long the dollar, aka, holding cash.”

    The functional difference is that I am getting hit with interest while that cash sits.  If I borrow a hundred grand, and cut it up into monthly payments for that hundred grand debt, I will end up short and have to find more money somewhere else because of that interest.

    Additionally, once paid off, your monthly cash flow is then completely liquid to do with as you please. And as you pay down principal, you can typically adjust or refinance your minimum payment.

    “If one has a finite amount of dollars and is choosing to put it towards say a mortgage than those dollars cannot go to the market. You do not reap the benefit of the decreased interest costs until that whole note is gone. Then one has to account for the opportunity cost in whatever time frame that was. If short, it doesnt matter, if a number of years than it needs to be considered.”

    You reap the benefit of the decreased interest cost with every dollar of principal you pay back.  Are you suggesting that if I take a $100,000 loan at 5%, that I owe $5,000 annually of interest no matter the principal balance?  That’s the impression you’re giving.  The reality is that if I pay $50,000 of principal off this year, I will only have a $2,500 interest bill next year.

    Again, the impression you are giving is that paying off or eliminating a future expense or liability somehow doesn’t count and does not factor into the equation.  

    “I simply enjoy arguing.”

    Me too.   😀

    LEVEL 1 WCI FORUM MEMBER.

    #54714 Reply
    Liked by Zaphod
    Zaphod Zaphod 
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    Zaphod,

    I agree with most of what you said about and I applaud the effort towards getting at the truth.

    Couple of thoughts:

    1. It seems like much of your thoughts center on very long-term terminal wealth argument.  Two thoughts:  #1.  is this right for everyone?  and #2.  Some of the mathematics you are quoting are trivial over short periods of time.

    2.  All wealth arguments must be passed through a utility function.  The marginal utility argument we all know so well, is not the same for everyone.  I will admit this point is not congruent with my point above.  But it is not either/or.  They both co-exist.  One man’s trivial is another man’s life savings.

    3.  Mass communication is difficult.

    4.  Short efficient communication is more difficult and time consuming than long form communication.

    Given these realities,  I think the work on WCI is some of the best on the net.  I can see your argument, but wonder if we are getting “lost in the weeds”.  (Could not help with one more catch phrase!)

    I have enjoyed thinking about your post.  Time to get back to the real jog however.

    Kent

     

     

    Click to expand…

    1. Yes true. Thats up to them, but they should have the option to evaluate several different courses of action and then determine where they fit on the spectrum of peace of mind to maximal wealth. I dont think they are getting a fair eval so to speak.

    2. Timeline is different for everyone, and a consistent point of the blog seemed to me at least to think long term. Yet lots of these issues boil down to short term thinking. The only real factor advantage we have is a long term time frame really, so thats my whole bag. We dont know what will happen in any other regard, but we have time on our hands and should use it accordingly. I assume those that dont have their stuff figured out by now! I try to be very explicit in that my view is long term, very long term. Otherwise, it doesnt really matter.

    Agree utility is personal.

    4. Uh, see anything I ever write. This I know.

     

    #54715 Reply
    Zaphod Zaphod 
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    “I simply enjoy arguing.”

    Me too.

    Click to expand…

    I think there is something lost in translation in the $100k example.  Forgive my bad quoting skills  “Your liquidity argument makes no sense. If you have 100k why not in cash? Its exactly what you are doing by paying the mortgage. If holding it in cash makes no sense, the same goes for the mortgage. A mortgage is a currency hedge and you are effectively short the dollar.”

    The difference is, holding the mortgage costs me money (interest).  Paying the mortgage saves me the interest.  Holding the cash while I hold the mortgage gives me zero return on my cash, and I incur interest on the loan while I hold the cash needlessly.

    This is a cost issue not a liquidity one. Totally valid, but different. I am not in real life recommending a pile of cash and a mortgage, makes no sense. Rather in that quote was a way of categorizing the “type” of money/return of the underlying asset.

    Additionally, once paid off, your monthly cash flow is then completely liquid to do with as you please. And as you pay down principal, you can typically adjust or refinance your minimum payment.

    Time has elapsed. Time, time, time value of money. You get bumpkus until then, and decreased actual day to day liquidity to deal with life in the mean time.

    You reap the benefit of the decreased interest cost with every dollar of principal you pay back.  Are you suggesting that if I take a $100,000 loan at 5%, that I owe $5,000 annually of interest no matter the principal balance?  That’s the impression you’re giving.  The reality is that if I pay $50,000 of principal off this year, I will only have a $2,500 interest bill next year.

    No obviously that is not what Im saying, Im just not doing a good job. Full disclosure, I spent a lot of time in LA traffic this weekend and am exhausted. I hate wasted time in a car.

    Saying that you could do other things with that money that havent been considered fully.

    I am saying the lifetime value of that money is larger in the market than used to offset future interest is. Mortgages are a special case given their low rate, long term and then further lowered rate due to their tax advantages. This is made even worse by the cost associated with transacting your house or accessing any of its value. In reality very few people stay in their houses for even 10 years, you’re likely going to take a transactional beating on a house. Its to be expected.

    Again, the impression you are giving is that paying off or eliminating a future expense or liability somehow doesn’t count and does not factor into the equation.  

    I think we simply did the equivalent of financial metaphor mixing (in this and regards to first quote on translation).

    Future expenses are lower on a real term basis due to inflation and a fixed nominal payment. Returns in the market are maximized by investing sooner rather than later given compounding, etc….

    I am just trying to remind people that the dollar in your hand today is very likely, the most valuable dollar you will own from now until death. You can use it to increase your purchasing power in the future, or you can take this ultra valuable dollar and use it to pay down a debt (like a mortgage, short term debt is meh) that will be significantly cheaper in the future due to inflation. Likewise you have forever lost the opportunity to take advantage of this dollar if not invested, and doing so in the future is with a less valuable one with less time to grow. Double whammy.

    People seem to forget this like everyday. Time value of money.

     

     

    New rant, why smileys so big on quote?

    #54717 Reply
    Liked by Craigy
    Zaphod Zaphod 
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    So…on the continuum between behavior and math, you’re way at the right end?

     

    Also, I think it is important to realize that paying down a load, at least until it is paid off, compounds in the exact same way as an investment because a larger portion of the next payment goes toward principle. That’s easy to see with a financial calculator. Now obviously if the interest isn’t calculated based on the entire balance of principle + unpaid interest as in some student loans, that’s not the case. So paying down debt absolutely does provide a guaranteed return, at least until the debt is gone.

    Click to expand…

    You are technically compounding your payments. You can still only avoid up to 100% of the finance cost and thats it. It is in no way the same. A similar way to think about it, but not the same. I realize that is super picky but I guess its a pet peeve.

    I know I have mentioned this elsewhere but compound has a specific mathematical definition. Paying down a loan faster does not qualify nor does the interest avoidance. I think Kitces has a good post about this iirc. Compound is interest on interest and simple relates only to the balance. If we keep talking like that we end up with the situation where people really believe their loans compound, and I have seen it several times.

    #54720 Reply
    Zaphod Zaphod 
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    I guess we can just reconvene in 2040 to see how all our prognostications turned out in the harsh truth of reality.

    #54721 Reply
    Liked by skidoc
    Donnie Donnie 
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    My main issue with what this thread has devolved into and my issue with WCI’s initial blog post is that people debate the mortgage payoff point and several others like they are not quantifiable.  You’ll notice there are not debates over whether to pay a manager 100bps of AUM to actively manage a fund.  Why?   Because the “math” has been done that shows actively managed funds are likely to underperform passively managed index funds.  Everyone can see it and easily understand it.

    Mapping out the impact of leverage is not so easy.  It is not the average return that is the problem.  That part is easy, and it is the reason why people say the “math” works for leverage, i.e. expected returns are higher than the interest cost, so leverage is good.  The issue is that leverage leads to volatility in returns that people have difficulty quantifying. People intuitively know leverage increases volatility, and that is why many say leverage is bad.

    We shouldn’t really settle for accepting lower returns without leverage in order to get “peace of mind” while making no attempt to quantify such peace of mind.  So let’s try.  In my view peace of mind represents low volatility.  For example, if I have $10M in the bank in cash earning 1%, I have much more peace of mind because my net worth is locked in and no matter what happens to the market, my net worth will change very little.  On the other hand if I have $10M of assets in the stock market and $10M of debt, I have very little peace of mind.  If market increases 10%, I now have $1M of net worth, but if it declines 10%, I may have to file bankruptcy.

    This problem needs to be addressed with actual financial modeling and the range of outcomes based on debt levels will allow people to make informed as opposed to visceral decisions.

     

     

    #54723 Reply
    Zaphod Zaphod 
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    My main issue with what this thread has devolved into and my issue with WCI’s initial blog post is that people debate the mortgage payoff point and several others like they are not quantifiable.  You’ll notice there are not debates over whether to pay a manager 100bps of AUM to actively manage a fund.  Why?   Because the “math” has been done that shows actively managed funds are likely to underperform passively managed index funds.  Everyone can see it and easily understand it.

    Mapping out the impact of leverage is not so easy.  It is not the average return that is the problem.  That part is easy, and it is the reason why people say the “math” works for leverage, i.e. expected returns are higher than the interest cost, so leverage is good.  The issue is that leverage leads to volatility in returns that people have difficulty quantifying. People intuitively know leverage increases volatility, and that is why many say leverage is bad.

    We shouldn’t really settle for accepting lower returns without leverage in order to get “peace of mind” while making no attempt to quantify such peace of mind.  So let’s try.  In my view peace of mind represents low volatility.  For example, if I have $10M in the bank in cash earning 1%, I have much more peace of mind because my net worth is locked in and no matter what happens to the market, my net worth will change very little.  On the other hand if I have $10M of assets in the stock market and $10M of debt, I have very little peace of mind.  If market increases 10%, I now have $1M of net worth, but if it declines 10%, I may have to file bankruptcy.

    This problem needs to be addressed with actual financial modeling and the range of outcomes based on debt levels will allow people to make informed as opposed to visceral decisions.

     

     

    Click to expand…

    Thank you for saying much more succintly what Im trying to say. It can be quantified, and should, and then decisions and trade offs can be made with full knowledge.

    I am super beat today, even though im off. I now recall why I am so tired, in addition to summer craziness and so much driving this weekend, I went to the Game of Thrones premiere during the middle of the week. Ugh.

    #54725 Reply
    Avatar adventure 
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    1) At what rate to you, if any, does it make more sense to prioritize loan payoff instead of investing? 2) What about variable rate loans?  Does that change your thinking at all?

    Click to expand…

    For me, this comes down to paperwork and hassle.

    I love to maximize the return or leverage on every option, but the further I get from middle school, and the more complicated my financial picture becomes, the more value I put on simplicity, time, and organization. I had a 5k student loan, low interest rate, but it drove me nuts to deal with it every month. Paid it off to make the hassle go away. Still have much higher % student loans, but the paperwork and hassle drove me nuts. I actually did the math, and determined I’d save $86 or something if pay off the higher interest rate loan.

     

    Given how terrible the lender was, and how much of a hassle it was, I happily paid the 5k (and know I’ll pay $86 over the years) to make my life less stressful.

    #54730 Reply
    Avatar adventure 
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    My main issue with what this thread has devolved into and my issue with WCI’s initial blog post is that people debate the mortgage payoff point and several others like they are not quantifiable.  You’ll notice there are not debates over whether to pay a manager 100bps of AUM to actively manage a fund.  Why?   Because the “math” has been done that shows actively managed funds are likely to underperform passively managed index funds.  Everyone can see it and easily understand it.

    Mapping out the impact of leverage is not so easy.  It is not the average return that is the problem.  That part is easy, and it is the reason why people say the “math” works for leverage, i.e. expected returns are higher than the interest cost, so leverage is good.  The issue is that leverage leads to volatility in returns that people have difficulty quantifying. People intuitively know leverage increases volatility, and that is why many say leverage is bad.

    We shouldn’t really settle for accepting lower returns without leverage in order to get “peace of mind” while making no attempt to quantify such peace of mind.  So let’s try.  In my view peace of mind represents low volatility.  For example, if I have $10M in the bank in cash earning 1%, I have much more peace of mind because my net worth is locked in and no matter what happens to the market, my net worth will change very little.  On the other hand if I have $10M of assets in the stock market and $10M of debt, I have very little peace of mind.  If market increases 10%, I now have $1M of net worth, but if it declines 10%, I may have to file bankruptcy.

    This problem needs to be addressed with actual financial modeling and the range of outcomes based on debt levels will allow people to make informed as opposed to visceral decisions.

     

     

    Click to expand…

    Great thread. I agree with the OP’s points. However, it’s difficult to explain high level (600 series courses) to new folks. We start medicine education with simpler terms, not with the intricacies of renal diuretics. As @@thechfinancialadvisor mentioned, there are difficulties there.

    Sticking to clear terms certainly has value.

    Explaining that one’s one behaviors can override the math is also a lesson often not taught. I think this is the main issue for me. Teaching that we as humans have stupid behaviors, or risk tolerance, or are irrational with regard to economics would be lessons well shared.

    #54731 Reply
    Liked by Zaphod
    Avatar beagler 
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    Paying off mortgage or not is just leverage. Leverage multiplies positive and negative returns (and multiplies volatility). Historically, over long holding times it works out to keep the leverage. (Historically so does 100% equity allocation.)

    It is neither right nor wrong to have an investment portfolio without leverage. Personal risk tolerance is personal. It is psychologically easier to feel confident that one can handle a higher risk tolerance (i.e. 100% fully invested in stocks) when we have had a ~8 year bull market. It is more telling to remember how you felt and what you did during the last 50% market crash (late 2007 to early 2009, 1561 to 683 s&p 500) when 401ks became 201ks;)

    We will have another financial crisis / bubble. I hope it will be brief. After reading Tim Geithner’s Stress Test, I realize it could have been drastically worse and drastically prolonged. More so than any historical depression. 10 year bear market after a crash? Definitely possible although not probable. Then ask who’s feeling good about leverage 8 years or so into a bear market…

    Solo Internist, Midwest

    #54735 Reply
    WallStreetPhysician WallStreetPhysician 
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    Very interesting thoughts by Zaphod and others in this thread.

    I wrote about mortgages and other student loans as sources of leverage in a recent post on my blog — for most of the commenters on this thread, the post is probably way too basic.

    Leverage is like fire — if used properly, it can make you warm, but don’t get burned.

    Essentially what Zaphod and others are doing are acting like one-person banks — banks borrow money from the government / depositors at very low interest rates and then lend it out at higher interest rates. Banks push the envelope and try to scale this advantage — and often make huge profits as a result.

    But banks have large risk management departments and government regulations to ensure that they do not take excessive risk and take the chance of going belly-up in an economic downturn.

    Individual investors, on the other hand, are on their own. Pushing the envelope with leverage is not for people who are new to investing or risk management. I personally hesitate from pushing the envelope, and would probably do the same thing as WCI if I were in his position.

    Just my 2 cents.

    -WSP

    Former Wall Street trader, current physician and blogger @ http://www.wallstreetphysician.com
    "As Gordon Gekko might say, 'Fees never sleep'" - Warren Buffett

    #54740 Reply
    Zaphod Zaphod 
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    Very interesting thoughts by Zaphod and others in this thread.

    I wrote about mortgages and other student loans as sources of leverage in a recent post on my blog — for most of the commenters on this thread, the post is probably way too basic.

    Leverage is like fire — if used properly, it can make you warm, but don’t get burned.

    Essentially what Zaphod and others are doing are acting like one-person banks — banks borrow money from the government / depositors at very low interest rates and then lend it out at higher interest rates. Banks push the envelope and try to scale this advantage — and often make huge profits as a result.

    But banks have large risk management departments and government regulations to ensure that they do not take excessive risk and take the chance of going belly-up in an economic downturn.

    Individual investors, on the other hand, are on their own. Pushing the envelope with leverage is not for people who are new to investing or risk management. I personally hesitate from pushing the envelope, and would probably do the same thing as WCI if I were in his position.

    Just my 2 cents.

    -WSP

    Click to expand…

    Again, Im not leveraging anything to the hilt, I was taking a position on the argument and the way its talked about.

    Framing paying off your loans as contractually obligated as pushing the envelope is exactly the hyperbole that Im talking about. Its acting and talking about stove burner being on as if its akin to the house burning down, its over kill. Everyone continues to take any admission of not being deathly afraid of debt as a sure sign youre a degenerate gambler. There is a judgemental tone to it all, when often times people just value different things. I may understand why someone feels a burning desire to pay off debt, it doesnt make sense to me or my goals, but as I tell my patients dont ask for my opinion you dont know me and we wont be seeing each other long term nor do I ultimately care.

    You do you. As long as you’re basing it off of a true telling of the pros/cons/trade offs the ultimate choice is yours. I feel much like @donnie said so well, people act as if you cant do the math and its unknowable, when its not that difficult especially in broad general terms.

    Not that my personal situation has anything to do with the truth of the matter, but since it keeps getting brought up I’ll just spill it. Though do remember, its neither an endorsement nor invalidation of any argument, they stand on their own.

    I do have a lot of student debt still, but less than a years salary worth and falling. My house is less than a years salary. Our family has one car at about a months salary. I do have a rental that we lived in for a year worth 4 months of salary, but they’re paying it as well. Net worth is just above zero, amounts in investing accounts are even to just more than student loans. Its extremely skewed and frankly misrepresenting to pretend thats some crazy leveraged dangerous situation. If all went to hell I could sell it all and be broke including transaction costs.

    The only envelope I push is the only one I actually have, more time than the debts (supposing I dont die of course, which I insure against) and knowledge of inflation. I also dont have any hassle with any loans or payments, everything is autopay or ach so its on auto pilot. I just check them periodically to adjust extra payments and make sure everything is working. Otherwise its basically maintenance free.

    Just because my play money is traded in a not well understood manner, doesnt mean Im selling kids toys and churning credit cards to buy options on bitcoin futures.

    When you think about it every thing you buy, think of buying and plan for is ultimately leveraged off of your belief you will be producing income in the future so you’re always leveraging something even if you have no debts.

    #54749 Reply
    Liked by RocDoc, hatton1
    Donnie Donnie 
    Participant
    Status: Other Professional
    Posts: 770
    Joined: 01/11/2017

    WallStreetPhysisican, I don’t want to bring this back to symmantics, but if there is one thing I can’t stand in a debate, it’s faulty analogies. Individuals are nothing like banks for a myriad of reasons. I agree that people should be careful with debt, but they should also be careful investing in the stock market, real estate, etc. All professional investment companies like banks, funds, etc. have sophisticated risk officers. That doesn’t mean people shouldn’t make investments.

    If anything, individuals are more like individual companies in that companies have a source of income other than making investments or lending money and they use leverage to enhance equity returns. Anyway, that’s also a bad analogy, so better just to stick to the facts.

    #54761 Reply
    Liked by Zaphod

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