I don’t. I’m quite a bit more fiscally cautious than most people. I’ll do stuff intended to protect the downside, and am perfectly content to pay a cost for that. Other people either don’t care about the downside, or don’t consider it.
Example: I had some probable potential revenue in the future. However, if that revenue didn’t come through, and a couple other things went sour, I’d have to liquidate an asset (rental property) to pay the bills. And if the market took a rental market took a dive just when I needed to liquidate, I’d be in a tougher position.
So, we liquidated when I knew the market was strong, even though I didn’t need that money at that time, and didn’t expect to need the money, and didn’t expect the housing market to dive.
Most people would’ve just figured it out at the time. Turns out the market didn’t take a dive, so I’d have been better off financially to have kept the property. Still, I’m quite happy we sold it when we did.
Keep in mind that some of us are in the business of risk management.
Investing extra cash rather than using it to pay off low-interest debt is generally best if maximizing wealth is THE objective.
However, doesn’t a wise person need to consider: what happens if there is an unexpected disaster? What if I lose my job and can’t get another? What if my health unexpectedly takes a turn for the worse and I have to spend an extended period on disability, or retire early?
The answers to these questions might imply that reducing just how leveraged you are is wiser than simply seeking to optimize wealth.
I’m writing this with my wife and I both having had some nasty health surprises beyond COVID, and with us about to inherit some money. I’ve talked my wife out of the idea of “let’s just pay off the house”. But we might take the opportunity to pay some principal and refinance as part of making sure that we are at less risk of problems if I were forced to retire early/on disability.
I mean if we really want to run down this rabbit hole why are we just playing with the equity in our house? Hell we could buy another house with little money down just to raise the capital to invest it. There are plenty of ways you can really leverage yourself up many times if you really want to capture that spread and you’ll just be playing bank naked. This isn’t some simple thing where you should borrow and invest whenever borrow rate < invest rate, there are plenty of books written on people doing that and blowing up catastrophically.
Norm-Dan, are you joking? I cannot tell if you are serious.
You are making the very definition of a straw man fallacy:
A straw man fallacy occurs when someone takes another person’s argument or point, distorts it or exaggerates it in some kind of extreme way, and then attacks the extreme distortion, as if that is really the claim the first person is making.
I don’t understand option 2. How do I have a big bank account?
The only way your strategy has any upside is if I invest the money that I’m not using to pay down the mortgage. And not just invest in any old asset… invest in something with a higher rate of return than the interest rate on my mortgage. Which means accepting some risk.
(Risk free rate of return is currently lower than my mortgage rate. If Treasury yields increase above my mortgage rate - which might happen at some point - then the math most definitely changes.)
Now… I’m a good employee and I work for a stable employer. If I lose my job it’s going to be because I got laid off, which probably means the economy is in the toilet, right along with my investments.
So basically… you’re telling me to buy high, sell low. That’s not a good investment strategy.
It seems your real strategy is to hope and pray that the economy doesn’t go in the crapper. And if that happens, sure, your strategy is better.
I’ve been trying to follow this discussion but it seems like most people are just repeating different versions of the same argument.
Assuming we can use the utility function from exam 9, then the optimal rate of return depends on the excess returns the market has over the risk-free rate relative to how risk-averse a person is. 2 different people will have 2 completely different optimal returns given the exact same investment options. And yes, this will result in some accumulating wealth at a different rate than others (or being “poorer than you need to be”).
I think NormalDan was intentionally making a straw-man point. If risk-aversion is completely ignored, then the optimal strategy is to invest for the highest potential return. In that case, it would be best to constantly refinance your house in order to take out whatever equity you’ve built and use it to chase higher yield. The fact that none of us are doing that (or at least no one is admitting to it) means that we are thinking actuarially about our investments and optimizing our asset portfolios based on our level of risk-aversion. If you’re optimized return is greater than someone else’s, then congrats, you might end up a much wealthier person.
I don’t think anyone in this thread is arguing that holding cash at a 0% return that loses value due to inflation is a good idea though, so to accuse people of not thinking actuarially is a bit much. I think you’re really trying to accuse them of being too cautious/conservative. Which is fair, but is also largely a personal preference.
Yep, or the one before it or the one before it or the one before that one.
Geez I recall visiting family in Boston in the 1990-91 recession following the Savings & Loan crisis and literally every third house was on the market, and according to relatives, all for a fraction of what they’d been worth just a few years earlier.
This was in nice neighborhoods where my relatives (mostly engineers) lived!
I’m wondering if real estate in the ghetto actually fared better due to being less leveraged. Teenage me didn’t think about these things though, so I’m really not sure.
Shitty areas won’t appreciate unless something drastic happens, like Amazon moves in, it’s almost like winning the lottery.
We have family friends that have lived in the same house in GA for 30+ years, and their house only increased like 100k in value.
How much experience do you have in this market? Between my father and my uncle (who was also briefly my employer) they have owned a lot of low-end rental properties over the last 50 years (across 4 states in 2 regions) and this has not been their experience at all.
Or at least, not exclusively so. When Massachusetts (one of the four states) got rid of rent control, the values of the affected properties certainly skyrocketed. And that qualifies as “something drastic”. But as they’re able to increase rent generally then the value also increases. That’s lumpier when rent control is in place as one long-term tenant moving out has a material impact on the building’s value… a phenomenon that isn’t at all the same when there’s no rent control. But still… even under rent control tenants do occasionally move out (sometimes when they die) and the value will increase.
Or maybe I can answer for both, over the long term the low end rental properties tended to increase in value faster than their higher end personal residences.
And low-end rentals tend to be more profitable than high-end rentals too. A lot of people don’t want to deal with the hassles. Evicting tenants and dealing with Section 8 housing and knowing the cops will be there a lot and having a good gut feel for which low-income tenants will work out and which won’t and saying “no” when you see their credit reports and dealing with tons and tons and tons of complaints and fixing the copious amounts of damage… it’s definitely not for everyone.
But if you’re willing to put up with all of that, it can be a lot more profitable than the higher end stuff which has far tighter margins.
doesn’t sound like it contradicts my post then, although my post came off as more absolute now that I’m reading it back.
I simply meant - if prices were to go up, nice areas/cities usually go up first before rural/ghetto, and the increases are a lot more, and generally a safer investment.
For the ghetto to fare better, something external needs to happen, and at that point it’s similar to a lottery draw.