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12 comments:
roger - a little off topic but wanted to get your thoughts on something. Given the significant drop in 30 yr mortgage rates, I am thinking about refinancing. I have a decent amount of equity built up. I am thinking about cashing out the equity up to the 20% of home value (to avoid PMI) and taking the money and investing in a variety of stock and bond index funds. Mortgage rates are so low given historical levels, and over long periods of time, the "market" makes about 8 - 10%. With the tax deduction you get on the mortgage interest, the spread could be about 4-6%. I am 30 yrs old, so I'm not looking to use this money for probably 20 -30 yrs. Can you comment on this. I would appreciate it. By the way, great blog.
i am the wrong guy to ask about this. the way the numbers work, over time paying down the mortgage is the less attractive choice versus the equity market.
I have particularly conservative views here. We paid off our mortgage on our primary residence three years ago (I was 38) and not having a nut is very empowering.
We recently bought a second home and are paying in an extra $500 per month (I think we will up it to an extra $1000, but we'll see about that).
I love not having a mortgage and claiming the standard deduction instead. Do not just calculate your mortgage deduction but the amount mortgage payments above the standard deduction. Living rent free is the income on my investment and it is not taxed.
I do not worry about loosing customers or my wife loosing her job. I have always invested and now I invest a large percentage because our expenses are lower.
I have no idea what Roger will say but I think constantly extracting equity from a home is not necessarily the proper thing to do.
But if things were to get really bad and the S&P were to decline to 700 to 800 (which I am not predicting just saying if it really went lower) I might change my mind.
We are really not down a lot in the great scheme of things no matter how you may feel. I would not change my mortgage due to normal variation (which is all this is so far) in the market.
Roger I like the rules of thumb in your video. You may even have a nice simple book written 5 years from now simply by compiling information like this. But, they are rules of thumb and each bear market unfolds differently. I would not feel to comfortable predicting the decline at 25 to 30% based on a rule of thumb. Which is not to say you will be wrong either.
Bottom Line: The average Joe six pack is a baby boomer quickly running out of time. His single largest asset, his primary residence, is deflating rapidly. This single largest asset is also the primary collateral for his single largest liability. His balance sheet is rapidly deflating as all his assets, from his home to his equity portfolio, all simultaneously deflate while his debt outstanding may actually still be increasing. His debt servicing are costs not dropping, despite aggressive rate cuts, and may actually be rising. It has also become damn near impossible to refinance certain mortgages as easy credit evaporates. On top of that, Joe six pack should now be seriously concerned about his job security. So when a cheque for $300 to $1500 arrives in the mail, Joe six pack is not going to spend it on a $200 steak dinner or a new computer or on a vacation. Got it people?
More on the stimulous package: (http://benbittrolff.blogspot.com/2008/01/fact-sheet-bush-stimulous-package.html)
TheFinancialNinja
Thanks for the comments. I am usually pretty conservative as well (and similar to you, making additional payments to pay off the mortgage early).
30 year mortgage rates are just so low it makes it tempting as long as you don't need the money anytime in the near future.
anon 832 - not thinking about changing the mortgage due to market conditions, but rather that rates are being pushed to extremely low levels again. I would agree though, if the S&P went back to 700 or 800, it would probably be a no brainer.
Regarding home refi I heard this week that they will be passing legislation allowing PMI to be tax deductible until 2010, perhaps longer. That is another stimulus.
I have heard several experts advise against ever paying off your house with interest rates in the 5-6 range, since the interest is deductible, and long term market returns wiill allow you to make more on OPM (other peoples money). It must also be a nice feeling not having that mortgage payment over your head.
To each his own.
I heard Jonathan Hoenig recommend FXF as his
favorite currency buy right now given the fact that their financial and social structure is the soundest of any outside the US. Any thoughts?
Thanks,
Scoot
The average bear market last for 18months, so by most historical measures we probably haven't seen the bottom yet. However, it's still possible to make money on the long side during bear markets.
I just posted my latest model readings (www.regimenia.com) and my long positions are growing purely based on the extreme pessimism I am seeing in the sentiment indicators. If you look at charts of almost every bear market, significant rallies are fairly common - and we may be seeing one of these fairly soon.
Roger, do you think the bear market in stocks will also be accompanied by bear market in precious metals and grains? I have read your articles in seeking alpha but wanted to know your current thoughts.
Roger-
I am intrigued by your recent review of NARFX. Can you comment on its decline here. Also, do you know if they will be renewing their fee waivers? Otherwise it appears from their materials that the fee could be quite high.
Thanks.
MarkM
in a bear market money has to go somewhere so it could keep rotating into certain commodities, certain currencies and certain bonds. I would not want to make a big bet on any of those but money will flow somewhere.
they way i think of this is that i want to own things that fundamentally decouple. things that decouple fundamentally have a chance of going down less or turning up sooner--no guarantee just a chance.
as for NARFX, they fee waiver was extended as I recall but am not sure for how long but no doubt it is expensive in nominal terms.
as for the decline, I am inclined to say what decline? as i see it on yahoo charts it is down 1% in the last three months versus 12 for SPX. YTD it is down less than 4% versus about 9% for SPX.
a couple of clients own it, and I'd say that is pretty good result. am i missing something?
some very intelligent people argue that the 8-10% return of the market might be high. dimson, marsh, and staunton (of london business school) wrote a paper in 2003 that suggests that the 6% annual real return of the market probably overestimates future real returns 1% to 2% annually (see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=476981 to download a copy of their paper); they examined real returns in non-US markets over relatively long periods to support their conclusions. earlier, rob arnott and peter bernstein also argued in an article in the march/april 2002 issue of the financial analyst journal that the upward re-valuation of equities since WWII contributed to higher returns in the past than should be likely to occur in the future. if i were thinking of a re-fi to use to reinvest in stocks, i would use an expected return of something closer to a 6% to 7% annual return (with a 2% to 3% inflation rate.) i retired in mid-2006 and assumed only a 2% real return for equities--after all, better safe than sorry. hopefully, if you use conservative assumptions, all the error in your estimates will be favorable rather than against you.
on another observers point--i bought narfx a few months ago. i don't expect every day to be up (although i would like it to be that way.) narfx has certainly done much better than the market recently--not up, but not down anywhere near the market's drop. they performed very well during 2007 although the fund eased a bit toward the end of the year. i am not very concerned about a couple of weeks of modest downside, especially given the dropoff in almost all assets since the end of last year. i'm inclined to give them at least a quarter or two before i become concerned (unless the fund really collapses, especially vs the market).
gig-
I concur with your comments about the market's returns. I favor these absolute return strategies. At least until we wring the excesses from these markets.
I have examined the NARFX positioning as described in their latest comments and have concluded that the massive short squeezes lately in a few sectors likely produced the falloff. Nothing to concerning.
MarkM
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