Investing 102

[67pro-street]

Thanks Greg! I started reading this book called The Elements of Investing last night. It is a short read that anyone can easily finish in a few days, but i like the way it is written. The authors wrote it in a manner much like this investing 102 thread where someone who has minimal knowledge of the stock market can pick it up and understand what sound investing is all about. The book is oriented towards investing long term into index funds as opposed to buying individual stocks...but even if you aren't that kind of investor i would suggest it to everyone as there is a lot of good information in there that is easy to read and understand. Also, its a fairly current book written after the '08 crisis so the stuff they talk about is relative to our current market...

So speaking of which, Greg i am sure you are invested into index funds as well. What would your thoughts be on a guy like myself using my Roth IRA to invest into index funds and my brokerage account to invest into individual stocks. At least for the next 3-5 years as i am just getting started out? I want to be diversified but at the same time i am worried about trying to get too diversified too quickly to the point where i have spread my money out too thin amongst different investments and in doing so i never really take advantage of the market swings...or would you say there is no such thing as doing that as long as i am in it for the long term and not trying to make a quick buck??

[67pro-street]

Another thing i am looking into is refinancing my home mortgage. With rates as low as 3% i did some math and figured out that if i can refinance @ 3% for 15 year fixed, i would be paying damn near the same monthly mortgage as my current monthly payments are on my 30 year fixed loan. Of course, prices are changing daily and i need to time it properly to lock my rate in a good percentage, but i just thought i would throw it out there since a home is also a long term investment and any money i can save on interest is money i can put into the market and hopefully get a higher return than 3%.

Which I guess this brings me to another point, and i apologize i know i can get long winded sometimes, but what is everyone's opinion on refinancing with another 30 year mortgage where maybe i am paying 300-500 dollars less per month than if i went with the 15 year refinance. My thought is to pay the min. payment for 30 years and take that 300-500 dollar savings and use it for investing. Not only does keeping my home loan help with tax returns, but i also know that i have a fixed 3% loss on interest for the next thirty years (i am just going to use 3% as an example even though that might not be the rate i lock into...). From what i have gathered so far, the stock market will generally have a ~7% RoR. so even though i am "losing" money by paying interest on my home loan that has been dragged out for 30 years, i know right now that the interest rate will always be 3% for the life of the loan. So if i take the money i save per month by having a 30 year loan as opposed to the 15 year loan and invest it, i can reasonably expect a higher growth than 3% on my investments AND i can afford to invest more money now, rather than later because my monthly mortgage payment decreased. So essentially, if what i am trying to say makes any sense at all then i would be making ~4% on my money ([7% RoR on stock market] - [3% interest payment on homeloan] = 4%) and i am doing so 15 years earlier than i would be if i went with a 15 year loan, right?? (i am ignoring salary increases or other forms of income when i say this...).

Once again, i apologize if this doesnt make sense and for being so long winded. Sometimes it is really hard to type what you are thinking in your head...

[ErikLS2]

Originally Posted by 67pro-street

Another thing i am looking into is refinancing my home mortgage. With rates as low as 3% i did some math and figured out that if i can refinance @ 3% for 15 year fixed, i would be paying damn near the same monthly mortgage as my current monthly payments are on my 30 year fixed loan. Of course, prices are changing daily and i need to time it properly to lock my rate in a good percentage, but i just thought i would throw it out there since a home is also a long term investment and any money i can save on interest is money i can put into the market and hopefully get a higher return than 3%.

Which I guess this brings me to another point, and i apologize i know i can get long winded sometimes, but what is everyone's opinion on refinancing with another 30 year mortgage where maybe i am paying 300-500 dollars less per month than if i went with the 15 year refinance. My thought is to pay the min. payment for 30 years and take that 300-500 dollar savings and use it for investing. Not only does keeping my home loan help with tax returns, but i also know that i have a fixed 3% loss on interest for the next thirty years (i am just going to use 3% as an example even though that might not be the rate i lock into...). From what i have gathered so far, the stock market will generally have a ~7% RoR. so even though i am "losing" money by paying interest on my home loan that has been dragged out for 30 years, i know right now that the interest rate will always be 3% for the life of the loan. So if i take the money i save per month by having a 30 year loan as opposed to the 15 year loan and invest it, i can reasonably expect a higher growth than 3% on my investments AND i can afford to invest more money now, rather than later because my monthly mortgage payment decreased. So essentially, if what i am trying to say makes any sense at all then i would be making ~4% on my money ([7% RoR on stock market] - [3% interest payment on homeloan] = 4%) and i am doing so 15 years earlier than i would be if i went with a 15 year loan, right?? (i am ignoring salary increases or other forms of income when i say this...).

Once again, i apologize if this doesnt make sense and for being so long winded. Sometimes it is really hard to type what you are thinking in your head...

My free advice, so take it for what it's worth, is to always get a 15 year loan if you can. Chances are you wont be in the house even that long and on a 15year much more of your payment goes to principal reduction so you're really just paying yourself that money assuming the house doesn't go down in value.

I wouldn't make your decision based on tax deductibility alone either. Doing something just to get the tax deduction isn't a good reason for doing it. If it's a good financial decision and it's tax deductible, then just look at that as a bonus. Don't bank on that interest always being tax deductible either, the gov't needs cash right now and they'll find it somewhere.

You already have the correct mindset though of maximizing the amount of return on your money so just do what feels right to you and you'll be fine. A lot of people just try to focus on the lowest payment and longest term they can get on borrowed money and borrowing as much as they can get.

[GregWeld]

I would advise the opposite of Eric... I'd take the 30 year note - and then if you want to you can add principle payments each month or once or twice a year.

The real math needs to be worked out with your real interest rate as the taxable net is what's important.

Having said the above it also depends on how old you are. It's absolutely ridiculous for someone that is 45 or 50 years old to owe on a 30 year mortgage! The whole key to RETIREMENT is to have your expenses low! A house payment is the biggest debt burden people have... You can live quite effectively if you don't have a house payment when you're 70!

I have a 30 year mortgage (with 23 years left of the 30) I'm 59.... but I also do not have to have a mortgage - I do it for tax purposes and I DOUBLE the payment each month just because it bugs me to owe anything.

So if you're a good money manager - and are truly diligent about paying extra on the principle - it's better to "have to" pay less per month - but only as long as you stick to your guns and pay down that principle.... thus effectively saving you the interest along the way.

[Vegas69]

You'll never regret having a mortgage free place to live. Timing the stock market at retirment age may be a different story.

[GregWeld]

Originally Posted by Vegas69

You'll never regret having a mortgage free place to live. Timing the stock market at retirment age may be a different story.

Sorry -- that's just a giant misconception. The day you retire -- you don't just curl up in a ball and die... Or have to put all your money in a CD....

If you retire at 65 and have a life expectancy of early 90's.... you've got 25 more years that your retirement investments will still be working for you... with both growth and income. Dividends increase - a fixed rate mortgage does not.

He can still pay off his house as early as he is able...

The problem is most people cut their payment with a re-fi but then go out and piss the money away rather than investing it... so it really depends more about how anyone handles their finances.

[ironworks]

Ok So I maybe I'm missing it, but correct me if I'm wrong, but doesn't having a tax write off that you don't need anymore if you have 15 year note instead of a 30 year term mean your just wasting money for a write off?

Example

1000 bucks per month interest that your not paying taxes on at the end of the year.

But had you of just paid the taxes on that money by paying off your note early, won't that put 720 bucks per month in your pocket instead of a banker pocket for that lower payment but longer term? That is saying your paying 28% to the IRS. Seems to me that a just having write off is great, but sometimes it might be better to pay the government a little bit of money instead of the banker alot of money.

Follow Me? or should I just back out into the shop?

Heck if you want a write off, go buy a 2nd home and rent it out.

[GregWeld]

Originally Posted by ironworks

Ok So I maybe I'm missing it, but correct me if I'm wrong, but doesn't having a tax write off that you don't need anymore if you have 15 year note instead of a 30 year term mean your just wasting money for a write off?

Example

1000 bucks per month interest that your not paying taxes on at the end of the year.

But had you of just paid the taxes on that money by paying off your note early, won't that put 720 bucks per month in your pocket instead of a banker pocket for that lower payment but longer term? That is saying your paying 28% to the IRS. Seems to me that a just having write off is great, but sometimes it might be better to pay the government a little bit of money instead of the banker alot of money.

Follow Me? or should I just back out into the shop?

Heck if you want a write off, go buy a 2nd home and rent it out.

Yeah -- you should probably just stick to bending metal.

The WRITE off.... can reduce your TAXABLE INCOME.... so the proper math might look more like...

A guy makes 100K taxable income

He pays 25K in interest

His net taxable income (without anything else) would be 75K.

Now not only is this guy saving the taxes on the 25K but he's also reduced his amount of taxable income which may have put him in a lower % tax bracket as well!

It's all very complicated -- and is something that needs to be worked out per individual and with a qualified accountant that can crunch the actual numbers.


+++++++++++++


So here's the other thing that people forget about when buying a house.

The ROI should actually be calculated on the amount of money you put down... so let's say a guy puts down 25K on a 100K house.... and 10 years later he sells for 150K... did he make 50 on 100 or did he make 50 on the 25 he actually "invested".

Of course that is oversimplification... because the numbers just aren't that simple and if you ask me -- NOBODY ever made any money buying a house that they LIVE in... because when you take into account the payments and the upkeep and the taxes etc -- they've spent way more than they "made"... but it SOUNDS GOOD!

The way to make money on real estate is to buy something and rent it out... 'cause it doesn't work out on you primary living space. But everyone has to live somewhere and the key is to have it free and clear as soon as you possibly can.

The catch is -- investing in the stocks or other forms of investments -- will far exceed the amount you save by paying off early. You have to take into account the COMPOUNDING of interest on interest over time.... and a paid off house doesn't return anything to you after it's paid off.... it just saves you some money each month. But the money isn't WORKING... if that makes any sense.

[GregWeld]

Aman --- good post.


#1 --- ETF's.... I'm not a fan of this style of investing for the main reason is that they are "dumb" like Mutual Funds are. They seek to just diversify an investment in a group/basket of stocks and sadly the bad to midland stocks drag down the overall investment in the good names they hold. While they can pay dividends they are usually super low % wise... so that leaves you with mostly the "growth" component. It's for that reason that I don't use them. They will simply follow that market - you'll never beat the market - and you don't get paid to sit on your hands.



So the ETF "versions" I use are for Corporate Bonds - and Junk Bonds (one and the same really except for the quality of the underlying issue quality/credit worthiness) such as HYG and JNK and PFF.... those are the trading symbols for the three I use the most (in fact have a couple mil in these). I use these to park cash and get a fairly high return - but I would warn that these are not for the buy it and fugidaboudit investor. They'll get crushed if the interest rates move! So you have to be nimble.


#2 -- I've suggested in the past that if you have 5K to invest - that you might only choose TWO stocks... and 10K you might choose 5 names etc.... and when you get to 100K you should have 20 names....and even if you have a million you can still stick to 20 or 25 names. This is given that you're simply invested in the best of breed and want the dividends long term etc. So to answer your question --- diversity without the corresponding level of investment just won't get ya done.... so don't diversify just to diversify - but rather WORK TOWARDS THAT GOAL.... so with 5K buy two - save for your next investment and buy name number 3 and so on.

Hope this answers your question?

[Woody]

The others have made some good points, but I I thought I would add a few other things to think about. First of all this is not an easy question to answer and is very dependent on the individual. The first thing to consider is that you can generally get a lower rate with a 15-year than a 30-year and the amount of interest saved is rather large between getting a lower rate and borrowing the money for a shorter time period. For example, if you have a $300,000 loan at 4.0% for 30-years vs. a $300,000 loan at 3.375% for 15 years, the amount of intestest savings is $132,879. However, you are paying (investing) an additional $694 per month to get that savings of $132,879. The question you need to ask is can you invest $694 per month over the next 15 years and end up with more than $132,879.

The answer is it depends on what you invest the money in and how the investment performs. By selecting the 15-year loan, you are essentially selecting a "safe" guaranteed return. As long as you make the payment, you are guaranteed that return. If you instead take the 30-year loan and invest in the stock market you are selecting a higher risk investment with greater return potential, but no guaranteed return. While you can argue that the stock market has had a long-term average return of x% (7% 8%,9%), there is no guarantee you are going to get that return in the future. You are taking on more risk to potentially get a higher return. So the question becomes what is your risk tolerance. Do you want the guaranteed return or are you willing to take on more risk for the potential of a higher return, but also with the potential for a lower return.