Author Topic: Idea for investing during a recession  (Read 4958 times)

Radagast

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Re: Idea for investing during a recession
« Reply #50 on: June 16, 2018, 10:01:39 PM »
There's a thread elsewhere on the net (I can't for the life of me remember where), in which an extremely intelligent person devised an extremely carefully backtested plan for leveraged martingale-style investment, and lost absolutely everything - we're talking mid six figures gone up in smoke and reduced to zero over the course of a year or so.
https://www.bogleheads.org/forum/viewtopic.php?t=5934
This one. One of the best investing threads, like a Greek tragedy or a horror movie, where countless sages prophesied the future, and all the observers can see what is about to happen, but the hapless OP walks into it and is slaughtered (but shortly after discovered the FI community and achieved a happy ending with an unsurprising if remarkably low stock exposure).
Doesn't take long to see that this guy invested a lot of money late in a bull market. I didn't bother to read his cunning plan. Investing on margin in a mature bull market is highly risky and the opposite of what the OP is suggesting.
Different but not opposite. Both are leverage. In neither case could OP predict future market movements or know with foresight if it was a major or minor recession or major or minor correction. The big difference would be if the HELOC was not callable. Provided OP could get it, I understand banks are less willing to do cash out refis in major recessions.

runbikerun

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Re: Idea for investing during a recession
« Reply #51 on: June 17, 2018, 02:03:35 AM »
What makes me deeply uneasy about ideas like this is pretty simple:

There is a long, long, LONG history of people who thought they'd figured out a way to increase returns without increasing risk or exposure. The thread starter over on Bogleheads is a small example, as was the r/tradeXIV subreddit over on Reddit before XIV exploded and took all their funds with it. But there are bigger examples: in 1997, Myron Scholes and Robert Merton won the Nobel Prize in economics for "a new method to determine the value of derivatives" while sitting on the board of Long Term Capital Management LP. One year later, their fund lost $4.6bn. Four billion, six hundred million dollars, lost in the space of four months, by a firm run by actual Nobel-Prize-winning economists.

The odds that you have bucked the trend are long. The combined intellects of a few dozen frugal-living adherents with a reasonable interest in the markets may not be able to explain exactly how this will blow up in your face, but that does not mean it won't.

MustacheAndaHalf

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Re: Idea for investing during a recession
« Reply #52 on: June 17, 2018, 04:17:23 AM »
...
I did a quick review of the last 5 major recessions and found that the average decline was 40% and the average duration was 22 months:

1973-74 (48% - 645 days)
1976-78 (19% - 531 days)
1980-82 (27% - 622 days)
2000-02 (49% - 929 days)
2007-09 (57% - 517 days)
...
I'm curious which source shows those numbers, since Portfolio Visualizer shows:
Sept 2000 - Sept 2002 was -44.1%
Nov 2007 - Feb 2009 was -50.9%


Using a home loan is a better idea than using margin.  Unlike margin, home loans do not require more money if your house falls in value.  The payments are more stable, and less risky than margin loans.

But you're leveraging your job a bit.  During that downturn, is your job more likely to be lost?  In which case you'd be unemployed with higher house payments.  There's a risk you'd have to sell assets during a downturn to keep your home.

mrmoonymartian

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Re: Idea for investing during a recession
« Reply #53 on: June 17, 2018, 04:37:54 AM »
I think it's a fine idea and in fact I was already planning to use it sometime if conditions suit... especially if I'm still working when markets crash so that I can deduct the interest from tax. It's a more difficult decision if in spending phase... probably depends on how much dry powder I've got in bonds/cash at the time.

It's mostly just a compromise in the eternal 'invest or pay down mortgage' debate... it's the 'pay down mortgage then switch to investing when the sale is on' alternative.

xpauliber

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Re: Idea for investing during a recession
« Reply #54 on: June 17, 2018, 05:31:56 AM »
What makes me deeply uneasy about ideas like this is pretty simple:

There is a long, long, LONG history of people who thought they'd figured out a way to increase returns without increasing risk or exposure. The thread starter over on Bogleheads is a small example, as was the r/tradeXIV subreddit over on Reddit before XIV exploded and took all their funds with it. But there are bigger examples: in 1997, Myron Scholes and Robert Merton won the Nobel Prize in economics for "a new method to determine the value of derivatives" while sitting on the board of Long Term Capital Management LP. One year later, their fund lost $4.6bn. Four billion, six hundred million dollars, lost in the space of four months, by a firm run by actual Nobel-Prize-winning economists.

The odds that you have bucked the trend are long. The combined intellects of a few dozen frugal-living adherents with a reasonable interest in the markets may not be able to explain exactly how this will blow up in your face, but that does not mean it won't.

Noted.  Do you understand my original post and what Iím proposing?

xpauliber

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Re: Idea for investing during a recession
« Reply #55 on: June 17, 2018, 05:46:08 AM »
...
I did a quick review of the last 5 major recessions and found that the average decline was 40% and the average duration was 22 months:

1973-74 (48% - 645 days)
1976-78 (19% - 531 days)
1980-82 (27% - 622 days)
2000-02 (49% - 929 days)
2007-09 (57% - 517 days)
...
I'm curious which source shows those numbers, since Portfolio Visualizer shows:
Sept 2000 - Sept 2002 was -44.1%
Nov 2007 - Feb 2009 was -50.9%


Using a home loan is a better idea than using margin.  Unlike margin, home loans do not require more money if your house falls in value.  The payments are more stable, and less risky than margin loans.

But you're leveraging your job a bit.  During that downturn, is your job more likely to be lost?  In which case you'd be unemployed with higher house payments.  There's a risk you'd have to sell assets during a downturn to keep your home.

I'll try to find the site I used that gave me that data but here is the chart that was on the site.  I googled something like "history of market corrections in USA".

As for my job, my position is with a non-profit that is very secure and was unaffected during the Great Recession. Similarly, my wife works in the long-term healthcare field and her position was not affected during the Great Recession as well so we are pretty secure from the income standpoint. 

Another thing that I hope people understand is to not leverage themselves beyond their comfort level.  $50,000 in my particular situation would certainly be a hit that I wouldn't want to take if it all evaporated but my cash flow and other assets I own would be able to cover the loss.  If I was proposing this with a 6-digit investment or I was within a couple years of retirement, I may be a bit more queasy but then again, if I implement this and it goes as I planned with $50,000, then I don't see any reason why increasing the investment would make a difference if you only invest with an amount that you can comfortably cover the debt service for a number of years if necessary.
« Last Edit: June 17, 2018, 09:27:00 AM by xpauliber »

xpauliber

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Re: Idea for investing during a recession
« Reply #56 on: June 17, 2018, 05:47:02 AM »
I think it's a fine idea and in fact I was already planning to use it sometime if conditions suit... especially if I'm still working when markets crash so that I can deduct the interest from tax. It's a more difficult decision if in spending phase... probably depends on how much dry powder I've got in bonds/cash at the time.

It's mostly just a compromise in the eternal 'invest or pay down mortgage' debate... it's the 'pay down mortgage then switch to investing when the sale is on' alternative.

Interesting way of thinking of it; I like it!

boarder42

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Re: Idea for investing during a recession
« Reply #57 on: June 17, 2018, 01:25:55 PM »
You likely cant deduct your interest new tax law changes prevent most people from taking anything but standard deduction now.

PDXTabs

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Re: Idea for investing during a recession
« Reply #58 on: June 17, 2018, 01:56:15 PM »
The basic principle being discussed here is a leveraged investment... should you borrow against your house to buy into a risky, fluctuating stock market?

If I had the opportunity I would probably be willing to any time the market has dropped 50%. I know someone who took out a seven figure loan during the 2008 crisis and let it ride for a decade. Obviously, not everyone has that option. But if you can do it it's a good way to have some extra wealth to will to your heirs, donate, etc.

mrmoonymartian

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Re: Idea for investing during a recession
« Reply #59 on: June 17, 2018, 03:11:56 PM »
You likely cant deduct your interest new tax law changes prevent most people from taking anything but standard deduction now.
Depends which country you're in. Still good in Aus as far as I know.

xpauliber

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Re: Idea for investing during a recession
« Reply #60 on: June 17, 2018, 05:16:56 PM »
The basic principle being discussed here is a leveraged investment... should you borrow against your house to buy into a risky, fluctuating stock market?

If I had the opportunity I would probably be willing to any time the market has dropped 50%. I know someone who took out a seven figure loan during the 2008 crisis and let it ride for a decade. Obviously, not everyone has that option. But if you can do it it's a good way to have some extra wealth to will to your heirs, donate, etc.

The challenge though if you look at the chart I posted a couple posts up is that in the past 68 years, the market has only dipped below 50% one time.  Iím hoping to capitalize on more minor recessions because as another poster mentioned, in the midst of a recession, youíll never know whether itís a major or minor recession so if youíre waiting for a 50% drop, you may never get into the market.

xpauliber

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Re: Idea for investing during a recession
« Reply #61 on: June 17, 2018, 05:45:56 PM »
The basic principle being discussed here is a leveraged investment... should you borrow against your house to buy into a risky, fluctuating stock market?

If I had the opportunity I would probably be willing to any time the market has dropped 50%. I know someone who took out a seven figure loan during the 2008 crisis and let it ride for a decade. Obviously, not everyone has that option. But if you can do it it's a good way to have some extra wealth to will to your heirs, donate, etc.

7 figures?! Wow.  And it was a loan so he was servicing that debt for over a decade.  Sounds like they would be a good commentor for this thread!  Any idea if he lump summed into the market or deployed in stages?  Any idea when he entered the market (what percent it was down?) and how he made the decision to enter?

maizeman

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Re: Idea for investing during a recession
« Reply #62 on: June 17, 2018, 06:00:48 PM »
If you believe that ďthe market always goes upĒ, then how are you going to lose by investing with this approach?

I don't see how the logic about avoiding market timing is different if I'm holding "dry powder" in a checking account earning 0.5% interest or if I'm holding the same dry powder in excess home equity that I've be comfortable investing in the market. If I believe the market always goes up (which I do), wouldn't I have all of my money invested in the market before a market drop?
 
Let's say I'm okay with having as little as 20% equity in my primary residence (because below that the fees go up so the additional equity costs be a substantially higher effective interest rate than the first 80%). If I believe the market always goes up in the long run, then logically I should have all that money invested in the market, not held out of the market, waiting for a drop in prices which may never come.

The logic is the same if I'm only with as little as 0% equity, or 50% or 95%. So what I would lose by adopting your approach is the ability to profit if markets continue to go up, instead of only if the market goes down, and then back up again.

Now if you had a significant recession where interest rates for long term mortgages dropped, and home prices stayed approximately the same (or increased), yes in that case the amount of my net worth I'd be comfortable having locked up in home equity might decline. But even then the thing driving my decision making would be how much long term fixed rate mortgages had declined, not how much the stock market had declined.

tralfamadorian

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Re: Idea for investing during a recession
« Reply #63 on: June 17, 2018, 07:11:33 PM »
There's a thread elsewhere on the net (I can't for the life of me remember where), in which an extremely intelligent person devised an extremely carefully backtested plan for leveraged martingale-style investment, and lost absolutely everything - we're talking mid six figures gone up in smoke and reduced to zero over the course of a year or so.
https://www.bogleheads.org/forum/viewtopic.php?t=5934
This one. One of the best investing threads, like a Greek tragedy or a horror movie, where countless sages prophesied the future, and all the observers can see what is about to happen, but the hapless OP walks into it and is slaughtered (but shortly after discovered the FI community and achieved a happy ending with an unsurprising if remarkably low stock exposure).

Wow. I just read the whole thing.

PDXTabs

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Re: Idea for investing during a recession
« Reply #64 on: June 17, 2018, 07:57:18 PM »
7 figures?! Wow.  And it was a loan so he was servicing that debt for over a decade.  Sounds like they would be a good commentor for this thread!  Any idea if he lump summed into the market or deployed in stages?  Any idea when he entered the market (what percent it was down?) and how he made the decision to enter?

I don't know him that well. The interest would have been tax deductible and I'm pretty sure he had the cash flow to cover it.

The challenge though if you look at the chart I posted a couple posts up is that in the past 68 years, the market has only dipped below 50% one time.  Iím hoping to capitalize on more minor recessions because as another poster mentioned, in the midst of a recession, youíll never know whether itís a major or minor recession so if youíre waiting for a 50% drop, you may never get into the market.

Well, I'm simple. I just buy more every paycheck and don't keep any dry powder to speak of.

xpauliber

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Re: Idea for investing during a recession
« Reply #65 on: June 17, 2018, 10:10:51 PM »

The challenge though if you look at the chart I posted a couple posts up is that in the past 68 years, the market has only dipped below 50% one time.  Iím hoping to capitalize on more minor recessions because as another poster mentioned, in the midst of a recession, youíll never know whether itís a major or minor recession so if youíre waiting for a 50% drop, you may never get into the market.

Well, I'm simple. I just buy more every paycheck and don't keep any dry powder to speak of.

Neither do I except the equity that's built up in my home.  My main investment strategy is the same as you: investing every other week via my employer but this was an idea I had to try and capitalize on future downturns in the market with a source of equity that I do have outside of the market.  I don't for a second believe I can time the market getting out and back in successfully therefore my main retirement funds stay in the market once they get invested.

xpauliber

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Re: Idea for investing during a recession
« Reply #66 on: June 17, 2018, 10:27:59 PM »
If you believe that ďthe market always goes upĒ, then how are you going to lose by investing with this approach?

I don't see how the logic about avoiding market timing is different if I'm holding "dry powder" in a checking account earning 0.5% interest or if I'm holding the same dry powder in excess home equity that I've be comfortable investing in the market. If I believe the market always goes up (which I do), wouldn't I have all of my money invested in the market before a market drop?
 
Let's say I'm okay with having as little as 20% equity in my primary residence (because below that the fees go up so the additional equity costs be a substantially higher effective interest rate than the first 80%). If I believe the market always goes up in the long run, then logically I should have all that money invested in the market, not held out of the market, waiting for a drop in prices which may never come.

The logic is the same if I'm only with as little as 0% equity, or 50% or 95%. So what I would lose by adopting your approach is the ability to profit if markets continue to go up, instead of only if the market goes down, and then back up again.

Now if you had a significant recession where interest rates for long term mortgages dropped, and home prices stayed approximately the same (or increased), yes in that case the amount of my net worth I'd be comfortable having locked up in home equity might decline. But even then the thing driving my decision making would be how much long term fixed rate mortgages had declined, not how much the stock market had declined.

I'm not sure I'm following the point you're trying to make.  As you pay down your mortgage, the equity builds and is automatically tied up in your residence.  The only way to tap that and invest it in the market is to borrow against it at which point, you then incur debt that needs serviced.  Having dry powder in a checking account doesn't cost you anything to tap to invest so it can't be considered "dry powder" since you can't access it without incurring debt that needs serviced via your monthly cash flow.

I think what you're saying is that if I believe the market always goes up, then I should cash out all available equity (down to 20%) and invest that in the market at any point since it will eventually go up and generate a return for me.  If that's the case, then when do you advocate paying off the mortgage since every time you borrow against it, you're increasing the debt that would need serviced and therefore you're extending how long it is until you pay off the debt.

My ultimate goal is to pay my mortgage off and be debt free so I'm not interested in leveraging against my house during normal market conditions but if the market dips significantly, why not tap the equity in your home to invest in the dip, generate a return as the market recovers, pay back the equity you borrowed and be right back to where you were pre-recession with regards to how much equity you own in your home but having made a profit in the meantime (that you could either leave invested or use to further pay down your mortgage)?

Mighty-Dollar

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Re: Idea for investing during a recession
« Reply #67 on: June 18, 2018, 02:13:25 AM »
He even made the comment that if you pay your house off, "you have this huge asset sitting there doing nothing for you."
Nonsense. Real estate values generally go up over time. If you live in that house then you're kind of like eating your dividends because you're not renting it. But of course if you lived elsewhere you'd be paying rent.

Let me guess... Is this lawyer trying to sell you on some investment? This idea that your home is "dead equity" is usually what SALESMEN say when they want to sell you index universal life insurance, annuities, etc.

I was just going to say that economists have predicted 10 of the last 3 recessions. 

boarder42

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Re: Idea for investing during a recession
« Reply #68 on: June 18, 2018, 05:32:58 AM »
He even made the comment that if you pay your house off, "you have this huge asset sitting there doing nothing for you."
Nonsense. Real estate values generally go up over time. If you live in that house then you're kind of like eating your dividends because you're not renting it. But of course if you lived elsewhere you'd be paying rent.

Let me guess... Is this lawyer trying to sell you on some investment? This idea that your home is "dead equity" is usually what SALESMEN say when they want to sell you index universal life insurance, annuities, etc.

I was just going to say that economists have predicted 10 of the last 3 recessions.

Your real estate value moves regardless of a mortgage.


maizeman

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Re: Idea for investing during a recession
« Reply #69 on: June 18, 2018, 06:23:46 AM »
I think what you're saying is that if I believe the market always goes up, then I should cash out all available equity (down to 20%) and invest that in the market at any point since it will eventually go up and generate a return for me.  If that's the case, then when do you advocate paying off the mortgage since every time you borrow against it, you're increasing the debt that would need serviced and therefore you're extending how long it is until you pay off the debt.

My ultimate goal is to pay my mortgage off and be debt free so I'm not interested in leveraging against my house during normal market conditions but if the market dips significantly, why not tap the equity in your home to invest in the dip, generate a return as the market recovers, pay back the equity you borrowed and be right back to where you were pre-recession with regards to how much equity you own in your home but having made a profit in the meantime (that you could either leave invested or use to further pay down your mortgage)?

As boarder42 can tell you, you don't need a paid off mortgage to FIRE.

But if you really believe the market always goes up and you don't want to FIRE until you have a paid off mortgage to FIRE, the fastest way to hit FI would be to keep your equity at whatever the minimum amount you're comfortable with given available interest rates until the value of your stocks reaches 25x your annual expenses + enough extra to pay off your home loan and then sell enough stocks to pay off your home in one fell swoop.

And the point I'm making is that there is nothing magically different about the proportion of home equity that you're willing to invest vs money sitting in a checking account. In both cases you'll get better average returns by putting it in the market right away vs trying to wait for recessions and trying to time the market.

FIREJD2B

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Re: Idea for investing during a recession
« Reply #70 on: June 18, 2018, 02:18:51 PM »
If you believe that ďthe market always goes upĒ, then how are you going to lose by investing with this approach?

If I believe the market always goes up (which I do), wouldn't I have all of my money invested in the market before a market drop?
[...]
If I believe the market always goes up in the long run, then logically I should have all that money invested in the market, not held out of the market, waiting for a drop in prices which may never come.

I think you're correct that this strategy offers nothing for someone who has an interest-only mortgage or who continuously refinances their home to remove all "excess" equity (i.e. any equity over 5% or 20% or whatever number the person views as the desirable baseline).

However, I think that's an edge objection -- very few people fit those criteria. To my understanding, banks are fairly wary about extending interest-only mortgages, so selecting that option (and then investing the increased cash flow that would otherwise go into the principal) requires that you accept worse terms on other aspects (such as interest rates). Similarly, refinancing a mortgage regularly has both monetary costs (refinancing fees and potentially higher interest rates) and non-monetary costs (time and hassle of completing the refinance).

As a result, it's not uncommon to see people advocate holding a 30-year mortgage and investing the increased cash flow rather than prepaying the mortgage. It's quite rare to see people advocate continuously pulling all excess equity out of a home in order to maximize market investments, even if that's just the full-commitment version of the "invest the difference" strategy. (And obviously somewhere someone does do that, but it's extremely atypical.)

I'm still thinking about it, and I feel like seeing some historical backtesting would give a much better idea, but the core of the approach seems like it makes sense to me. Assuming that lenders are willing to allow you to pull equity out of your home during a downturn (which may or may not be an accurate assumption), then shifting assets from home equity  to (index funds of) stocks during a downturn seems to provide positive expected return at minimal (albeit nonzero) increased risk.

Also, if you lose your job, having 50% home equity doesn't help you avoid foreclosure. If I lost my job, from the perspective of being forced into foreclosure, I'd prefer to have pulled out the money comprising the home equity and put it into the stock market before losing my job (and as the Great Recession showed, both home values and stocks can drop, so it's not necessarily the case that holding your money in home equity will prevent loss of principal in the short-term).
(This latter point is something of a side discussion, but I recall others making this point on these forums previously -- perhaps boarder or Dodge? -- with the main takeaway being that less than 100% home equity doesn't actually protect you from foreclosure in the event of job loss and illiquidity.)

maizeman

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Re: Idea for investing during a recession
« Reply #71 on: June 18, 2018, 02:54:07 PM »
I think you're correct that this strategy offers nothing for someone who has an interest-only mortgage or who continuously refinances their home to remove all "excess" equity (i.e. any equity over 5% or 20% or whatever number the person views as the desirable baseline).

However, I think that's an edge objection -- very few people fit those criteria. To my understanding, banks are fairly wary about extending interest-only mortgages, so selecting that option (and then investing the increased cash flow that would otherwise go into the principal) requires that you accept worse terms on other aspects (such as interest rates). Similarly, refinancing a mortgage regularly has both monetary costs (refinancing fees and potentially higher interest rates) and non-monetary costs (time and hassle of completing the refinance).

As a result, it's not uncommon to see people advocate holding a 30-year mortgage and investing the increased cash flow rather than prepaying the mortgage. It's quite rare to see people advocate continuously pulling all excess equity out of a home in order to maximize market investments, even if that's just the full-commitment version of the "invest the difference" strategy. (And obviously somewhere someone does do that, but it's extremely atypical.)

I'm still thinking about it, and I feel like seeing some historical backtesting would give a much better idea, but the core of the approach seems like it makes sense to me. Assuming that lenders are willing to allow you to pull equity out of your home during a downturn (which may or may not be an accurate assumption), then shifting assets from home equity  to (index funds of) stocks during a downturn seems to provide positive expected return at minimal (albeit nonzero) increased risk.

Obviously it doesn't make sense to refinance your house to pull out $1,000 in excess equity. That's true whether the market is up or down relative to six months ago. However, in order to pull money out of a house without taking on variable rate debt through something like a HELOC (which xpauliber has said was not what he or she was advocating), you'd need to pull equity out of your house through either a refinance, second mortgage, or home equity loan. So the only people who would be discussing this situation are those with enough excess equity in their houses that it could make financial sense to pull some of that extra equity out to invest in the market.

So now we're back to the same question of, if a person believes that markets always go up, and they have enough equity in their home (beyond what they need to sleep comfortably at night) that it is financially viable to tap into that excess equity, why wouldn't that person pull that same equity out to invest in the market, regardless of what the current price is relative to two or three, or six months ago?

FIREJD2B

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Re: Idea for investing during a recession
« Reply #72 on: June 18, 2018, 05:16:36 PM »
I think you're correct that this strategy offers nothing for someone who has an interest-only mortgage or who continuously refinances their home to remove all "excess" equity (i.e. any equity over 5% or 20% or whatever number the person views as the desirable baseline).

However, I think that's an edge objection -- very few people fit those criteria. To my understanding, banks are fairly wary about extending interest-only mortgages, so selecting that option (and then investing the increased cash flow that would otherwise go into the principal) requires that you accept worse terms on other aspects (such as interest rates). Similarly, refinancing a mortgage regularly has both monetary costs (refinancing fees and potentially higher interest rates) and non-monetary costs (time and hassle of completing the refinance).

As a result, it's not uncommon to see people advocate holding a 30-year mortgage and investing the increased cash flow rather than prepaying the mortgage. It's quite rare to see people advocate continuously pulling all excess equity out of a home in order to maximize market investments, even if that's just the full-commitment version of the "invest the difference" strategy. (And obviously somewhere someone does do that, but it's extremely atypical.)

I'm still thinking about it, and I feel like seeing some historical backtesting would give a much better idea, but the core of the approach seems like it makes sense to me. Assuming that lenders are willing to allow you to pull equity out of your home during a downturn (which may or may not be an accurate assumption), then shifting assets from home equity  to (index funds of) stocks during a downturn seems to provide positive expected return at minimal (albeit nonzero) increased risk.

Obviously it doesn't make sense to refinance your house to pull out $1,000 in excess equity. That's true whether the market is up or down relative to six months ago. However, in order to pull money out of a house without taking on variable rate debt through something like a HELOC (which xpauliber has said was not what he or she was advocating), you'd need to pull equity out of your house through either a refinance, second mortgage, or home equity loan. So the only people who would be discussing this situation are those with enough excess equity in their houses that it could make financial sense to pull some of that extra equity out to invest in the market.

So now we're back to the same question of, if a person believes that markets always go up, and they have enough equity in their home (beyond what they need to sleep comfortably at night) that it is financially viable to tap into that excess equity, why wouldn't that person pull that same equity out to invest in the market, regardless of what the current price is relative to two or three, or six months ago?

I think we're in substantial agreement. I suspect most of the divergence in what we're saying is because I joined the thread late and haven't fully given my position (which isn't identical to the OP's views).

I don't think that refinancing your house to buy more stocks during a downturn is a risk-free way of increasing returns; there's likely still some increase in risk. And if refinancing / pulling equity out of your home were friction-less, then you'd want to be doing that constantly all the time anyway.

The OP primarily struck me as leveraging the psychological reaction of stocks being "on sale" during a downturn (as a way of preventing panic-selling), to then be used as a reminder to expend the effort to check whether pulling equity out of your home is feasible. I think that's substantively a bit more measured than what the OP suggested, so I realize my takeaway is more limited. But from that perspective, using a 25% or 30% downturn as a reminder to evaluate whether (1) current lending options make such a maneuver feasible and (2) the investor's emotional/psychological willingness to shift more assets into a declining stock market. If the answer to both is yes, then refinancing to shift home equity to stocks seems like it should have a positive expected value.

(And to reiterate, that expected value would still be lower than just checking whether refinancing is feasible every twelve months or something, but perhaps that's overly burdensome. I don't have any experience which would provide me with a personal basis of knowledge for making that judgment.)
« Last Edit: June 18, 2018, 05:18:25 PM by FIREJD2B »

maizeman

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Re: Idea for investing during a recession
« Reply #73 on: June 18, 2018, 05:34:23 PM »
Okay, yes I think part of the problem is I saw your post as a description of the OPs original position, rather than articulating your own independent view of the issue. Please do accept my apologies for that and thanks for the gentle call out on what I was doing.

My fear is that the OP, consciously or unconsciously, is thinking that after a significant downturn, stocks will tend to increase in value much faster than they do normally. This is a very common pattern to see come up both on these message boards, either in regular conversation or here on the forums, and I was trying to point out that the part about using money from home equity rather than cash in a bank account doesn't change the fact that historical analyses suggest higher average returns from buying into the market right away instead of waiting to buy during dips in price.

However, I do agree with you that for a person comfortable with a relatively slow amount of equity in their house, if a downturn acts as a reminder to check whether they have enough equity to pull out (when taking into account the friction of doing so), there's absolutely nothing wrong with that. It just probably doesn't provide a magic edge of increases returns vs just refinancing every 5 or 10 years on a fixed schedule.

FIREJD2B

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Re: Idea for investing during a recession
« Reply #74 on: June 18, 2018, 05:46:14 PM »
Okay, yes I think part of the problem is I saw your post as a description of the OPs original position, rather than articulating your own independent view of the issue. Please do accept my apologies for that and thanks for the gentle call out on what I was doing.

My fear is that the OP, consciously or unconsciously, is thinking that after a significant downturn, stocks will tend to increase in value much faster than they do normally. This is a very common pattern to see come up both on these message boards, either in regular conversation or here on the forums, and I was trying to point out that the part about using money from home equity rather than cash in a bank account doesn't change the fact that historical analyses suggest higher average returns from buying into the market right away instead of waiting to buy during dips in price.

However, I do agree with you that for a person comfortable with a relatively slow amount of equity in their house, if a downturn acts as a reminder to check whether they have enough equity to pull out (when taking into account the friction of doing so), there's absolutely nothing wrong with that. It just probably doesn't provide a magic edge of increases returns vs just refinancing every 5 or 10 years on a fixed schedule.

No worries; I wasn't entirely clear in differentiating my position, and I really appreciate your comments. When I wrote my first comment, I was actually still trying to parse out whether the approach of investing home equity during a downturn had some (risk-adjusted) upside I wasn't seeing that differentiated it from a typical market timing situation.

As far as I can tell, your second paragraph is completely correct and perfectly captures the issue. Even if we think it's reasonable to expect higher than typical returns going forward following a 30% stock market decline, that doesn't justify sitting on the sidelines waiting for a 30% decline before jumping in. That's true whether the funds which would be invested post-decline are held in cash or in the form of home equity.

I think the real insight from the OP is that if you buy the approach of investing excess funds rather than prepaying a mortgage, the logical outgrowth of that strategy is to periodically refinance your mortgage to extract and then invest "excess" home equity. I think you're right that parsing that step as triggered by stock market decline is sub-optimal market timing (even if it might be a useful psychological trigger).

xpauliber

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Re: Idea for investing during a recession
« Reply #75 on: June 19, 2018, 11:16:21 AM »
Okay, yes I think part of the problem is I saw your post as a description of the OPs original position, rather than articulating your own independent view of the issue. Please do accept my apologies for that and thanks for the gentle call out on what I was doing.

My fear is that the OP, consciously or unconsciously, is thinking that after a significant downturn, stocks will tend to increase in value much faster than they do normally. This is a very common pattern to see come up both on these message boards, either in regular conversation or here on the forums, and I was trying to point out that the part about using money from home equity rather than cash in a bank account doesn't change the fact that historical analyses suggest higher average returns from buying into the market right away instead of waiting to buy during dips in price.

However, I do agree with you that for a person comfortable with a relatively slow amount of equity in their house, if a downturn acts as a reminder to check whether they have enough equity to pull out (when taking into account the friction of doing so), there's absolutely nothing wrong with that. It just probably doesn't provide a magic edge of increases returns vs just refinancing every 5 or 10 years on a fixed schedule.

Wow.  Posting this topic has generated way more ideas than I had anticipated.  Thanks to everyone that's shared their thoughts/insight.  The thoughts about refinancing every few years to extract excess equity and invest is interesting but it's not at all what I had in mind when I made my original post and doesn't capture my intent.  I have no interest in refinancing periodically and continuing to extend the term on my mortgage just to invest the difference in the market & earn the average return over the years (as someone mentioned above, your mortgage is a risk until you own 100% of the equity in your home so that is a top priority goal for me).  However, I'm very interested in simply trying to capitalize on a significant downturn in the market to make a profit (ie. increase my net worth).

Let me see if I can articulate it in this fashion using a simplified net worth example:

Net Worth before recession:
$200,000 home
- $110,000 mortgage balance
$90,000 net worth

If I used Scenario 1 in the chart I posted earlier, here's what my Net Worth would be on 2/23/2009 on the day I was fully invested during the recession:
$200,000 home
+ $41,826 stock
- $110,000 mortgage balance
- $50,000 HEL
$81,826 net worth

Here's what Net Worth would be on 3/9/2009 at the bottom of the Recession:
$200,000 home
+ $37,922 stock
-$110,000 mortgage balance
-$50,000 HEL
$77,922 net worth

And here's what my Net Worth would be on 12/2/2010, the day the market fully recovered and I sold everything & paid off the HEL (just assuming that we "paused" any additional mortgage payments for the sake of this example and also assume that the value of my home didn't go down during the recession which would just be paper loss anyway)
$200,000 home
+ $23,516 realized gain from investments
- $110,000 mortgage
$113,516 net worth

Does that make more sense?  I only want to tap into the equity in my home to capitalize on an opportunity to buy stocks on sale and exit my position immediately upon market recovery and then eliminate the debt (leverage) which restores the original amount of equity I owned in my home AND increased my net worth via the profit I made from the increase in the value of the stocks I purchased using that leverage.  If I continuously refinance to invest the difference in the market, then my net worth only increases what the market returns since I'm constantly adding more debt via the refinanced mortgage.  In this latter case, I agree that it makes no difference whether you enter the market today or during a dip but that's not my intention.

Paying off my mortgage is one of my top priorities so I'm OK with letting my excess equity sit on the sidelines but I don't want to let opportunities that only happen every decade or so to slip away if I can capitalize on them using a disciplined strategy with limited risk and not only restore my equity position in my home on the opposite side but also increase my net worth.

As for your comments highlighted above, stocks absolutely do increase in value much faster immediately after a significant downturn provided you buy low & sell at recovery which is exactly what I'm advocating.  Using the chart I posted with historical data from the Great Recession, when the market bottomed out on 3/9/2009, VTI was trading at $28.07.  When the market fully recovered on 12/3/2010, VTI was trading at $63.34 which is a 126% increase in 22 months! I have no idea how to calculate what that translates to annualized (maybe someone can calc that out) but it's magnitudes more than the typical 9-10% that the market historically returns.  Now of course, that's using a perfect "what if" scenario of investing exactly at the bottom and exiting when the market returned fully to the previous peak.  However, using the deployment schedule I posted earlier which is entirely possible to calculate beforehand and execute (provided the market fell 50%), you would have realized:

30% return in 27 months (Oct 2008 - Dec 2010)
35% return in 27 months (Oct 2008 - Dec 2010)
40% return in 27 months (Oct 2008 - Dec 2010)
45% return in 27 months (Oct 2008 - Dec 2010)
50% return in 22 months (Feb 2009 - Dec 2010)

« Last Edit: June 19, 2018, 12:21:12 PM by xpauliber »

boarder42

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Re: Idea for investing during a recession
« Reply #76 on: June 19, 2018, 11:52:26 AM »
OP if you cant understand why this is valuable to do a REFI consistently and you view a low fixed rate mortgage as a risk in those scenarios then trying to time the market just increases your risk in most cases. the concept is sound regardless of the status of the market so if you ahve excess equity and rates are below your rate its a simple no brainer to refi and dump into the market - if on the other hand rates are higher you have to account for an increase in that rate or get an HEL for the balance you want and you have to account for the cost to REFI.  doing all this in a down turn may make you feel like you did it a better way but history would tell us this should be done regardless of the status of the market.  and consistently doing so would win out assuming rates are low enough to arbitrage the difference in return between mortgage rate and share price. 

Honestly you're bringing many emotions into it IMO at this point and are not looking at the math and the numbers.   

maizeman

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Re: Idea for investing during a recession
« Reply #77 on: June 19, 2018, 11:59:46 AM »
Okay, so we've clarified that it is, in fact, you're consciously thinking you can predict future stock market returns from past stock market returns (specifically you think that if the stock market goes down, you then expect it to move back up faster than it otherwise would have). As a result, you're willing to accept riskier investing behavior* during a recession than you are during normal times.

Being willing to accept higher risks for a higher expected return is perfectly rational, but, so far, you haven't presented evidence that the expected returns during a recession consistently higher than during normal economic times, beyond the observation that your strategy would have produced a positive return in the most recent recession the USA has experienced.

*Now it's is made more complex by the fact that the expected value of increasing your leverage in the stock market using low interest uncallable 30 year fixed term debt is indeed positive (as boarder42 points out). But since you've said that's not the approach you're trying to take, we can set this positive expected value aside.

daverobev

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Re: Idea for investing during a recession
« Reply #78 on: June 19, 2018, 01:04:39 PM »
I only want to tap into the equity in my home to capitalize on an opportunity to buy stocks on sale and exit my position immediately upon market recovery

Forgive me if someone else has mentioned this, but... Japan? You could be waiting a long time for the market to recover.

mrmoonymartian

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Re: Idea for investing during a recession
« Reply #79 on: June 20, 2018, 02:32:48 AM »
*Now it's is made more complex by the fact that the expected value of increasing your leverage in the stock market using low interest uncallable 30 year fixed term debt is indeed positive (as boarder42 points out).
Yeah, if I had low interest 30 year fixed term debt I'd have been throwing everything into stocks too. But I don't. Sorry OP, I can't really help with your argument if you're in the US... land of the free money.

Maybe frame it in terms of your specific circumstances? Employment precarious? Unusual mortgage? Got an SO you can blame?
I only want to tap into the equity in my home to capitalize on an opportunity to buy stocks on sale and exit my position immediately upon market recovery

Forgive me if someone else has mentioned this, but... Japan? You could be waiting a long time for the market to recover.
I believe time to recovery is irrelevant. The difference is in the time to crash. One case is fully invested in the market and the other is at least partially in home equity.

xpauliber

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Re: Idea for investing during a recession
« Reply #80 on: August 01, 2018, 09:56:47 PM »
So I decided to do some modeling using historical S&P 500 data and then I used (VOO) since it tracks the S&P 500 in lockstep and I could extrapolate what the price would have been all the way back to the Great Depression.  I then implemented my original deployment model of waiting for a 20% drop in the market to then obtain a $50,000 HEL and deploy it in $10,000 increments based on the following % drop: 30/35/40/45/50 and I modeled it across all recessions back to the Great Depression.  Then I played around with different deployment schedules (35/35/35/40/45, 35/35/40/45/50, 40/40/40/40/45, etc.) to see what the effective return would have been.

I then did an alternate scenario where instead of obtaining a HEL, what if I instead just invested the same amount that I would be paying on P&I payments on the HEL in the market for the exact same time that I would have been paying on the HEL to see what the result would have been (I called this "Simple Investing").  I also modeled this across all past recessions.

What I found was that over the course of the last 80+ years, obtaining a HEL when the market dropped 20% was way too risky as there were too many times that you would have obtained the HEL and been repaying it but the market didn't drop far enough for you to deploy any capital so you would have always been in the red.  Or there were times that you were only able to deploy $10,000 and you carried the $40,000 balance in your brokerage account earning nothing for YEARS and you came out way behind.

Since jumping the gun at 20% was too risky, I then decided to model waiting for a 30% drop before obtaining a HEL instead since the cost of carrying the loan would be lower.  I did the same thing waiting for a 40% drop as well.   In all of the models, I utilized various deployment scenarios and cross-referenced them against "Simple Investing" which would have been the P&I payments during the identical time that you would have deployed capital in the market.  Waiting for a 40% drop insulated you from obtaining a HEL too early and never deploying it and also provided the most consistent point that you'd have had a more favorable return obtaining a HEL & deploying it than just "Simple Investing" during the downturn.

Once I completed all of the modeling, I consolidated all of the results into a single spreadsheet for each recession and then sorted them in descending order to show which deployment schedule would have obtained the greatest return and then added the "Simple Investing" results beside each so you could see whether the HEL approach or the Simple Investing approach would have yielded the greater returns for each recession.

My conclusion is that waiting for a 40% drop in the market to obtain a HEL and then deploying would have been the most lucrative & less risky approach over the past 85 years with the exception of the Great Depression.  During the Great Depression, you would have been better off with the "Simple Investing" approach and investing the amount of P&I every month for 289 months. Haha  Of course, as other people have pointed out in this thread, refinancing regularly and investing that money in the market no matter what stage it is in would be the fastest way to achieve FIRE but I really like the idea of having a paid off mortgage & so this analysis is just toying with the idea of how to have the best of both worlds.

After reviewing all of this modeling, I think my approach now will be when the market drops 20%, I will begin investing $276 (which is what the monthly payment would be on a $50,000 HEL for 30 years @ 5.25%) every month from my monthly cash flow  up until the market either recovers or it drops 40%.  If/when it drops 40%, I would then have to give it some serious thought about obtaining a $50,000 HEL (provided I get a 30-year term @ 5.25% or less) and deploy it probably on a 40/40/40/40/45 schedule.

If anyone is interested in the Excel doc that I put together that shows the formulas/outcomes of the different scenarios, I'd be more than happy to email it to you.  Just thought I would share the results for the people that were also thinking about potentially utilizing this approach.  Here are the results of the first four most recent recessions using different timings & deployment schedules.



« Last Edit: August 02, 2018, 07:25:03 AM by xpauliber »

xpauliber

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Re: Idea for investing during a recession
« Reply #81 on: August 01, 2018, 09:58:08 PM »
And here are the other 4 recessions from 1974 to the Great Depression:


appleshampooid

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Re: Idea for investing during a recession
« Reply #82 on: August 02, 2018, 09:25:12 AM »
You likely cant deduct your interest new tax law changes prevent most people from taking anything but standard deduction now.
Nonsense, just have to live in a super high COL, high tax area.

In 2018 my mortgage interest will be about $18k, plus the $10k max for state/local taxes (which will be about $13k total) and I "beat" the standard deduction by about $4k. Oh and some charity thrown in there.

I'm being facetious as I am not "most" people so your point stands. If the new standard deduction holds, eventually the interest will drop down low enough that we'll be taking the standard as well.
« Last Edit: August 02, 2018, 11:04:30 AM by appleshampooid »

harvestbook

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Re: Idea for investing during a recession
« Reply #83 on: August 04, 2018, 05:57:48 AM »
If you end up implementing this plan in real life, please start a new thread so we can follow along. Thanks.

appleshampooid

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Re: Idea for investing during a recession
« Reply #84 on: August 06, 2018, 09:58:54 AM »
If you end up implementing this plan in real life, please start a new thread so we can follow along. Thanks.
And let's all hope it doesn't turn out like the saga of market timer over on BH. I'm about half way through the epic thread, and the huge thing that jumps out at me is that when he was laying out the plan, he was only using non-callable debt (sounds like mostly CC promo offers). So there was "no possibility" of a margin call.

Then he immediately took that borrowed capital and borrowed on margin to increase the leverage further. Had he stuck to the original plan, he would have at least kept all the assets, and just had lots of debt.