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 worthIf 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 worthHere'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 worthAnd 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 worthDoes 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)