Author Topic: Mortgage Payoff vs. Investing based on PE Ratio  (Read 1805 times)

Nubs

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Mortgage Payoff vs. Investing based on PE Ratio
« on: January 30, 2018, 10:19:00 AM »
See figure 5 (on page 13) and the following discussion in the vanguard whitepaper linked below:

https://personal.vanguard.com/pdf/s338.pdf

While the paper states that the realistic return forecast is 60% unexplained using just PE Ratio, it is at least somewhat suggested that as the PE Ratio gets very high - the lower we might expect the next 10 years of returns to be. 

Given this information, the fact that the current Shiller PE for S&P 500 is ~35, and the new tax plan, I am currently having a mental battle about payoff of mortage (15 yr, 2.9%) vs. investing.  The higher the PE ratio gets for US indexes, the more I feel that paying off the mortgage is worthwhile. 

Thoughts?




yachi

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Re: Mortgage Payoff vs. Investing based on PE Ratio
« Reply #1 on: January 30, 2018, 01:46:49 PM »
For me, the increase in the standard deduction due to the tax changes also means I will no longer be receiving a tax benefit on my mortgage payments.  You might find yourself in the same situation, so that 2.9% would be an actual 2.9% after taxes.  That said, 2.9% is rather low, so you should look around and see if you can get better or similar returns by some of the following:

Going full solar (maybe 4%)
Fully insulating your house (attic, crawlspace, basement, walls) (maybe 4-20%).
Replacing old or inefficient refrigerators (4-10%)
Replacing toilet paper with bidets (3%?)


Nubs

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Re: Mortgage Payoff vs. Investing based on PE Ratio
« Reply #2 on: January 30, 2018, 01:51:08 PM »
Indeed. 

Aside from going full solar and getting a Bidet, I've got all that covered.  Plus, full solar & getting a bidet vs. paying off remaining ~$180K on mortgage are not the same magnitude of investment. 

So I'm basically back in the same conundrum. 

boarder42

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Re: Mortgage Payoff vs. Investing based on PE Ratio
« Reply #3 on: January 30, 2018, 02:19:51 PM »
at its core this is market timing and its bad - you've already come to the realization that paying down your mortgage is suboptimal in general or you wouldnt be asking this question - so rather than debate market indicators and try to place your bets based on that why not just go ahead and write up an IPS and put that you will only make minimum mortgage payments.

Also the 10 year yield is rapidly approaching your current interest rate - bonds avg much higher return than your mortgage so if you think stocks will receede to the norm then you must think bonds will too at which point you will have wasted little green soldiers that can not be easily rebalanced sitting in a fixed asset.

ChpBstrd

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Re: Mortgage Payoff vs. Investing based on PE Ratio
« Reply #4 on: January 30, 2018, 03:09:27 PM »
Flip the question.

If I offered to lend you $10 million at 2.9% interest, would you take the loan?

boarder42

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Re: Mortgage Payoff vs. Investing based on PE Ratio
« Reply #5 on: January 30, 2018, 05:14:31 PM »
Flip the question.

If I offered to lend you $10 million at 2.9% interest, would you take the loan?

Yes who wouldn't do this assuming it's fixed for 15-30 years  take it fire tomorrow
« Last Edit: January 30, 2018, 05:19:59 PM by boarder42 »

yachi

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Re: Mortgage Payoff vs. Investing based on PE Ratio
« Reply #6 on: January 31, 2018, 06:48:48 AM »
Flip the question.

If I offered to lend you $10 million at 2.9% interest, would you take the loan?

Yes who wouldn't do this assuming it's fixed for 15-30 years  take it fire tomorrow

No doubt it's a good deal, but would you be comfortable with this loan during retirement?  Repaying this loan would require almost a 5% withdrawal rate at 30 years and an 8% withdrawal rate at 15 years.  I debate paying off my mortgage before retirement because of that math.

boarder42

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Re: Mortgage Payoff vs. Investing based on PE Ratio
« Reply #7 on: January 31, 2018, 09:51:49 AM »
Flip the question.

If I offered to lend you $10 million at 2.9% interest, would you take the loan?

Yes who wouldn't do this assuming it's fixed for 15-30 years  take it fire tomorrow

No doubt it's a good deal, but would you be comfortable with this loan during retirement?  Repaying this loan would require almost a 5% withdrawal rate at 30 years and an 8% withdrawal rate at 15 years.  I debate paying off my mortgage before retirement because of that math.

yes but the withdrawal rate is an incorrect way to look at it since its a finite loan - the math supports carrying a mortgage and a loan such as this in retirement - you greatly increase your safety levels carrying this loan for your money to last forever - you just fail faster if you were to fail at all.  in CFIREsim that loan paired with 1MM and a 40k spending rate only fails 2x and thats 1929 and 1930  gets a 98% success rate - it adds greatly to security. - and is a huge inflation hedge. 

Dicey

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Re: Mortgage Payoff vs. Investing based on PE Ratio
« Reply #8 on: January 31, 2018, 10:32:51 AM »
Of course this thread title caught my eye, but I see B42 is already here. Nothin' for me to add. Carry on, good sir.

Radagast

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Re: Mortgage Payoff vs. Investing based on PE Ratio
« Reply #9 on: January 31, 2018, 10:24:51 PM »
Make the decision more business-like. The expected return on stocks is a little more than 1/CAPE + inflation, so 5% after 10 years. Increase to about 6%-7% if you are making regular contributions, decrease to 4% for withdrawals. Your mortgage is most likely the lower return option.

For home improvements, I recall the average US home is owned for 9 years (but you will know more about your plans). Any improvement will need to pay for itself before you sell. Basically even now I "expect" stocks to be competitive or better than most options listed here. I insulated my house in 2014 just after I found MMM, but I now admit that even assuming I donated my time for a good cause, the basic fiber glass insulation will not pay for itself in my timeframe, much less return 7% / year, far less match investing that money in an index fund in a tax sheltered account.

Honestly, the government should subsidize insulation down to just over the return of 30-year TIPS.