Author Topic: mortgage and bond allocation?  (Read 937 times)

mistymoney

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mortgage and bond allocation?
« on: August 27, 2022, 11:17:16 AM »
Hey all, so I'm not sure I'm understanding how people are talking about the implications of holding a mortgage on bonds.

from the 2026 cohort thread:


Also, we’re in the Never Pay Off Your Mortgage club, and it’s silly to hold bonds if you also hold a mortgage.

I'm not sure I understand this as having a mortgage would increase your monthly obligations, making a market dive more difficult to navigate. As you are liquidating more stocks to pay the bills. I do see how the mortgage can act as an inflation hedge, does that relate here?

what am I missing?

because I can see where a paid off home can eliminate the need for bonds, so if mortage does too, then bonds seem - unnecessary.

Which given their performance over the past decade or so, I'd say yes!

ChpBstrd

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Re: mortgage and bond allocation?
« Reply #1 on: August 27, 2022, 12:02:14 PM »
The idea is that a mortgage is like holding a negative number of bonds. Instead of banks owing to you, you owe to banks.

So if you have a $100k mortgage at 4%, and a bond yielding 4%, you are being paid in one hand and out the other. These things net out to zero, so why not just sell the bonds and POYM?

Likewise, if you think you have a 90/10 asset allocation with $100k in bonds, but you also have -$100k on the mortgage, then your bond allocation is in reality zero and your stock allocation is 100%.

lifeisshort123

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Re: mortgage and bond allocation?
« Reply #2 on: August 27, 2022, 04:53:12 PM »
I kind of see how that could be useful to rationalize for yourself.  But on the other hand, I would prefer to not have the payment of the mortgage.  On the other hand, right now our mortgage is around 3% and the iBonds are paying over 9%…. Hard to justify paying off the mortgage with those extra $$$s.

MDM

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Re: mortgage and bond allocation?
« Reply #3 on: August 27, 2022, 04:58:46 PM »
...right now our mortgage is around 3% and the iBonds are paying over 9%…. Hard to justify paying off the mortgage with those extra $$$s.
Good analysis!

Gets less clear when comparing a known lower, but guaranteed, return on paying the mortgage vs. an expected higher, but not guaranteed, return on stocks.  But if the comparison is between a mortgage vs. a highly rated bond, the higher after tax return is a clear winner - at least mathematically....

mistymoney

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Re: mortgage and bond allocation?
« Reply #4 on: August 27, 2022, 05:04:03 PM »
...right now our mortgage is around 3% and the iBonds are paying over 9%…. Hard to justify paying off the mortgage with those extra $$$s.
Good analysis!

Gets less clear when comparing a known lower, but guaranteed, return on paying the mortgage vs. an expected higher, but not guaranteed, return on stocks.  But if the comparison is between a mortgage vs. a highly rated bond, the higher after tax return is a clear winner - at least mathematically....

oh - now you have me thinking there is another dimension here I wasn't considering! the function may differ between accumulation and RE phases

Dicey

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Re: mortgage and bond allocation?
« Reply #5 on: August 27, 2022, 09:25:36 PM »
I look at it slightly differently. My thinking assumes a fixed rate mortgage on an affordable house, yada yada yada...

Your mortgage is stable and the interest rate is constant. Therefore your housing costs you less in real dollars as inflation and your income increase over time.

If the role of a bond is to add stability to your portfolio, I believe having a fixed rate (and tax-deductible) mortgage also has a stabilizing effect. Therefore, how much stability does one need, particularly during the acquisition phase of your life? I'd agree it's a lot lower than the folks who want to sell you bonds say it should be.

Another wrinkle is if you live in a HCOLA and your mortgage is by necessity rather large. Since so much is tied up in that, what's left and how should it be allocated? If one allocates too much to bonds, there's simply not enough left to allocate to stocks and stocks are what do the heavy lifting.

In retrospect 90% Stocks + 10% Bonds + Mortgage would produce better results and is probably less risky than it sounds. And that's my non-technical explanation of why I wish I'd been more "Aggressive" in my portfolio allocation.

Bonus: During an inflationary period such as were currently experiencing, holding a long, cheap mortgage is a superpower, IMO.

jpdx

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Re: mortgage and bond allocation?
« Reply #6 on: August 28, 2022, 12:06:28 AM »
Can you sell pieces of your house to rebalance your portfolio?

Dicey

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Re: mortgage and bond allocation?
« Reply #7 on: August 28, 2022, 01:54:31 AM »
Can you sell pieces of your house to rebalance your portfolio?
If you're asking me, the answer is yes. We have three SFH rentals that we could sell at any time, we could also move into one of them and rent out our primary home, which is mortgage-free. Two neighbors have just moved out of their homes and rented them out. Both houses are smaller/older than ours. One got $5500, the other $5800. Per month. Finally, our son will be moving into his own place soon. His room is at the end of the house and has a private entrance. We could turn it into an ADU for very little cost and get about $2k/month for it. If we did that and rented out the rest of the house to someone else, it would fetch as much as the neighbor's homes do, plus the ADU income. Hmmm, there might be more...one of the rentals has a casita. We could make that our base and spend time traveling the country in our paid-for RV. Oh, and there are a couple of Airbnbs in our primary home neighborhood that rent for obscene amounts of money, so we could explore that route if we felt a need to.

We could also do none of that and be just fine. Those kind of calculations are free mustachian fun. Thanks for asking.

My point is that having less money in bonds would have gotten us to FIRE faster.

lifeisshort123

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Re: mortgage and bond allocation?
« Reply #8 on: August 28, 2022, 05:33:29 PM »
In my calculations it is based on owning a home that is not a financial burden on you.  I get the HCOL situation.  We live in a medium COL area, and we made the decision to live further away to have closer to the home we wanted at a more affordable payment.

It frees up money to buy the iBonds, which, after a year of holding them, can double as an emergency fund.  Another major perk to me….

HawkeyeNFO

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Re: mortgage and bond allocation?
« Reply #9 on: August 30, 2022, 07:50:05 AM »
Never really compared the mortgage to a bond fund.

Living in a HCOL area, and the 2.75% mortgage will never be paid off, until I sell the house.  I hold zero bonds, as I view my military retirement as adding stability, and to some degree a counterbalance to inflation, to the retirement portfolio (i.e., it  acts similar to a bond fund).   

davisgang90

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Re: mortgage and bond allocation?
« Reply #10 on: August 30, 2022, 08:00:45 AM »
Never really compared the mortgage to a bond fund.

Living in a HCOL area, and the 2.75% mortgage will never be paid off, until I sell the house.  I hold zero bonds, as I view my military retirement as adding stability, and to some degree a counterbalance to inflation, to the retirement portfolio (i.e., it  acts similar to a bond fund).

This is pretty much me, except I'm in a MCOL/LCOL area with a 2.25% 30 year mortgage. Otherwise, the same, military retirement and no bonds. I'm already FIREd and living on pension/VA disability without touching investments at this point.

Nords

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Re: mortgage and bond allocation?
« Reply #11 on: September 03, 2022, 09:48:27 AM »
Never really compared the mortgage to a bond fund.

Living in a HCOL area, and the 2.75% mortgage will never be paid off, until I sell the house.  I hold zero bonds, as I view my military retirement as adding stability, and to some degree a counterbalance to inflation, to the retirement portfolio (i.e., it  acts similar to a bond fund).

This is pretty much me, except I'm in a MCOL/LCOL area with a 2.25% 30 year mortgage. Otherwise, the same, military retirement and no bonds. I'm already FIREd and living on pension/VA disability without touching investments at this point.
We see our military pensions as the monthly income from a portfolio of I bonds or TIPS.  It’s an imperfect analogy (bonds have a duration while pensions are a life annuity) but the comparison is good enough for asset-allocation discussions.

To a military retiree, a mortgage is an advance on your pension deposits with your real estate as the collateral.

We’ve tracked our mortgage arbitrage since 2004 when we refi’d to a 5.375% loan.  Over the years we’ve had tremendous volatility in the average after-tax annual compounded return, but its 17-year track record is over 8%/year.

Our current 30-year loan is at 3.50% and has 25 years to go.  I’ll pay it off just short of my 87th birthday.