What you brought up is interesting; at different times the bond allocation should change; depending on the size of the savings for the person, as opposed to timeline. Rebalancing would be hard with a mortgage, that case is settled. However if I'm saving $20K/year while working with a $100k total portfolio, the rebalance just comes out of cash flow. Not so easy if the portfolio is 1 million, the cash flow is not enough for major rebalancing. It appears the simple strategy would be to pay down the mortgage in the early phase (to get the bond safety part) and then start accumulating bonds when the portfolio gets larger. The liquidity problem is non-existent, because of cash flow, while the risk is reduced.
I strongly disagree with paying down a mortgage early on for the following reasons:
1) having a mortgage 20% paid down or 90% paid down does not change your risk. If you can't afford the payments, you are forced to sell either way. The only time paying down a mortgage really decreases risk is to pay it off completely and decrease your fixed expenses.
2) The last thing you want is to have almost all your assets in 1 investment. In this case spending all your cash on a home makes a majority of your wealth tied to 1 house. That is just bad diversification and bad investment practice
3) You are much more able to tolerate risk early on in your portfolio and therefor should easily be able to tolerate market volatility when your net worth is so low.
4) Mathematically you are likely to come out much further ahead by investing in equities as opposed to paying down a low interest rate mortgage.
5) Not taking advantage of tax advantaged space just to pay down a low interest rate mortgage is like giving your money away to the government. I think you are better off holding unto as much as you could.
If you really want to pay down your mortgage I would strongly consider doing it after you have amassed some significant wealth and then realize you don't need to take as much risk and begin paying down your mortgage.
The other issue you brought up is house foreclosure and the bank calling mortgages. I tend to think that if the mortgage is under 60% of the appraised value then I should be fine. Is there such a thing as a safe percentage or low risk rule of thumb? My bank says 80%, the threshold for the HELOC, but my bank isn't always looking out for my best interests.
There is no rule of thumb that I have ever read or seen. What I would consider is trying to have enough savings in an emergency fund and retirement accounts to help pay down the mortgage until real estate prices can recuperate some. Otherwise you are forced to sell for a loss. An even better way to mitigate that risk is to buy a house you can easily afford.
EnjoyIt, it is a thoughtful and interesting reply. (Although I don't see what is gained by calling people who have different views than you robots.)
No offense intended, though the comment was intended to evoke emotion showing that even those "robots" have emotion and can make judgement mistakes based on fear or stress. The reality is that I know people who invested 100% in equities through several recessions without any issues. Those people tend to have very stable jobs and much more able to tolerate that stress.
I agree with the overall trend you are describing, but disagree with the idea that the need to take risk is completely gone at 25x expenses.
Maybe the correct way of putting it is that someone at 25x does not need to take on extra risk since they don't require their portfolio to keep growing, but to simply keep up with inflation.
... For an MMMer retiring in their 20s, 30s, or 40s it is sometimes worth taking on a little more risk early in retirement, when it's easier to cut back on expenses or adjust course, rather than play too conservatively and shift more of the risk of running out of money out to their 70s or 80s when options for correcting course are limited....
I agree with your statement. But also keep in mind that when we hit 62-70 we have the option to start Social Security which can be a significant boon in retirement especially if you have planned without it.
Finally, in a number of different threads, you've brought up the idea that people who disagree with your views on risk are doing so because they weren't investing through the 2001 and 2009 crashes, and didn't have the emotional experience of having their net worths dropping every day while their neighbors were foreclosed on. Do you think that this same effect may be creating a pro-bond bias in the world today? We're currently 35 years into a bull market for bonds that has seen neither high inflation no significant and sustained rising interest rates. Most of the people both here and bogleheads weren't investing in the late 1960s, where a heavy allocation to bonds would have been hit both by rising interest rates reducing the value of their principle at the same time high inflation wiped out the value of the increased interest paid by newly issued bonds, so there's not a good voice speaking for the emotional toll of being investing in bonds when they turn out to be a rather risky investment themselves.
Wow, great topic. I am 40 years old and although I was investing in 2001 and 2009, I had a tiny tiny fraction of what I have today and honestly can not tell you what my emotional response would be during our next recession when I have so much more to lose. Back then I invested in single stocks and had no idea what an index fund was. In 2009 and 2010 I did buy some gold because I was really scared money may be worthless one day. Since then I have learned a lot and hope not to make the same mistakes again. As for your comment about being pro bond of the last few decades, I think you may be correct, but my understanding is that historically even prior to the end of double digit interest rates, bonds still decreased the volatility of a portfolio and therefor were still a relatively safe investment. Maybe having some of your bond allocation in TIPS is one way to decrease inflation risk.
My portfolio is heavily weighted in bonds, a large portion of which are in muni bond funds, because my main goal is not to accumulate but to keep up with inflation. I am only working until I can claim my pension in less than 4 years. I always thought bonds were "safe", but it was disconcerting to see the value of my bond holdings drop a few months ago when inflation rates were being raised. I am mulling over whether or not to change my asset allocation a little more towards equities, but haven't made that decision yet.
Although the price of your bond went down, you will still get the full value of your bonds at redemption. This is very important. If you buy a 5 year bond at $100 at 2% at the end of 5 years you will have about $110 on the other hand as soon as you buy that bond the interest rate goes up to 3%. Yes the bond will now be worth $95, but by the end of those 5 years you will have the same $110. You did not lose any money in the bond in the long run. This exact same thinking is equally true in a bond index fund but is far more convoluted since bonds are sold before maturity and the new bonds are bought at higher interest rates but the math still works out similarly.
