Invest or Overpay Remortgage

racing_blue

I have found this a great thread, I would love it if there were a definitive answer to this question: is it better to invest, or pay off a mortgage. Bowlhead99's comments make a lot of sense to me.

To answer this question, could one compare the performance of an industry standard investment portfolio, with the average mortgage rate, over a significant period of time?

Eg. take a portfolio of 40% bonds, 60% equities. As I understand it, an industry standard, the sort of mix large institutional investors might use. There is a lot of information out there about historical performance. For example, in the 43 years 1970-2012, a portfolio of 60% stocks (S&P500 index) and 40% bonds (Barclays Government Credit index) would have returned 8.5% annualised. (ref: http://www.merriman.com/PDFs/UltimateBuyAndHold.pdf)

Then look at an average mortgage rate, 1970-2012. I don't really know how to do that- any ideas? If A>B then my conclusion would be that, historically, investing outperforms repaying. With lots of assumptions about future performance, tax implications, etc

On a personal level, I'm hedging my bets by repaying and investing in roughly equal proportions.

mark55man

I think gadgetmind said earlier just go 50:50 you'll regret one of the 50s but wont know which until after


I may go and look over at the motley fool where they have some enormously detailed statistical analyses to compare different strategies


here's the overall link http://boards.fool.co.uk/investment-strategies-50090.aspx

planteria

Investing rather than Paying Off is the best long-term approach, based upon previous form.

but

racing_blue wrote: »

On a personal level, I'm hedging my bets by repaying and investing in roughly equal proportions.

is a more than reasonable approach. there has to be some 'value' in reducing a long-term debt.

mark55man

couldn't quite find the link (droid) I was looking for


but Planteria you may enjoy playing with this and reading around on these forums


http://www.peaktotrough.com/hbpp.cgi (HBPP = Harry Browne's Permament portfolio)

bowlhead99

Just to nit pick:

planteria wrote: »

but [investing and paying off, equally] is a more than reasonable approach. there has to be some 'value' in reducing a long-term debt.

Well the 'value' is "peace of mind/ reduction of risk" rather than financial value; because not taking the gearing likely has negative value if you agree that

Investing rather than Paying Off is the best long-term approach, based upon previous form

And if your goal is to maximise your wealth rather than minimise risks, you won't achieve peace of mind by paying off a debt because you don't know what you could have made if you hadn't paid it off, until the information becomes available through hindsight, some point later...

I think the key caveat is your comment "based on previous form"; because the first rule investing is that you can't guarantee results from a strategy even if it has worked before and have a sound theoretical basis.

My supposition that over a 25-30 year period like a mortgage term, equity investments typically outperform fixed interest due to the higher risk/return profile, is something that might be relevant to someone embarking on one of those 25-30 year terms. However, more often than not, overpayments are only something one considers after they get quite far into their mortgage term and get older, wealthier etc with some spare cash here and there.

If you have only 5-10 years of borrowing and investing left it is not the same. Of course many investors reaching the end of that 10 years could just remortgage and continue the project, but others could not because of their personal status on the job or other income front, or other circumstances they had not envisaged.

You are right that nobody ever got criticised or called a fool for paying off their debts earlier than strictly necessary as it's normally seen as a risk averse strategy and risk aversion is a character trait that many people have.

sabretoothtigger

jamesd wrote: »

High, since that's what a FTSE All Share Index tracker fund does. Though I wouldn't personally favour that as a core investment, preferring a global tracker instead.

Global tracker is also another snake on the board. A global tracker is another name for usa tracker plus friends

http://www.hl.co.uk/shares/shares-search-results/d/db-x-trackers-ftse-all-world-ex-uk

Invest 52% for shares residing in the two largest debtor countries to ever exist, leave to cook for 5 years and see how it turns out though its debatable who suffers more creditor or debtor

jamesd

That one is global developed markets, excluding UK, not fully global. Still, it is what most global trackers aimed at the UK market do. The US and Japan have high weightings because it's a standard market cap weighted index and those two places have the two most valuable markets. That's part of the point of suggesting a global tracker, to get out of the very high UK concentration.

gadgetmind

planteria wrote: »

but is a more than reasonable approach. there has to be some 'value' in reducing a long-term debt.

Yes, investing should be best, long term. But there are likely to be extended periods, particularly in the early decades, when you're glad that you're doing both.

planteria

good post bowlhead, and agreed gadgetmind.

i am currently on interest only, and invest my full ISA allowance, but i have paid a couple of chunks off the mortgage too.

mark55man

sabretoothtigger wrote: »

Invest 52% for shares residing in the two largest debtor countries to ever exist, leave to cook for 5 years and see how it turns out though its debatable who suffers more creditor or debtor

Life started to get sweet after I stopped fighting the fed, the BoE and other powers that be.


I am a pretty serious techie guy with a large organisation and yet I have made much more money (currently) out of banks specifically and the QE wave in general than I ever did out of tech (lot of talk about hindsight on this board - it wasn't clear back then about apple google etc)


To the point where I now have a healthy margin of safety and I look at the silver linings not the clouds - and for me that is until mid 2015 (post election UK and pre election US)


Its clear that the only people getting scrwed at the moment are those relying on cash savings - personally one of the reasons I started this thread was uncertainty about the best investment strategy I should follow given the change/opportunity I have gained through remortgaging in terms of how much cash / debt / other investments