I really don't understand why you are being downvoted. I've been checking /r/investing for a while now and the general advice is to put all you have into the stock market (diversify) and HODL.
Everyone says there's no way the market can underperform on a longer run and you can't time it so don't bother. When someone brings back 2008 they downvote it to death and reply that it went back up so it will be all fine. When the market goes south just keep buying.
Indeed. But more prosaically, many of these HODL types are discounting how much they'll actually freak out at a market correction. They've never seen a 30% drop, or lived through a five-year correction (let alone an extreme situation, like Japan). Even if you have the stomach to handle the drop, things happen on a five-year horizon that people don't consider: extended unemployment (which tends to happen during recessions), children, houses, etc.
I made that comment thinking it would be a completely uncontroversial statement of fact. It's amazing to me that I'm getting downvoted, as if I've expressed an opinion of some kind.
Obviously, you were like how could these people be so stupid to give this person all this money? Didn't they read the details? ... But one of the reasons it happened, psychologically, was because people thought 8-10% with 0 risk was perfectly normal. That's why nobody asked any questions.
EDIT
And regarding my Reddit rant, also scared me that many people don't pay off their mortgage because they get a better return from the stock market, something I find quite wrong unless you're living in a hyper-inflation economy (which is not the case in the developed world)
But it's not wrong, in expectation given long term past trends. It's just leveraged investment using a vehicle for leverage that has some tax and refinancing advantages that favor the borrower, not to mention the liquidity advantages. There are very rational reasons to do this.
For any investor, there is a point in the mortgage interest rate vs risk-adjusted returns space at which investing is better. That point may differ, of course.
There are other reasons to not pay off you mortgage, especially in the US. The two most prominent being:
1. Usually a certain amount of equity in the house is protected by state law (varies from state to state). So if someone sues you and/or you go bankrupt, no one can touch your principal residence provided your equity in the home is below the state's threshold. That is assuming you stayed current on your repayments and the bank is still good with lending to you.
2. No recourse loans. If you pay off more earlier, you are just opening yourself up to further risk. I'd much rather lose a bit on super low interest rates (and maybe a little in lender's insurance, too), than lose out if the housing market crashes.
@dgacmu Cannot reply to your comment so I will here.
> For any investor, there is a point in the mortgage interest rate vs risk-adjusted returns space at which investing is better. That point may differ, of course.
I agree there always is a point, what I think is that the risk-adjusted return should be much bigger to be worth taking. The spread between the mortgage rate and the stock market return usually is not that big.
There will always be missed investing opportunities but leveraging the house you live in to squeeze an extra 1-2 percentage point at the risk of going bust doesn't look optimal to me.
Right - but what you just said was an expression of your risk/reward preference. :) But also, in the US, there's a pretty large contingent of mortgage holders who have <= 3.75% mortgages [1], which compare very nicely to the (expected / hoped for) 9.7% average return from a diversified total market fund. That's not 1-2%, that's an expected ~5%, depending on how things sit from a tax perspective.
(You don't need to account for inflation in that return calculation, since the mortgage rate is also affected by inflation.)
If you're me -- 42, great job security, relatively small mortgage relative to income, and in a high tax bracket that's unlikely to change soon -- it's a no-brainer: Take the risk and go for higher long-term expected yield. A recession just means I keep doing what I planned to do anyway - working and saving more money for retirement.
If you're 60, planning on retiring in 5 years (and so about to drop into a lower top marginal tax rate), and in an industry with uncertain job prospects ... suddenly paying off the mortgage looks more attractive from a risk minimization perspective. Or at least splitting the difference.
The "or refinanced" is important, because when rates were that low, a lot of people had a strong incentive to refinance, so the actual distribution of outstanding mortgages is biased towards the lower rates. [2]
Everyone says there's no way the market can underperform on a longer run and you can't time it so don't bother. When someone brings back 2008 they downvote it to death and reply that it went back up so it will be all fine. When the market goes south just keep buying.
Japan would like to have a word with you.