I understand. And that is great to hear. Being comfortable is important. Both in times of excess and distress. Which there will always be both.

You can't look at this year as typical. I tend to think given how much the market has gone up recently, we're due for a bit of an ass kicking. However, I don't think that will give back everything that's been made in the run up of the last few years.

If you want a real number to work with, over the last twenty years, which includes one of the biggest stock market busts in history, the S&P 500 returned and average 7.7% annually. I think that would be a good planning number to use for long term investing.

quote:

Originally posted by sourdough44:

<snip>

Look at what the stock market did THIS YEAR, compared to your theoretical 4%. May not do it next year, but consider historical averages.

<snip>

quote:

If you want a real number to work with, over the last twenty years, which includes one of the biggest stock market busts in history, the S&P 500 returned and average 7.7% annually.

My retirement planning is based on averaging 8% annually.... so I agree.

I would do the following:

Buy the house with a 30 year mortgage (let's say 3.5%), but make extra equity payments to equal a 15 year payoff rate. You get the benefits of an after tax rate of about 3%, and you get the benefits of a faster payoff to build equity faster and the ability to scale back payments if you have hard times. You have locked in a low rate and you have to live somewhere.

Invest the bulk cash in the US stock market, S&P500 funds with low fees. As mentioned earlier, the S&P has average over 7% over the last 20 years.

You are compounding 4% to your favor.

quote:

Originally posted by JeffSig2022:
My question to you guys, which one do you think is more beneficial? Paying the home in cash to avoid a mortgage or investing that cash somewhere else?

If I had the cash, I can only think of 2 reasons to borrow:

- to earn a guaranteed/risk-free return on the cash that was greater than the loan interest

- if there were several things I wanted to spend money on, then I wouldn't mind taking a loan so I would have cash for other things (down pmt on house, down pmt on car, kid's college tuition, etc.). This is basically leveraging.

quote:

Originally posted by Rey HRH:
Looking at it from a pure numbers, there are several considerations. I'm assuming you have the $300,000 on hand. I will also set up the options as two extremes so that the comparisons will be more pronounced and for simplicity. The comparisons will still apply at realistic scenarios.

Option A: Buy the house fully with $300,000 in cash.

Option B: Buy the house with 1 cent and a mortgage of $299,999.99. I'm assuming simple interest rate, no buy down, no origination, no private mortgage insurance. Let's also just round up the mortgage to $300,000 but leave the 1 cent as equity in the house.

1) The first consideration is leverage. Leverage is a two-edged sword. Here's how it works under the normal assumption that houses eventually sell for more than the purchase price and the stock market eventually keeps increasing.

Let's assume one year later, the value of the house goes up to $330,000 and you sell it.

Under Option A: you made $30,000 on $300,000 investment. That's a 10% return.

Under Option B: You pay off the mortgage. If the interest was 5%, You made $15,000 on an investment of 1 cent. Let's say the down payment was $3,000 and you still net $15,000, the return is 500%.

Let's introduce Option C: You bought 2 houses with downpayments of $1,500 each and you net $15,000 each. That's a total of $30,000 against an investment of $3,000 for a return of $1,000% after you pay off the mortgages on both houses. That's leverage or OPM (Other People's Money). Of course, the reverse works in the same manner.

Your outlook regarding the direction prices will take will steer you to buying outright or taking a loan.

2) Next consideration is the opportunity cost.
The question in buying the house outright versus mortgaging it is can you get a higher rate of return for your money than the mortgage interest rate?

Let's say the mortgage rate would be 5%. If you bought the house fully with cash, you would be saving yourself 5% each year. Your $300,000 invested in the house is making you avoid the mortgage interest of 5%.

On the other hand, if you bought the house with a one cent downpayment, is it possible for you to earn more than the 5% that you'd be paying each year over the life of the loan? Let's say it's a 30 year loan. The common proxy for alternative investments would be the S&P 500. Over 30 years, it's a sure bet the S&P 500 will grow over that long time period. Even at a conservative 7% average projection, you're netting a 2% rate of return compounded annually over the life of the loan.

Another component of this second consideration is that current deductibility of the mortgage interest. Roughly, the 5% mortgage interest nets out to 2 1/2% mortgage interest. This effectively gives you 4 1/2% spread as a rate of return compounded annually assuming you only sell a portion of the stock investment to pay off the mortgage interest.

You're missing 1 HUGE COMPONENT. You're not deducting how much per year you are paying in total monthly mortgage payments into all of your equations. When you back that out, the numbers look very different. Also all mortgages now require PMI if you don't have 20% equity so add that in.

$1610 per month, monthly payment on a 30 year, 5% loan. $19,320 in payments in 1 year (99% of it will be all interest too and hardly any principle the first 5 years and not much better the next 5).

Now, If you paid cash for the house and invested that $1620 per month (that you'd normally be paying the mortgage company) into the S+P at 7% for 30 years. You'd have a paid off house and $1,836,317.69 in cash after 30 years

Now if you mortgaged the house and invested $300k for 30 years at 7 % you'd have $2,283,676.51 in cash - $583,200 (you paid the mortgage company on your $300k home loan) and you'd end up with $1,700,476.51

So your net worth would be $135,841.18 HIGHER by paying cash for the house and investing the mortgage payment you would have made each month into a mutual fund AND, you'd be better diversified and MUCH safer if SHTF. You could work at the grocery store bagging groceries 30 hours a week and pay ALL of the bills on a paid off $300k house. Plus if SHTF you could always borrow against the house if you had to also.

quote:

Originally posted by jimmy123x:

quote:

Originally posted by Rey HRH:
Looking at it from a pure numbers, there are several considerations. I'm assuming you have the $300,000 on hand. I will also set up the options as two extremes so that the comparisons will be more pronounced and for simplicity. The comparisons will still apply at realistic scenarios.

Option A: Buy the house fully with $300,000 in cash.

Option B: Buy the house with 1 cent and a mortgage of $299,999.99. I'm assuming simple interest rate, no buy down, no origination, no private mortgage insurance. Let's also just round up the mortgage to $300,000 but leave the 1 cent as equity in the house.

You're missing 1 HUGE COMPONENT. You're not deducting how much per year you are paying in total monthly mortgage payments into all of your equations. When you back that out, the numbers look very different. Also all mortgages now require PMI if you don't have 20% equity so add that in.

$1610 per month, monthly payment on a 30 year, 5% loan. $19,320 in payments in 1 year (99% of it will be all interest too and hardly any principle the first 5 years and not much better the next 5).

Now, If you paid cash for the house and invested that $1620 per month (that you'd normally be paying the mortgage company) into the S+P at 7% for 30 years. You'd have a paid off house and $1,836,317.69 in cash after 30 years

Now if you mortgaged the house and invested $300k for 30 years at 7 % you'd have $2,283,676.51 in cash - $583,200 (you paid the mortgage company on your $300k home loan) and you'd end up with $1,700,476.51

So your net worth would be $135,841.18 HIGHER by paying cash for the house and investing the mortgage payment you would have made each month into a mutual fund AND, you'd be better diversified and MUCH safer if SHTF. You could work at the grocery store bagging groceries 30 hours a week and pay ALL of the bills on a paid off $300k house. Plus if SHTF you could always borrow against the house if you had to also.

1) Wow, Jimmy, I said my examples were for simplicity. No PMI was one of my assumptions again to make the discussion simple. One could actually go through the calculations using 20% downpayment to avoid the PMI. Even then one could add a second layer of complexity of comparing with PMI and more investable money versus no PMI and less investable money. I didn't even enter into how the mortgage will be paid down with each payment as it's not relevant to the general discussion of opportunity costs.

I reduced my discussion into a comparison of the interests earned from not having a mortgage versus the potential net interest of paying the interest on the mortgage and earning the returns of the invested money.

I never made a recommendation one way or the other. I laid out the options and based on the person's outlook of which way prices are headed will be the determining factor of which option they'll take.

2. Talk about somebody MISSING ONE HUUUGE COMPONENT: You said: "Now, If you paid cash for the house and invested that $1620 per month (that you'd normally be paying the mortgage company) into the S+P at 7% for 30 years.

We only talked about $300,000 total. If you paid cash for the house, the $300,000 is gone. You don't have money, you only have the house. The house isn't an ATM that's going to spit out $1620 every month. From which orifice are you going to pull out the $1620 per month to invest into the S+P?

3) You also said as your last sentence: "Plus if SHTF you could always borrow against the house if you had to also."

You didn't think through the considerations: If you had a morgage, you can STILL always borrow against the house PLUS sell off a portion of the investments that you had put the $300,000 in the first place instead of the house. And even then, one can do an analysis on whether paying the interest on the additional loan is better than cashing out a portion of the stock investments and avoiding the loan interest.

In short, you're all wet on this one especially on your point of investing the phantom $1620 a month when you don't have any money left.

quote:

Originally posted by ensigmatic:

That's why we have A Guy. This is something at which he's the expert. Occasionally we have a phone or f2f meeting, he talks about where things are, where he sees things going, makes recommendations. Sometimes that's just "I'm happy with where things are." We discuss pros, cons, risks vs. rewards, etc. and the agreed-upon changes, if any, are made. (Usually, after him explaining his reasoning, we just go with his recommendations.)

I believe in letting experts do what they do best. Same reasoning we use in paying a tax consultant each year. Same reasoning I consult a lawyer if I have legal questions.

I agree about having a guy. We moved the bulk of our funds to a money manager who charges 1.25% a year. For those who say doing the work myself and investing in Mutual Funds and such haven't looked at what expenses and fees those funds charge.

Another thing about having a guy is they have the discipline and the resources to execute against their strategy. The only requirement is you agree with their strategy. The strategy of my guy/firm is they have a world wide benchmark and the value they add is they make calls as to which countries and market segments do they feel they should overweight or underweight in my portfolio.

The last thing for me is I'm removed from the stock picking process and I don't have to depend on my analysis or my feelings with regards to my money under management. I have a small amount under my control just to keep me engaged. I have a total, at most, of a dozen securities I am tracking while my manager has about 70 securities he's managing. That means a lot less work for me (as I can't track 70 securities) and a lot less stress so I can relax.

When I did my own projections, 3% average return was all I needed for my portfolio to be a hair above self-sustaining. My personal target for my money manager is 5%. But I don't tell him those numbers.

I personally analyzed the S&P 500 by year from 1871 through May 17, 2017 and determined the average rate of return is 6% (mode is 14%) and the average standard deviation is 17%. External sources I researched state 10% average annual return with a standard deviation of 15%.

But I tell my money manager that I expect him to make as much money for me with the acceptable risks we previously discussed plus avoid the next worse part of the next bear market.

quote:

Originally posted by Rey HRH:
For those who say doing the work myself and investing in Mutual Funds and such haven't looked at what expenses and fees those funds charge.

Anyone who owns shares in a mutual fund is paying various fees via the expense ratio. Those fees include fund expenses, 12b-1 fees, management fees, administrative fees, operating costs, and other costs incurred by the fund.

quote:

Originally posted by Rey HRH:

quote:

Originally posted by jimmy123x:

quote:

Originally posted by Rey HRH:
Looking at it from a pure numbers, there are several considerations. I'm assuming you have the $300,000 on hand. I will also set up the options as two extremes so that the comparisons will be more pronounced and for simplicity. The comparisons will still apply at realistic scenarios.

Option A: Buy the house fully with $300,000 in cash.

Option B: Buy the house with 1 cent and a mortgage of $299,999.99. I'm assuming simple interest rate, no buy down, no origination, no private mortgage insurance. Let's also just round up the mortgage to $300,000 but leave the 1 cent as equity in the house.

You're missing 1 HUGE COMPONENT. You're not deducting how much per year you are paying in total monthly mortgage payments into all of your equations. When you back that out, the numbers look very different. Also all mortgages now require PMI if you don't have 20% equity so add that in.

$1610 per month, monthly payment on a 30 year, 5% loan. $19,320 in payments in 1 year (99% of it will be all interest too and hardly any principle the first 5 years and not much better the next 5).

Now, If you paid cash for the house and invested that $1620 per month (that you'd normally be paying the mortgage company) into the S+P at 7% for 30 years. You'd have a paid off house and $1,836,317.69 in cash after 30 years

Now if you mortgaged the house and invested $300k for 30 years at 7 % you'd have $2,283,676.51 in cash - $583,200 (you paid the mortgage company on your $300k home loan) and you'd end up with $1,700,476.51

So your net worth would be $135,841.18 HIGHER by paying cash for the house and investing the mortgage payment you would have made each month into a mutual fund AND, you'd be better diversified and MUCH safer if SHTF. You could work at the grocery store bagging groceries 30 hours a week and pay ALL of the bills on a paid off $300k house. Plus if SHTF you could always borrow against the house if you had to also.

1) Wow, Jimmy, I said my examples were for simplicity. No PMI was one of my assumptions again to make the discussion simple. One could actually go through the calculations using 20% downpayment to avoid the PMI. Even then one could add a second layer of complexity of comparing with PMI and more investable money versus no PMI and less investable money. I didn't even enter into how the mortgage will be paid down with each payment as it's not relevant to the general discussion of opportunity costs.

I reduced my discussion into a comparison of the interests earned from not having a mortgage versus the potential net interest of paying the interest on the mortgage and earning the returns of the invested money.

I never made a recommendation one way or the other. I laid out the options and based on the person's outlook of which way prices are headed will be the determining factor of which option they'll take.

2. Talk about somebody MISSING ONE HUUUGE COMPONENT: You said: "Now, If you paid cash for the house and invested that $1620 per month (that you'd normally be paying the mortgage company) into the S+P at 7% for 30 years.

We only talked about $300,000 total. If you paid cash for the house, the $300,000 is gone. You don't have money, you only have the house. The house isn't an ATM that's going to spit out $1620 every month. From which orifice are you going to pull out the $1620 per month to invest into the S+P?

3) You also said as your last sentence: "Plus if SHTF you could always borrow against the house if you had to also."

You didn't think through the considerations: If you had a morgage, you can STILL always borrow against the house PLUS sell off a portion of the investments that you had put the $300,000 in the first place instead of the house. And even then, one can do an analysis on whether paying the interest on the additional loan is better than cashing out a portion of the stock investments and avoiding the loan interest.

In short, you're all wet on this one especially on your point of investing the phantom $1620 a month when you don't have any money left.

I didn't include PMI in any of my calculations.

If you put the $300k into the S+P and mortgaged the house, then you're paying a $1620 mortgage payment every month and not taking money out of your mutual fund investment. You never mentioned taking the proceeds from the S+P fund and paying the mortgage with them. Most all funds charge a hefty fee to take money out the first 2 years.

If you paid cash for the house, why wouldn't you have the same $1620 in cash every month that you'd normally pay the mortgage in scenario 1, and put THAT into a mutual fund each month instead of paying a mortgage.

Here in Florida you pay an extra 5% (of the $300k) in closing costs if you mortgage a house. A cash deal is around 1% closing costs, with a mortgage around 6%. So the day you purchased that $300k house with a mortgage, you paid $318k versus $303k paying cash. So add that into your calculations and the numbers are similar in all states (doc stamps and fees).

How do you mortgage a house that's already mortgaged if SHTF???? If you look back to 2008, when SHTF, who still had equity in their home when the bottom fell out, to refinance it and what banks were even giving loans? You cannot count on the real estate market still improving each year so you have equity if you finance the house for $300k.

Age has everything to do with financial decisions. BUT, most all people retired could afford the bills on a paid off $300k house with just social security.

I paid cash for my house in 2013,I have $300k in it, it's worth $425k. It costs me $800 a month for EVERYTHING: Electric, tv, water, taxes, insurance, lawn man, in expensive South Florida. You'd be surprised how much discretionary cash you have to invest when you don't have a mortgage payment. And you know what, it doesn't matter what the stock market does, what my business does, I have NO WORRIES about how I'm going to pay my bills if I broke a leg tomorrow. (I also have a 4 plex and a condo I rent out though).

quote:

Originally posted by BBMW:
Do you, or most normal people have $300,000 available to pay cash for the house? If not, it's not even a question. But if you do...

What is the effective interest rate for the mortgage, given it's tax deductability? This will be lower the higher tax rate the buyer has.

What return can you get on the cash if you don't put it into the house? Look at the article below:

http://www.businessinsider.com...ns-impressive-2016-5

It shows the annualized 30 year S&P 500 return for each starting year. They are mostly over 10%, sometimes significantly. So if you're paying 4% - the tax deduction on your money, you're getting a good return. Now, could you get drop kicked, especially over short periods, definitely. But most likely now, especially if you invest long term.

So, in short, no, it is NOT better to buy the house for cash.

This is the analysis to perform.

Is the savings from interest deduction more than the amount you'd not spend on the interest? (You probably know the answer to that question.) And then compare the projected return on a RE investment to what you might earn on some other investment if you don't put the cash into the house.

It is a good educated guess that most people would be better off buying the house in cash and not paying all those interest charges for 20 or 30 years. Both a house and other investments face risk, and the rate of return is hard to predict.

As many noted, a lot of people can't pay cash for a house.

quote:

Originally posted by jhe888:

quote:

Originally posted by BBMW:
Do you, or most normal people have $300,000 available to pay cash for the house? If not, it's not even a question. But if you do...

What is the effective interest rate for the mortgage, given it's tax deductability? This will be lower the higher tax rate the buyer has.

What return can you get on the cash if you don't put it into the house? Look at the article below:

http://www.businessinsider.com...ns-impressive-2016-5

It shows the annualized 30 year S&P 500 return for each starting year. They are mostly over 10%, sometimes significantly. So if you're paying 4% - the tax deduction on your money, you're getting a good return. Now, could you get drop kicked, especially over short periods, definitely. But most likely now, especially if you invest long term.

So, in short, no, it is NOT better to buy the house for cash.

This is the analysis to perform.

Is the savings from interest deduction more than the amount you'd not spend on the interest? (You probably know the answer to that question.) And then compare the projected return on a RE investment to what you might earn on some other investment if you don't put the cash into the house.

It is a good educated guess that most people would be better off buying the house in cash and not paying all those interest charges for 20 or 30 years. Both a house and other investments face risk, and the rate of return is hard to predict.

As many noted, a lot of people can't pay cash for a house.

I agree. But if you own a house outright. It really doesn't matter what it's worth, plus or minus, until you go to sell it. Cost of Living is all that matters.

quote:

I agree about having a guy. We moved the bulk of our funds to a money manager who charges 1.25% a year. For those who say doing the work myself and investing in Mutual Funds and such haven't looked at what expenses and fees those funds charge.

Another thing about having a guy is they have the discipline and the resources to execute against their strategy. The only requirement is you agree with their strategy. The strategy of my guy/firm is they have a world wide benchmark and the value they add is they make calls as to which countries and market segments do they feel they should overweight or underweight in my portfolio.

Having a guy or gal for that matter is purely a choice.
Thinking that they are sitting at their computer focused on your account and financial well being each and every day is well, being optimistic and naive.

Most likely they have 100's of accounts and if at all, they monitor yours rarely, if ever. Other than annual or semi annual basis. Or before a sit down that you arranged with them.
They are going to do what you ask, which can be done in a matter of minutes.
Their focus is on making money, not making you money. If you make money it is because they are making money off of your money.
Simple as that.
Are some better than others at making you feel good and important, sure. That is their job above all else.
They make you good $ when everyone else is, like now. And tell you that you are losing less money then everyone else when times are tough.
It is not rocket science.

If you have a good one, that is great.

Having one to be successful is optional.
Having one is also optional to fall on your face.
But many have had them and had horrible outcomes.

So I am back to no absolutes.

If you educate yourself and don't go nuts I feel you can be successful. If not than you have no one to blame than yourself.

For me that beats being pissed off at "the guy" who was obviously first a foremost in it for himself and was surely going to let you take the hit vs himself. All the while making lots of money off of yours.

mtcw

quote:

Originally posted by jimmy123x:

I didn't include PMI in any of my calculations.

You were the one that brought up PMI as if that mattered, remember?

quote:

Originally posted by jimmy123x:
If you put the $300k into the S+P and mortgaged the house, then you're paying a $1620 mortgage payment every month and not taking money out of your mutual fund investment. You never mentioned taking the proceeds from the S+P fund and paying the mortgage with them.

I never mentioned? Did you miss the following under my point number 2? "Another component of this second consideration is that current deductibility of the mortgage interest. Roughly, the 5% mortgage interest nets out to 2 1/2% mortgage interest. This effectively gives you 4 1/2% spread as a rate of return compounded annually [/B]assuming you only sell a portion of the stock investment to pay off the mortgage interest."[/B]

quote:

Originally posted by jimmy123x:
Most all funds charge a hefty fee to take money out the first 2 years.

Completely not true. Most all funds do NOT charge a hefty fee to take money out the first 2 years, maybe in the 60s or 70s. I don't know what else to say about this except this statement shows you're ignorant of the current state of the financial market.

quote:

Originally posted by jimmy123x:
If you paid cash for the house, why wouldn't you have the same $1620 in cash every month that you'd normally pay the mortgage in scenario 1, and put THAT into a mutual fund each month instead of paying a mortgage.

Can you not do math or do you not understand the original problem? The original problem was: "Which is more beneficial? Paying the home in cash to avoid a mortgage or investing THAT cash somewhere else?"

The question wasn't "should I buy a house in cash for $300,000 and, oh by the way, what should I do with the additional money I have?"

I have $300,000 in my pocket. I buy a house for $300,000. How much do I have in my pocket? zero. I don't have an additional $1650.

To pre-empt you retorting that "nobody who can buy a house for $300,000 for cash isn't going to have no other cash" or "it's stupid to buy a house for cash for $300,000 if that's all the cash you have," the explanation is problem analysis. When resolving a problem, you boil it to the core components and take out any extraneous insignificant facets. The problem is if you had $300,000 is it better to buy a house outright or carry a mortgage?

Looking back at other people's post, I expanded on BBMW's initial post and added the leverage factor of owning a mortgage as my first point.

With regards to closing costs that you mention, my expressed assumptions included no buy down, no origination, etc. You could always roll that into the equation but it doesn't matter for this discussion. If you want to be appeased, we can say closing costs and everything else is rolled into the $300,000 purchase price. Satisfied now?

As for the rest of your post regarding SHTF, you bought the house in cash for $300,000. Let's assume SHTF and the bottom fell out and the house is now worth $150,000. Compare to buying the house with a mortgage for $300,000 and having $300,000 in investments that is worth at the most still $300,000. Which scenario would offer access to higher amount of money? (you can't just imagine one SHTF scenario just because it supports your case.)

Regarding age, the discussion referred to 30 years in the OP. So the assumption is a 30 year time horizon is a viable one. If the person under discussion is in stage 4 cancer given only 6 months to live or an 80 year old person, do you think a 30 year time horizon would have been brought up? That would have been goofy thinking on the OP's part and I don't believe he's goofy.

quote:

Originally posted by old rugged cross:

quote:

I agree about having a guy. We moved the bulk of our funds to a money manager who charges 1.25% a year. For those who say doing the work myself and investing in Mutual Funds and such haven't looked at what expenses and fees those funds charge.

Another thing about having a guy is they have the discipline and the resources to execute against their strategy. The only requirement is you agree with their strategy. The strategy of my guy/firm is they have a world wide benchmark and the value they add is they make calls as to which countries and market segments do they feel they should overweight or underweight in my portfolio.

Having a guy or gal for that matter is purely a choice.
Thinking that they are sitting at their computer focused on your account and financial well being each and every day is well, being optimistic and naive.

Most likely they have 100's of accounts and if at all, they monitor yours rarely, if ever. Other than annual or semi annual basis. Or before a sit down that you arranged with them.
They are going to do what you ask, which can be done in a matter of minutes.
Their focus is on making money, not making you money. If you make money it is because they are making money off of your money.
Simple as that.
Are some better than others at making you feel good and important, sure. That is their job above all else.
They make you good $ when everyone else is, like now. And tell you that you are losing less money then everyone else when times are tough.
It is not rocket science.

If you have a good one, that is great.

Having one to be successful is optional.
Having one is also optional to fall on your face.
But many have had them and had horrible outcomes.

So I am back to no absolutes.

If you educate yourself and don't go nuts I feel you can be successful. If not than you have no one to blame than yourself.

For me that beats being pissed off at "the guy" who was obviously first a foremost in it for himself and was surely going to let you take the hit vs himself. All the while making lots of money off of yours.

mtcw

All well and good. I am well-educated in finance. And I took over 3 months educating myself with money managers - went to several seminars with free lunches, did follow up visits to their office, had several visits at my house, had several teleconferences. Some firms obviously had more follow-ups than others. I educated myself on their fees, their strategies, etc.

quote:

Having a guy or gal for that matter is purely a choice.
Thinking that they are sitting at their computer focused on your account and financial well being each and every day is well, being optimistic and naive.

Most likely they have 100's of accounts and if at all, they monitor yours rarely, if ever.

I certainly am not being optimistic or naive. I went with a firm that have thousand of accounts and even pension funds that they manage. But I know they are focused on my account. How do I know? Because the stock portion of my account that they manage for me reflects the stock portion of every other account they manage for the most part. I would imagine the difference would be the number of securities they manage in my account versus the number of securities they manage for, say, a pension fund. But unlike a mutual fund, I can see what stocks they bought for me at any given time. The account is with my brokerage where I am the owner of the account and the money manager have management rights. If they buy or sell a stock, I can see it. (I actually just download to quicken and Quicken flags for me the new transactions.)

Another difference between mine and another is the percent balance between stocks and bond securities.

The fee structure is simple. They buy individual stocks for me so no mutual fund is giving them a kick back. It's 1.25% of the value of the funds they manage. If my funds grow, their fees grow. If my funds decrease, they get less. So they are driven to make my portfolio grow to increase their income.

I understand that many who had money managers had horrible outcomes. Up until August of this year, it was either me or later on, my wife, who was managing our investments. Several of our interviewers remarked that my wife did very well. We could probably do better than even the one we ended up with. But it's similar to the time I stopped mowing my lawn and started hiring someone else to do the job. I still monitored how well he did and whether the lawn was starting to die off.

Thanks for making my point for me Rey. Relax friend.
It's all for not. Its just the internet. Glad it is working out for you. I really am.

PS. I was always told there was no free lunch?

quote:

Originally posted by old rugged cross:
Thanks for making my point for me Rey. Relax friend.
It's all for not. Its just the internet. Glad it is working out for you. I really am.

I am relaxed.

I like having discussions, especially polite discussions in this forum. I lide discussing numbers even more. I didn't take your post as antagonistic and I hope I don't come across that way.

The lunches were free from the firms we didn't go with. But it was tiring listening to people and writing down notes to compare afterwards. And talking with my wife to get her impressions. I decided to cut off further company research as it was getting tiring. We went with the one that met our criteria.

quote:

Originally posted by Rey HRH:

quote:

Originally posted by jimmy123x:

I didn't include PMI in any of my calculations.

You were the one that brought up PMI as if that mattered, remember?

quote:

Originally posted by jimmy123x:
If you put the $300k into the S+P and mortgaged the house, then you're paying a $1620 mortgage payment every month and not taking money out of your mutual fund investment. You never mentioned taking the proceeds from the S+P fund and paying the mortgage with them.

I never mentioned? Did you miss the following under my point number 2? "Another component of this second consideration is that current deductibility of the mortgage interest. Roughly, the 5% mortgage interest nets out to 2 1/2% mortgage interest. This effectively gives you 4 1/2% spread as a rate of return compounded annually [/B]assuming you only sell a portion of the stock investment to pay off the mortgage interest."[/B]

quote:

Originally posted by jimmy123x:
Most all funds charge a hefty fee to take money out the first 2 years.

Completely not true. Most all funds do NOT charge a hefty fee to take money out the first 2 years, maybe in the 60s or 70s. I don't know what else to say about this except this statement shows you're ignorant of the current state of the financial market.

quote:

Originally posted by jimmy123x:
If you paid cash for the house, why wouldn't you have the same $1620 in cash every month that you'd normally pay the mortgage in scenario 1, and put THAT into a mutual fund each month instead of paying a mortgage.

Can you not do math or do you not understand the original problem? The original problem was: "Which is more beneficial? Paying the home in cash to avoid a mortgage or investing THAT cash somewhere else?"

The question wasn't "should I buy a house in cash for $300,000 and, oh by the way, what should I do with the additional money I have?"

I have $300,000 in my pocket. I buy a house for $300,000. How much do I have in my pocket? zero. I don't have an additional $1650.

To pre-empt you retorting that "nobody who can buy a house for $300,000 for cash isn't going to have no other cash" or "it's stupid to buy a house for cash for $300,000 if that's all the cash you have," the explanation is problem analysis. When resolving a problem, you boil it to the core components and take out any extraneous insignificant facets. The problem is if you had $300,000 is it better to buy a house outright or carry a mortgage?

Looking back at other people's post, I expanded on BBMW's initial post and added the leverage factor of owning a mortgage as my first point.

With regards to closing costs that you mention, my expressed assumptions included no buy down, no origination, etc. You could always roll that into the equation but it doesn't matter for this discussion. If you want to be appeased, we can say closing costs and everything else is rolled into the $300,000 purchase price. Satisfied now?

As for the rest of your post regarding SHTF, you bought the house in cash for $300,000. Let's assume SHTF and the bottom fell out and the house is now worth $150,000. Compare to buying the house with a mortgage for $300,000 and having $300,000 in investments that is worth at the most still $300,000. Which scenario would offer access to higher amount of money? (you can't just imagine one SHTF scenario just because it supports your case.)

Regarding age, the discussion referred to 30 years in the OP. So the assumption is a 30 year time horizon is a viable one. If the person under discussion is in stage 4 cancer given only 6 months to live or an 80 year old person, do you think a 30 year time horizon would have been brought up? That would have been goofy thinking on the OP's part and I don't believe he's goofy.

First off, please DO NOT call me ignorant about the current financial situation. Just by the way you're talking you're naïve. Do you REALLY think the market is going to keep performing the way it's performing forever??? DO you really think there won't be a correction sometime in the next few years????I have a bachelors degree in Finance and know ALL about stocks, mutual funds, ETF's, REITS, BONDS, etc. I have increased my net worth 800% since 2008 and it was six figures then, which includes absorbing a 6 figure loss in net worth on a condo I bought in 2005, still own, and have rented at a loss each month. I don't NEED a money manager to figure out how to invest my money. I averaged 36% each and every year in the stock market from 2008 to 2014 and diversified by taking the profits and buying real estate. I bought a 4 plex for $170k cash and have a total of $200k in and it's worth $450k and makes me a 15% ROI every year, then bought my house cash for $225k and have $300k in and it's worth $425k. Basically at 41 years old I can retire, right now, in my current lifestyle. I'm mostly out of the market and I make the odd trade here and there on something that's way undervalued, last month I made 20% on a stock trade and held it less than 10 days. I'm just waiting for a shoe to drop right now as the market is over valued but when interest rates rise, money will move from stocks to bonds and cd's causing a correction. How big of a correction depends on how fast interest rates rise. As for the real estate market, if it dropped 50% I wouldn't care, because my renters are still going to pay me rent, and my paid off house is still going to cost me $800 a month for everything (taxes, insurance, tv, electric, water, lawn man, etc. etc.) and I'll just buy more real estate with the cash I have sitting secure. I also run/own a pretty successful business.

That being said. A money manager is going to do whatever benefits himself first, his firm second, and you third as a bi-product of that. If the firm he works for is holding a lot of stock in a fund and they want to dump it, guess what, you're buying some of it because he's getting a double commission on an in house trade.

If you look at what happened in 2008. Real Estate holds it's value a lot better when SHTF than the stock market.....because everyone needs to live somewhere. The real estate market dipped 50%, the stock prices dipped 100-400%. Why, because you can dump an entire portfolio and convert it to cash in 10 seconds......you don't live in a stock, you live in a house. houses not so fast.

You have to figure the closing costs into the $300k, even if you roll it into the mortgage because you're instantly losing 5% in value or $15k in net worth. Basically your $300k at 7% in the S+P would have to go 10 months to equate the net worth loss you took on buying the house with the closing costs of the mortgage, IF you're not using the investment income to pay the mortgage, 9 years while paying the mortgage from the investment income before you even started making money and your net worth was equal to the $300k in cash you started with.......not to mention the mortgage payments. Plus another 6-7% in commission when you go to sell the house but assuming he's staying there 30 years we won't figure that into anything. Just as if you didn't put 20% down, you'd have to account for PMI.....Money is money......whatever effects the bottom line has to be accounted for. An expense added because of a financial decision has to be accounted for in the equation. A good investor accounts for all costs, not just some and all incomes. A fool picks and chooses what costs he'll figure into the equation to make a decision. This is precisely why most new businesses go under, they don't account for ALL expenses when doing a cost analysis. For example. When I look at an investment property (rental) to buy. I figure 10 months income- 12 months expenses, and if that doesn't equal a 10% or better ROI, I'm not interested (and the cost basis figure is the purchase price AND all improvements the property needs). I figure one months rent goes to repairs and the other to vacancy......a stupid investor will just figure 12 months income- 12 months expenses and NOT account for vacancy and long term repairs......and then overpay for the property and not make any money.

The OP stated either pay cash for the house or INVEST the $300k elsewhere, nowhere did he state he was going to use the income from the investment to pay the mortgage. And, again your figures are wrong because you're not accounting for 20% of the return on the money he's taking out to pay the mortgage going to capital gains tax. Without hearing from the OP, I'm assuming he is investing the $300k and not touching it and paying for a mortgage, considering it sounds like he is working and of normal working age. When you factor in all of the tax loses, the house is the better deal. AND, if there's another 2008, he'd lose most of his money in the market and be taking from investment equity to pay a mortgage and start bleeding net worth. The house would have recovered. What if half of your portfolio had GM, Circuit City, Blockbuster, and other companies that went bankrupt, that half would never recover.

Everyone's situation is different, but for most people, paying cash for a house would make the most sense. As no matter what happens in life, they'll still usually have the house. Anyone can find a means to pay the bills on a paid off $300k house. If you're in one of the top tax brackets it would make sense to hold a mortgage possibly. BUT, What happened to all those people that refinanced their paid off or nearly paid off house in the housing boom and invested it. Almost all of them lost it all. Investing that cash somewhere else comes with a lot more risk.

House with closing costs $315,000
300,000 mortgage =1620 payment a month = $19440
300,000 x 7% (investment income) = $21000
$21000 - 19440= $1560 PER YEAR after paying mortgage......
15,000 closing costs /1560= 9.6 years.
This is not including capital gains taxes......so basically it's a 9.6 year payback to just get EVEN without even accounting for capital gains between buying the house cash and buying the house with a mortgage and having the cash pay for the additional closing costs..... If you add 20% capital gains tax. You'd LOSE MONEY.

21,000 /.20 capital gains = 16,800 NET......
19440 mortgage - investment proceeds= -$2640
A $2640 LOSS year after year for at least 10 years until the same amount in principle comes off of the mortgage each year.

Buying the house cash makes much more sense.

quote:

Originally posted by jimmy123x:

First off, please DO NOT call me ignorant about the current financial situation.

I didn't call you ignorant about the current financial situation, I said you're ignorant about the current state of the financial market based on your statement that "most all funds charge a hefty fee to take out money out the first 2 years." I said "financial market" as in the market for financial funds specifically, not whatever financial situation there is currently.

Have you looked recently at how many funds currently do that versus the universe of funds that don't charge a back-end load? I haven't but it's a safe bet that in the whole universe of funds currently available, at most 20% if that charge any fees for taking out money in the first 2 years. And I only say 20% which refutes your "most all funds" because I want to be certain I'll win my bet.

Okay, before I posted, I went and checked. On Schwab, there's 5,773 funds open to new investors. There was only a filter for No-load funds (meaning no front-end or back-end loads). Of the 5,773 funds open to new investors, 5,594 are no-load funds. I'm assuming Schwab is reflective of the total market and so that refutes your statement that "most all funds charge a hefty fee..."

As for the rest, it's apparent we don't have the same definition of the problem posed and I'll just leave it at that.

quote:

Originally posted by Rey HRH:

quote:

Originally posted by jimmy123x:

First off, please DO NOT call me ignorant about the current financial situation.

I didn't call you ignorant about the current financial situation, I said you're ignorant about the current state of the financial market based on your statement that "most all funds charge a hefty fee to take out money out the first 2 years." I said "financial market" as in the market for financial funds specifically, not whatever financial situation there is currently.

Have you looked recently at how many funds currently do that versus the universe of funds that don't charge a back-end load? I haven't but it's a safe bet that in the whole universe of funds currently available, at most 20% if that charge any fees for taking out money in the first 2 years. And I only say 20% which refutes your "most all funds" because I want to be certain I'll win my bet.

Okay, before I posted, I went and checked. On Schwab, there's 5,773 funds open to new investors. There was only a filter for No-load funds (meaning no front-end or back-end loads). Of the 5,773 funds open to new investors, 5,594 are no-load funds. I'm assuming Schwab is reflective of the total market and so that refutes your statement that "most all funds charge a hefty fee..."

As for the rest, it's apparent we don't have the same definition of the problem posed and I'll just leave it at that.

You are not ACCOUNTING for ALL COSTS in the equation. You are not accounting for the effect of closing costs on net worth and time to repay that loss. You are not accounting for capital gains on investment income. When you include both of those items. You are LOSING money by investing it and mortgaging the house versus just paying cash for the house. Numbers are numbers and what it equates to at the end of the year is what counts.

Now there are three variables I am not accounting for, the OP's primary income or tax bracket.....if he's in the bottom two tax brackets there are no capital gains. Then there's the 25% of the mortgage interest you can deduct from your income taxes. I doubt if he has $300k in cash, he works at burger king. AND, the third is the effect of principle coming off of the mortgage. I'm way too tired to account for all of those variables without having the rest of the numbers, it's impossible actually. But figuring in capital gains and closing costs, it's somewhere around 15 years, just to break even on the investing the money over paying cash for the house to begin with, if at all. From a cursory glance, and you're taking on a ton of risk to do so......