How Does It Feel?

In Joe’s comment, he offered up that I had missed a reason to pay off my mortgage and that is the peace of mind that it offers.

While he is correct that it does offer peace of mind knowing that as long as I pay my property taxes, my house will never be taken away from me, it honestly doesn’t ‘feel’ any different.

It isn’t that I expected to feel much different without a mortgage payment every month, but for some reason I expected to feel something. Maybe I expected to feel relief, or satisfaction?.  In any event, I do not regret the decision whatsoever, but the shift of stress now seems to have planted itself squarely on the shoulders of replenishing the investment and savings account(s).

What To Do With That Extra Cash Flow?

Because the majority of the cash that was used to pay the mortgage off came from a brokerage account, the former mortgage payment is now being directed to that account to replenish that capital.  I have automatic transfers set up and am currently treating this as a ‘bill’ that required being paid each month just like the mortgage did.

Treating the transfer of funds to my investment account as a bill is likely part of the reason that it doesn’t feel any different not having a mortgage.  I set this up on purpose to ensure that I do not fall victim to lifestyle inflation . I certainly don’t need to frivolously spend that extra cash simply because I don’t have a mortgage payment any longer.

 Since I already max out my retirement accounts, have no other debt and an emergency fund, the replenishment of the brokerage account will be the top priority. Some of those funds will also be earmarked for a few things that have been neglected in the quest to pay off the mortgage. The earmarked funds will be directed to the following categories:

1.) Vehicle Replacement Fund – Although both 2003 Hondas are still serving us well, replacing one of the vehicles in the next few years is likely inevitable.
Disclaimer – I absolutely hate buying vehicles. I believe that they are the worst use of money and generally cause people more financial troubles than housing debt. More on this in an upcoming article.

2.) Home Maintenance – While major repairs such as a new furnace or air conditioner would be covered by the Emergency Fund, a more general home maintenance fund will take care of deferred maintenance such as new paint, upgraded finishes, shingles etc. A home should maintain or increase its value over the long term, especially if it is well maintained. And, a well maintained home is more efficient and comfortable to live in.

3.) Vacation Fund - It was important to my family not to sacrifice too much in the quest to become completely debt free, so we did take vacations every second year. However, with the additional cash flow from paying off the mortgage, some of the funds will be earmarked to increased vacation time. This doesn’t mean frequent air travel and/or all inclusive luxury vacations, but simply more time with friends and family. Spending from this fund could include local camping, visiting friends and/or family in their homes, or destination vacation travel. The idea is to invest some money and time in fostering relationships with others – including the immediate family. Often, being away from the distractions of home life allows people to focus on just being together.

 As you can see, there are plenty of places to direct the additional cash flow from what used to be the mortgage payment.   Due to all of these different competing priorities, it doesn’t feel like there is extra money to go around. That said, regardless of which account the funds get transferred to now, the net result is the accumulation liquid assets.

Did I miss anything that you feel is important?  What is the first goal that you will focus on when the mortgage is paid off?

These are the tried and true money management rules for traders, given to us by the greatest trader of all time.  I felt obligated to share these points as I read through them- even though I am more of a long term investor.

I have always said that there are many ways to make money in the market and that you can always learn from others.  That said, please take these words of Mr. Livermore and figure out what they mean to you and your investing or trading plan.

1) Don’t lose money.

Don’t lose your stake. A speculator without cash is like a store-owner with no inventory. Cash is your inventory, your lifeline, and your best friend. Without cash, you are out of business. Don’t lose your line.
There is no place in speculating for hoping, for guessing, for fear, for greed, for emotions. The tape tells the truth.

2) Always establish a stop.

A successful speculator must set a firm stop before making a trade and must never sustain a loss of more than 10 percent of invested capital.
I have also learned that when your broker calls you and tells you he needs more money for a margin requirement on a stock that is declining, tell him to sell out the position. When you buy a stock at 50 and it goes to 45, do not buy more in order to average out your price. The stock has not done what you predicted; that is enough of an indication that your judgment was wrong. Take your losses quickly and get out.

Remember, never meet a margin call, and never average losses.
Many times I would close out a position before suffering a 10 percent loss. I did this simply because the stock was not acting right from the start. Often my instincts would whisper to me:J.L., this stock has a malaise, it is a lagging dullard. It just does not feel right, and I would sell out of my position in the blink of an eye.

I absolutely believe that price movement patterns are repeated and appear over and over with slight variations. This is because humans drive the stocks, and human nature never changes.

Take your losses quickly. Easy to say, but hard to do.

3) Keep cash in reserve.

The successful speculator must always have cash in reserve for exactly the right moment. There is a never-ending stream of opportunities in the stock market and, if you miss a good opportunity, wait a little while, be patient, and another one will come along. Don’t reach for a trade, all the conditions for a good trade must be on your side. Remember, you do not have to be in the market all the time.

The desire to always be in the game is one of the speculator’s greatest hazards.
When playing the stock market, there are times when your money should be waiting on the sidelines in cash waiting to come into play. Time is not money “ time is time, and money is money.

Often money that is just sitting can later be moved into the right situation at the right time and make a fast fortune. Patience is the key to success, not speed. Time is a cunning speculator’s best friend if it is used wisely.

4) Let the position ride.

As long as the stock is behaving normally, do not be in a hurry to take a profit. You must know you are right in your basic judgment, or you would have no profit at all. If there is nothing basically negative, then let it ride. It may grow into a very large profit. As long as the action of the overall market and the stock do not give you cause to worry, have the courage of your convictions, and stay with it.
When I was in a profit on a trade, I was never nervous.

Of course the opposite is true as well. If I bought a stock and it went against me I would sell it immediately. You can’t stop and try to figure out why a stock is going in the wrong direction. The fact is that it is going in the wrong direction, and that is enough evidence for an experienced speculator to close the trade.
I do not and never have blindly bought and held a stock.

To buy and hold blindly on the basis that a stock is in great company or a strong industry, or that the economy is generally healthy, is, to me the equivalent of stock market suicide.

Stick with the winners. Let them ride until you have a clear reason to sell.

5) Take the profits in cash.

I recommend parking 50 percent of the profits from a successful trade, especially when the trade doubled the original capital. Set the money aside, put it in the bank, hold it in reserve, or lock it up in a safe-deposit box.

Like winning in the casino, it’s a good idea, now and then to take your winnings off the table and turn them into cash is the single largest regret I have ever had in my financial life was not paying enough attention to this rule.

More great information on Livermore can be found here.

Have an awesome day!

1. An investor’s choice of asset allocation is the single largest factor that will influence the probability of long-term success. Historical evidence suggests that cash investments return the least amount over the long run.
2. There is significant upside potential in equities for long-term investors right now. Stock valuations are well below their highs and have a long way to go to be back in line with what we consider to be fair value.
3. Sustained low interest rates and dramatic increases in money supply combined with increased deficits have many fearful of the inflationary impact once a true economic recovery takes hold.
   Money market investments, non-market linked CD’s and high interest savings accounts offer little protection against the wealth eroding effect of inflation.

That is not to say that there is no downside.  In fact, there is an inherent risk when investing in equities and there may, in fact, be another leg down.

However, I believe the risk vs. reward payoff  favors the astute dividend growth stock investor at this time.

Increasing Importance of Global Diversification

The importance of global diversification and how most future growth is expected to come from U.S. and international markets, in particular Emerging Markets is not a new idea. MGI’s report however, outlines some additional new insights into the world’s major cities’ current contributions to global growth and where it’s likely to come from in the future.

Below are some key pieces of data form the report that are most relevant:

• Contrary to common perception, MGI found that the world’s largest cities have not been driving global growth for the past 15 years, and many have not grown faster than their host economies. Its estimated that today’s 23 largest urban areas will contribute just over 10% of global growth to 2025, below their current 14% share of global gross domestic product (GDP) today.
• Middleweight cities in emerging markets are poised to delivery nearly 40% of global growth by 2025, more than the entire developed world and emerging market megacities combined
  (middleweight is defined as metropolitan areas with between 150 thousand to 10 million inhabitants and megacities have 10 million or more).
• Currently, 1.5 billion people live in the top 600 urban centers of the world and account for $30 trillion or more than half of the world’s GDP. It’s expected that by 2025 the population in these cities will reach 2 billion and will account for $64 trillion or more than 60% of the world’s GDP.

Again, the importance of global diversification of investments is not new.  However, this report gives some merit to paying additional attention to the growth of centres outside of the major metropolitan areas in the emerging economies.

What does this mean for you as an investor?

The argument for either side of the equation usually heats up over the topic of investment return. While some argue that investing can yield a higher after tax return based on historical figures, others posit that those historical figures are likely not going to be accurate going forward and that finding a ‘guaranteed’ rate of return in the current environment as high as your mortgage rate is improbable.

While both can make good arguments, I am not going to approach the mathematical side of this subject with this article.

The truth of the matter is that everyone’s situation is different and everyone has their own personal views on risk and debt. Truth be told, I firmly believe that we can’t reasonably compare an investment portfolio with one’s personal residence. Therefore, I view this argument as much more emotional than mathematical. It is for that reason that I want to bring to light some of the emotional trigger points that evoke the polar responses often associated with the pay down debt vs. investing debates.

Let’s start with a few basic questions that may help you decide whether it is better for you to invest or to pay down your mortgage.

1.) How many years are remaining on the current amortization of your mortgage?

If you have fewer than 10 years remaining on your mortgage amortization and your rate is fixed until maturity, you may be better off taking the guaranteed return associated with retiring your mortgage early. The reasoning behind this is that, while investments in the stock market may yield a higher return on average, ten years is a relatively short period of time to invest in the stock market. This is especially  true when we consider the necessity to achieve after-tax returns greater than your mortgage interest rate.

2.) Do you have the financial discipline to invest 100% of the amount of your mortgage payment once it is paid off?

If you choose to pay off your mortgage prior to retirement, you will have some catching up to do with respect to your investing goals for retirement. While there is peace of mind involved in being ‘mortgage free’, diverting that former mortgage payment to an investing/savings account is the perfect way to beef up your retirement portfolio.  the opponents to the pay off the mortgage early plan often cite the tempation for the new found cashflow to lure you in to a lifestyle that you won’t be able to afford once your working days are through.

3.) How confident are you in your investing abilities?

While I like to think that by investing in dividend growth stocks and dividend paying ETFs, I don’t always make the perfect investment. Yes, I even lose money sometimes

According to the statistics, most of us do not have the ability to consistently out perform the stock market indexes. What’s more, none of us have the ability to move the market which puts us at a further disadvantage. So, I must agree with Five Cent Nickel on one benefit of paying off the mortgage early:

Another advantage of paying off your mortgage early is that doing so protects you from yourself. While paying the minimum on your mortgage and investing the difference might sound like a great idea, there are no guarantees that you’ll actually follow through on the second part of the equation.

4.) What is your current state of job security and liquidity?

This is where we have to take a long, hard look at our personal situations and assess those things that could derail even our best laid plans. If you are confident in your job security and are comfortable with lower liquidity as you aggressively reduce your mortgage, then mortgage reduction may be the decision that is best for you. However, if job security is a question or if you are the sole breadwinner in the household, you may be more inclined to carry a higher level of liquidity (ie. larger emergency fund).

So, what am I doing?

I took a similar approach to this question that The Financial Highway suggests. Look at both the mathematical and emotional aspects of the equation and answer honestly to the above four questions.

Well, I am somewhat confident in my investing abilities, but the emotional side of me would like to eliminate my mortgage. However, the real benefit for me in eliminating the mortgage is in the increased cashflow provided from the complete elimination of the debt.

You see, my mortgage rate is variable and currently at 2.25% 2.50%, so the idea of paying extra payments instead of investing has little merit in reducing the overall interest paid on my mortgage.

Comparatively, saving/investing until I can eliminate the debt entirely will have the effect of keeping my funds liquid as a hedge against job loss or another financial tragedy until such time as I can mitigate the risk of job loss etc. by removing the entire mortgage payment from my liabilities.

What are your thoughts on the invest vs. pay down mortgage debate?

Resources:

Mortgage Pay Down vs. Investing Calculator