No. of Recommendations: 1
Hi 2Gifts,

You're welcome, and glad I brought the conversation out of the quagmire.

If your only access to liquidity is selling decimated positions, you are S.O.L.
This is a big assumption, at least in my mind. It seems to say that your only funds available are your investments, whether those are retirement funds (and I am in the camp that I consider those only for retirement, but I would touch them for a disaster) or funds in an IUL. I am a very big proponent of having a significant efund, and that's where money would come from first in the case of a disaster.
So am I. In my practice I have found that 6 months of cash to cover 1/2 year of all inclusive lifestyle costs is about the right number, if you can also keep ready revolving credit worth an additional 6-12 months of lifestyle burn rate.

If you keep more than 6 months cash on hand you are unecessarily restricting your household net growth... eespecially when you have an IUL, since it is liquid within a 1-3 day turn time.

Its a nice notion to mentally segregate an account that is "off limits"... but that firewall becomes irrelevant when loved ones are at risk, or other unforeseen and unimagined ruinous scenarios arise.

I might be reading this incorrectly, but I don't see putting my house at risk if I choose to invest the dollars over and above my mortgage payment in something, whether that be the S&P, individual stocks, an IUL, or even just parked in a bank account collecting interest. That is money intended to pay it off faster, not pay it as I go, and so I don't see this as a risk to losing my house.

Excellent! You are advanced beyond many. Many people unecessarily inject more cash into their real estate accounts (either via larger than minimum down payments, shorter than available amortization terms, or voluntary equity transfer via early repayments) because they've fallen into the mistake of believing they are somehow 'sfer' or eliminating their net liabilities faster by doing so (both of which, of course, are wrong.)

I see it as a risk that I might not pay it off as fast as I would like, but losing the investments does not put my mortgage payment at risk, which comes out of cash flow. I see this as mixing apples and oranges, but again, I am not completely sure that I am reading it correctly.

Oh no, you read it perfectly correctly... and you have the far more responsible and accountable perspective on the mortgage management issue. The vast majority (even otherwise sophisticated investors) have a visceral fear of debt... even when the numbers are so skewed in favor of using it in a well managed fashion.

You've referred to the ability to take advantage of terrific investment opportunities several times, and I think perhaps where we differ here is that although I find that attractive, it is not a driver for my behavior. I have reached all of my financial goals ahead of schedule, including having bumps along the way like no income for up to a year multiple times, and I've done that without pouncing on those terrific investment opportunities because I am happy with having enough, and I don't necessarily need to have a ton more than that. I prefer to spend my time elsewhere than always looking for the next great financial victory provided that I have enough, and I've always had that.
This *almost* sounds as though you are telling me that you are fortunate enough to be wealthy enough to have no further fear of losing equity, nor of accumulating more for either yourself, your heirs, or your personal contributions. Am I understanding you correctly? (And if so... wow! I wanna rub your hem!)

This explanation actually helps me a lot to understand where you are coming from. First, I don't particularly care if I end up with the most money. I only care that I end up with enough money to meet my needs and financial goals. I think that is a huge distinction here.

That's an amazingly mature & centered perspective, in my opinion! Money is nothing but the power of accumulated time... and it costs time to accumulate/multiply... so unless we discover some kind of immortality pill, exerting effort to accumulate more than we need for our purposes is inefficient of the very limited living time we are each given.

Secondly, I have planned for catastrophe to happen, and I've had to make use of those plans more times than I care to remember, but as long as I have a way to cover those catastrophes, I think I'm OK. I think we can probably agree that there are multiple options to cover a catastrophe, and that an IUL or any other insurance product is not the only answer
Absolutely! In fact, I don't look at an IUL from the perspective of problem solutions as much as a form of balanced strategy. And even at that, its just a ready-to-wear retail form of the strategy that can be custom fit "off the rack" rather than building it out yourself (which is also doable, and recommendable... for those so inclined (but not required of all, or any really.))

And as I've stated above, I am not driven at all by your 3rd point because I only need to have enough. Plus, my risk tolerance may not be suitable to those opportunities, and knowing myself and my own risk tolerance is a good thing so that I can do things like sleep at night.
I suspect you misunderstood what I mean by "an unfair deal/trade/exploit." When I refer to these, I am talking about deals where a dollar today buys you $1.50 to $3 (or more) of immediate resellable face value assets, which also throw off a very significant yield as well. Generally speaking, these are the 'golden chalice' lifetime deals of extremely *LOW* risk, matched with extremely *HIGH* reward.

Catherine referred to a 'friend' who bought a condo of immediate $230,000 value by stroking a $140,000 check... all because the securities markets were devastated so cash investors were absent, and the mortgage market was blocked out because the condo association was still wrapping up a litigation issue. That 'friend' was me. My immediate net asset cashflows were over 8% and have been rising along the way. The HOA won the litigation, and is pouring the proceeds into further enhancement upgrades to the overall property, and a mini-bidding war is on for this complex, driving my position up strongly (both in face value and rental yields.) This was an extremely low risk, high reward trade that I was able to execute when nobody else was, because I could stroke a check from my hedged account that didn't lose a dime.

I have a handful of stories of similarly "unfair" deals that have nothing to do with real estate (medical device deals, intellectual property deals, legal partnership buyouts, and like that) where hedged account owners were able to walk away with a steal, and have the seller virtually kissing them for saving the day with cash (albeit pennies on the dollar) when no other 'heros' were anywhere to be found.

Its amazing (but no longer surprising to me) how the "needle in a haystack" deals actually find their way to YOU... when you have cash to employ when everyone else is bleeding in the markets.

In *ANY* case... anyone with a low risk threshold would be wise to avoid *ANY* kind of securities long-term buy and hold scheme. Carrying the risk of waking up any morning to a 50% loss, in trade off of pursuit of a 10-13% average return, is laughable to the serious and tragic to the ignorant.

Again, thanks for taking the time for the detailed response as it helps me to understand where our priorities or approaches might differ, and I can use that to better understand what you are trying to explain.
It's my pleasure! (And I don't know what crawled up my good friend Catherine's butt... and we've had a few words about it on the back channels. ;~)

Your post was wonderful to me... as you may observe in these threads, your reasonings are not common. I appreciate that, and you!

Dave Donhoff
Leverage Planner
Print the post  

Announcements

Useful Resources
Our Home Center has all you need to make buying and owning a home a great experience. Get or refinance a mortgage and much more!
Buying/Selling a Home FAQ

Mortgage Professor
Offsite resource for mortgage questions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.