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Subject:  Re: Ann Says It Better Date:  3/15/2001  9:47 PM
Author:  telegraph Number:  106 of 220

But... wait a minute. Phil kept socking away his paltry $300 a month. By the time his house is paid off, his investment account has grown to over $1,048,000. Both guys own their houses free and clear, both have paid out exactly the same amount every month for 30 years, but Phil comes out way ahead.

I disagree with this on several points. This writer lives in a dream world.

First is, that bankers and mortgage lenders are very smart people. They don't do dumb things. THey also tend to make a lot of money.

Now, if they are willing to loan you money, at 8%, and you figure your are going to make 12%/yr, and that the market is going to return that year after year, then:

Why would any banker in the first place loan you money? They could take the same money the might loan to you, put it in an index fund, and by your math, be %400,000 ahead, for sure, in 30 years. Or, put another way, they would lose $400,000 if they lent you the money. Ask yourself that. If they could be 100% sure of even 9%, they would be better off doing that...still making 1%/yr on their money.

They loan you money since they know they will make 8% guaranteed. Each year, every year, year in and year out. Depression, recession, fever, war, famine, pestilence, matters not. They will make their 8%.

Second, future trends are not guaranteed. As many dot.goners will tell you, the market that went up, up and up is now going down, down, and down. Those who bought stocks in the 1920s didn't even see break even until the 1950s!.....(and that was the index that took upteem years to recover.)

Third, try telling that to the Japanese. The Nikkei is at a 15 year low....that means, that people who have been putting money into Japanese stocks, over the past 15 years, are behind. Big time. The market is going up? The Nikkei index is where it was 15 years ago. Where is the 12% per year in your plan there? That comes out to zero or less percent gain, depending upon when you invested. If you had been investing all along, you would be down about 20-30% on all the money you had been putting went up, and you bought, and it went down. Guaranteed? Ha!

Can't happen here? Says who.....1929 happened....1973/74 happened. 2001 happened....

Fourth, there is no telling where the market will be in 3, 5 or 10 years. You claim in 13 years, you will have seen 12% annualized growth. But the numbers say the SP500 does 10.8% in the past. Run those numbers. It could be six percent. Run that.

Fifth, paying down 8% interest is guaranteed 8%. 100% sure.

Sixth, the average American family moves every five years. If you move after five or ten or 15 years, you now have more equity.....rather than put 5% down, or 10% down, now you can put 20% down on the next house, and get 1/4 or 1/2 pt lower rate, and not have PMI of another couple tenths. If you have to tap your savings, 20% of the gains disappear to Uncle Sam to get your money. If in IRA,401K, 40% of it can disappear in tax and penalty.

Unless the money is tax deferred, IRA/401K, then Uncle Sam is giving you a free ride for many many years. You get to save another 28% or 31% or whatever your tax bracket. That makes sense.

Again, if you have XXXXX dollars extra a month, they all don't have to go to paying down mortage or buying stock. You can certainly divvy the money up.

Just don't fall in love with the idea there is no risk in the equity markets. There is, which is why there is slightly higher return.

You can evaluate just about any investment based upon the risk.

if you look at junk bonds paying 13.5%, when rock solid corporate bonds are paying 7%, and an investor wants a premium of 2% for the risk he is assuming, then the market figures 7% plus 2%, or 9% should be the expected return for a large basket of 13.5% junk bonds, and that means they assume that 1/3rd of those junk bonds will go worthless and they won't collect. That is, they will only see 2/3rds of that 13.5%, or 9%, long term. That is the expected norm over a large holding of various junk bonds, over a long period of time, averaged out. They also could get wiped a depression....100% loss....

The same with the stock market. If investors want a 2% premium for taking the risk of buying equities, and treasuries are paying 5.5% now, then the market is really telling you it is expected a 7.5% return. That is a far cry from 10.8%. (note: corp bonds might be paying 7.5%, but they have some risk - treasuries have zero risk held to maturity)

Now what would happen to your friend if the next 13 years in the US happened to be exactly what happened in Japan 1985 to 2000?

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