Should I sell investments to pay off the mortgage?

When stock markets are choppy, this is a question that often arises. With the market acting like a see-saw, investors are wondering: Why do I have money invested and earning ‘nothing’ when I pay 4% interest for my mortgage?

On its face, this seems like a reasonable question. But there is more to it than a simple pay off of debt. It is a total change in strategy that has financial costs, and is often a change based on two things I don’t recommend as key drivers to financial decisions: 1) an emotional reaction to the markets, and 2) short-term results.

Whether or not to pay off the mortgage is the topic of many personal finance blogs. We won’t discuss that today, though the ideas are important to understand before settling on a new approach.

The shift is more about changing how your assets are allocated than paying off a debt. You are decreasing your financial or investment assets, and increasing your ownership in a real asset, the value of your equity in your home.

This change often involves locking in market losses, and selling assets that many do not consider. Likewise, major shifts in asset allocation can be a gamble going forward, just as selling a diversified stock basket and placing all of your eggs in one basket is a gamble.

To illustrate these two points, the last time I heard from investors about paying off the mortgage with stocks was the period of 2008 into 2009 when the stock market lost over half of its value. Investors were frightened, and many did sell at or near market bottoms in order to pay down the mortgage.

Their timing couldn’t have been worse. After a market bottom, the S&P 500 returned 26.5% in 2009 and 15.1% in 2010. Investors could feel comfort in that they no longer had a mortgage, but they missed an opportunity to recover the market losses from 2008.

Not only that, but a balanced investor not only sold stocks from the portfolio, but also bonds. During 2008 many bond indices achieved returns of 7-10%, not enough to keep most portfolios from losing, but many investors were not running from bond returns… it was the stock market they sought safety from.

We don’t always have a great sense of what our portfolios have returned over time. We hear about ‘lost decades’ and do not realize that many balanced approaches over that decade returned positive results. We set high watermarks whenever our portfolios reach new heights, and forget that as investor Benjamin Graham taught us the market in the short-run is a voting machine, but in the long-run is a weighing machine.

Many who are trying to ‘do the right thing’ and pay off a mortgage with investments are generally practicing the investing sin of marketing timing.

Is there a better approach? I would recommend anyone convinced they need to sell from their portfolio do it over time rather than trying to time the decision. You may find that when the markets are less volatile that an all or nothing approach to the mortgage is rarely the best move,as I wrote about earlier in the year.

Having an understanding of a long-term strategy, and making incremental moves when appropriate is an often recommended strategy in managing your portfolio. It should be considered as well in managing your real estate equity assets.

The preceding blog was originally published by the Financial Planning Association®(FPA®). To view the original blog please visit the FPA Web site.

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online fee-only fiduciary financial advisor blog robert schmansky
online fee-only fiduciary financial advisor blog robert schmansky
online fee-only fiduciary financial advisor blog robert schmansky
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