In 1999, former truck driver Arnold stood at the crossroads of retirement. Ten years remained on his mortgage (for a $300,000 home in suburban Los Angeles), and he still owed $125,000 at an interest rate of 2.5% per annum.
He had the same $125,000 that tortured him with hypotheses on what to do.
"Pay off the mortgage and sleep peacefully" - insisted his wife. "No, that's for the timid. I'll invest in the growing S&P 500, and let the magic of the market cover my monthly payments of $1185!"
He invested money in stocks, dreaming of wealth, as Barrons predicted.
But fate, that cruel jester.
The tech bubble burst and the markets fell.
Arnold diligently withdrew money from his brokerage account for the mortgage, and his portfolio gradually withered.
By 2005, when stocks began to show growth too late, Arnold's funds had radically decreased.
Because he had to sell his portfolio at very low prices to service the market.
What options did he have?
😈 pay off the mortgage and live on a modest pension;
👍 create a fund of bonds for 2-4 years of payments and service the debt with coupons and redemptions, even in the leanest times do not sell stocks;
🔥 create a diversified portfolio and not follow the news with boredom, sell appreciated assets - pay off the mortgage.
Conclusion - if you have fixed payments in the future, it's worth securing a reliable income rather than relying on perpetual market growth.