The stock market has always had it’s ups and downs. While I think timing the market is futile for nearly everyone, I haven’t been able to resist myself and have recently doubled my monthly investment into several funds. It’s like money is on sale now!

The most reliable way we have to make decisions about the stock market is it’s past performance, and past performance indicates that we’ll continue to average 10% or greater returns going forward, with intermittent dips. Past performance also shows us that 95% of the 5 year periods and 100% of the 10 year periods, in the history of the stock market have made money, and 100% of the 10 year periods. Which is why if you’re investing for the short term you don’t use the stock market…

Is everyone still as sanguine about making a 10% return on the stock market now as they were in June 2007?

Be debt free. You have many more options in the future. Hey, if you lose your job, you probably won’t lose your house! As we can see in this market with times of huge government spending and borrowing, times are changing.

It’s funny to read the comments from the know-it-alls above about the mathematics of investing and bla-bla-bla. I dare anyone to find a portfolio that has returned 10% annually for the last 10 years! What bull! The last 5 years s&P 500 rate is a negative -2.5%! and before that we had the 2001-2002 crash.

following up on the point made by Stein that paying off a 6% mortgage is equivalent to a 6% return on your investment– and it’s guaranteed– we should also take into account that it’s like earning 6% absolutely tax-free. Because if you’re getting rid of a debt that’s at 6% it’s arithmetically the same thing as earning a 6% return– but crucially it doesn’t involve any income as defined by the IRS!

Now I’ll admit that when I had a house I didn’t overpay my mortgage– I put extra money into the stock market instead (buy and hold, baby!). But I did this in full awareness of the fact that if I could earn 6% in stocks (outside my retirement account), I’d have to pay taxes when I sold, but if I made my debt go down and thus avoided a 6% interest rate on the same money, there would be no taxes. (Seriously: where’s the line on your 1040 to list “how much less I owe on my mortgage now”? If you can’t list it even if you wanted to, then you can’t pay taxes on this “earning”).

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I also feel better paying off loans. That is why I pay more to my super low interest student loans. Sometimes emotions override pure logic.

By the numbers, paying off the mortgage early or investing is basically a wash. It becomes an emotional decision.

It comes down to three factors:

1. Estimated alternative return. Long-term future return from the stock market is likely to be about 7% (not the 10% commonly quoted). See this article:

http://www.investorsfriend.com/return_versus_gdp.htm

for details. This article is the best explanation around and justifies the 7% annual return number. Don’t just quote 10%!

At 7% the difference between, for example, $1500 invested monthly for 17 years vs. 500 invested monthly for 30 years is pretty much a wash.

2. Volatility. The 7% stock market return is an average. Look at stock market cycles. If you had to cash out for retirement in 1999, for example, it would have been great. If you had to cash out in 2001, it would have been terrible. If you invest all the money in the stock market (no diversification, which would likely reduce the 7% return) then you better be comfortable with risk.

3. Taxes. The mortgage deduction tax only lasts for the first few years of the mortgage payback, and is further impacted by the AMT. There is a difference, but it’s not a huge difference.

Realistic Numbers show this decision is about emotion. The numbers are a wash. If you less oriented toward risk, then you pay off the house and diversify the investments after that. If you are more oriented toward risk, then you stay on the regular mortgage schedule, don’t diversify, and hope you sell out at a high point in the market cycle.

Your choice.

If you don’t know anything about investing, you’re probably better off paying it down (after you’ve built up a large emergency fund).

The only place where disagreement can arise is the psychological side of it. For most people 90% of personal finance is the psychological side. I mean, really…most of this stuff is very basic math.

For most people being completely debt free is quite the invigorating thing that allows you freedom to do what you want, when you want.