The Weekly Commentary - 07/05/2021
Is Paying Off a Mortgage Better Than Investing For Retirement?
A recent article by Investopedia gave an interesting viewpoint on a question that many retail investors query. Is it better to pay off a mortgage quickly or is it better to use the same capital to save for retirement in an investment fund? While the answer to that question will sadly only be definitively answered depending on a person’s specific circumstances, the article found that in general, the younger you are, the more you should prioritize retirement savings over a mortgage. The main reason being the compounding effect that saving earlier and for longer provides.
Interestingly, as well, the article also highlights that we should not be tempted to pay off an outstanding balance on our mortgage nearer the end. Seeing it closing down to zero can mean that you, mentally, think it is better just to get rid of the debt entirely. However, again due to compounding, it is actually better to make extra payments earlier on as that reduces the principal, which then reduces the interest. The result is you will pay far less over the life of a loan.
These questions are exceptionally pertinent today given the low rates that mortgage providers are charging. And, with stock markets historically returning 10% on average every year since inception, when you balance out the equation, it does make more sense to invest for retirement. I.e. You are paying very little interest on your mortgage already, while gaining more interest on your retirement. The reason that it does not always feel that way is because the majority of us will have higher mortgage payments than what we put into savings.
Plus, as returns aren’t fixed on investments, it makes all the more reason for the majority of us to start saving for retirement as early as possible. It allows your pension pot to make up any losses, while your mortgage amounts can stay largely fixed for a long period of time.
Mortgage Rates Rise Again
Staying in the world of mortgages, mortgage rates have been seen to rise again this week. Just last week, we reported on how remortgagers may have missed out on historically low rates as mortgages started to become more expensive. Now, some 30 year mortgages have gone above 3% for the first time since April. In fact, some economists believe they have the ability to rise far higher.
The rationale for them going higher is that mortgage rates have historically followed long term bond yields. Last week, the Fed announced that they may raise the interest rates on those yields sooner than expected. The Fed is looking at ways to ensure that inflation – thanks to a huge round of quantitative easing – will not get out of control. The negative result of which will be rising mortgage rates for the majority of homeowners.
For those that are looking to move their mortgage, it is important to keep any eye on key announcements from the Fed and other central bank policymakers. Doing so can mean that you can make an informed decision helping you keep your mortgage payments as low as possible – leaving you with more spare cash to put into savings or so one of the best budget tools out there suggests.
Apple Moves to a Defensive Stock
While many blue chip stocks remain firmly in the remit of only fund managers and experienced traders to get excited about, many retail investors will have thought about investing in Apple. This week, as opposed to being an exciting growth stock, Apple arguably moved to the realms of being a defensive portfolio play. That’s really important to those who have added Apple to their portfolio for its previous high growth appeal.
Last year, Apple undeniably grew at an unprecedented rate. Thanks to the help of the pandemic moving us all increasingly online and in need of high tech solutions, Apple did brilliantly well. Its market cap now stands at $2.22 trillion. But so far this year, its price has been moving more or less sideways. To some, that means that its valuation is broadly about right, reflecting its progressively more blue chip business. It also has a growing dividend, which is usually very important to defensive, capital preservation portfolios.
It is an interesting idea as it actually shows a longer term theme that could manifest itself in other tech stocks that have previously been the ‘exciting ones to watch’. As companies like Amazon and Google become more entrenched in every aspect of our everyday lives, they could well be the backbone of portfolios that help maintain capital balances. In addition to the usual defensive sectors of utilities and healthcare, tech may no longer be the place to find extreme growth and instead be the sector that steadies the ship.
Facebook Becomes Part of the $1Trillion Club
Staying with the FAANG stocks, Facebook made headlines this week for becoming part of the $1trillion club. That means that 5 tech stocks are now worth at least $1 trillion – again emphasizing the importance that they play in all of our lives. Interestingly, it reached this eye watering market cap as its price rocketed after a federal court judge dismissed antitrust cases filed against it by the Federal Trade Commission.
For those looking to increase their personal wealth through investing in stocks – perhaps with Facebook amongst them – it is an important moment. Not only were a huge amount of legal claims against the social media giant dismissed, it joins an elite group of companies that are part of the four comma club. The majority of which are tech companies.
It does also go to show the impact of lawsuits on companies and their price. Facebook rallied by 4% on the back of the news that a huge amount of lawsuits against it were dismissed. And, those lawsuits were dismissed fairly early on in proceedings too – something that experts say is rare and speaks volumes going forward. Many of the tech companies are dogged by lawsuits, which is why this ruling is arguably so important as it was thrown out so early. It arguably could discourage many lawsuits in the future.