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Traders Workshop

A Wall Street Veteran: Paying Off Your Debt Is the Best Investment Today

Personal_Finance / Debt & Loans Nov 21, 2017 - 10:31 PM GMT

By: John_Mauldin

Personal_Finance

BY JARED DILLIAN : I try to keep my investment ideas a secret—if you want them, you have to subscribe! But I’m going to give away this month’s idea. Are you ready? Here it is:

Pay down your mortgage.

Yes, that’s a bit unorthodox to hear from a person writing financial newsletters. But people think too much about the next get-rich-quick idea and not enough about their overall financial well-being.


I bet that in addition to having a successful portfolio, many of you have a lot of debt. And going into what could be a serious downturn (I wrote about that in free special report, Investing in the Age of the Everything Bubble, which you can download here), I’m uncomfortable having a lot of financial leverage.

If you think the market will go down, then:

  1.  you should stop thinking about buying inverse VIX ETNs
  2. and start thinking about how to deleverage in a smart fashion.

Paying Off Debt Gives a Much Better Risk-Reward Today

Paying down your mortgage is part of that. It is part of an overall exercise in balance sheet repair, which includes…

  1. Building a cash position
     
  2. Paying off debt:
    1. Margin debt
    2. Credit card debt
    3. Car loans
    4. Mortgage debt

Financial leverage cuts both ways. It can help you on the way up, and it can hurt you on the way down.

Funny thing about paying down debt—technically, you are “making” whatever the interest rate on your loan is. If you are paying down a 4% mortgage, you are actually earning a 4% return (on a pre-tax basis).

Given that high-yield ETFs yield about 5% these days (and are circling the drain), it seems like a much better risk-reward.

Also, I would not get get too caught up in thinking about your mortgage interest deduction. Chances are, it is going away anyway in the tax reform bill, and besides, that is a terrible reason to have debt.

As for credit card debt… there is no reason to have credit card debt unless you are experiencing temporary financial stress.

And I would not worry too much about your credit score suffering because you do not have any debt. That’s the wrong reason to take out debt.

Deleverage Before It’s Too Late

There is no freedom in the world quite like freedom from debt. All this money going out the door in monthly payments… you can make it stop.

If you don’t do this, and we get the downturn I think we are going to get, your balance sheet is going to deteriorate as the asset side of the ledger gets smaller. So the goal here is to deleverage when you can, not when you have to.

Forced deleveraging (i.e., margin calls) is never any fun.

The heuristic on paying down your mortgage is that you shouldn’t do it when interest rates rise. To use an extreme example, if interest rates rose to 10% and your mortgage was 4%, you would be better off keeping the money in a savings account than paying down your mortgage.

But one thing that is not factored into that calculation: less debt is always better than more debt.

My guess is that when the market turns, we are going to be hearing about a lot of hidden leverage that we never even knew was there. It is like that old Warren Buffett quote: “You only find out who is swimming naked when the tide goes out.”

Grab Jared Dillian’s Exclusive Special Report, Investing in the Age of the Everything Bubble

As a Wall Street veteran and former Lehman Brothers head of ETF trading, Jared Dillian has traded through two bear markets.

Now, he’s staking his reputation on a call that a downturn is coming. And soon.

In this special report, you will learn how to properly position your portfolio for the coming bloodbath. Claim your FREE copy now.

John Mauldin Archive

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