market still best option for me i think!

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market still best option for me i think!

Post by familydaddy » Sat Jun 16, 2018 10:29 pm

I asked earlier this week about my 2M mortgage interest-only loan at 2.5 percent . I have 5 more years at this 2.5% rate. The rate can jump 2 percent in year 6 and then 1 percent more per year for a total of 8.5% worst case scenario in year 10 (and would stay there if I don't refinance). My plan was to pay 5K to the principal every month, but wondered if I should invest in an index fund instead. Here is my research and conclusion. I used the WORST DOOMSDAY scenario of the great depression repeating starting tomorrow coupled with a spontaneous interest rate hike to 8.5% (i'm protected initially from this, remember). Even in this doomsday scenario, investing in the market comes out ahead over 10 years. Did I screw up? Does this look right?

$5,000 per month invested in Dow Jones Industrial Average (I would do the S&P 500)

Worst downturn in market history

1927 +27.67%
1928 +49.48%
1929 -17.17%
1930 -33.76%
1931 -52.67%
1932 -22.64%
1933 +63.74%
1934 +5.44%
1935 +38.53%
1936 +24.18%
1937 -32.82%
1938 +27.72%

the scenario: the absolute worst time to start investing 5K per month would be 1927, as the crash hit massively in 1931 which would be the 5th year where I'd stand to lose the most
-if 5K per month starting January 1927, a total of 300K invested over 5 years
-year one ($69.787.77)
-year two ($192,133,34)
-year three ($216,322.55)
-year four ($203,680.86)
-year five ($159,839)
-year six (no additional principal: ($127,180.56)
-year seven (no additional principal: ($236,667.47)
-year eight (no additional principal: ($249,868.09)
-year nine (no additional principal: ($365,102)
-year ten ( no additional principal: ($463,855.40)

Holding ten years in great recession yields total return of 54.62% or $163,855.
Paying principal would have “earned” $22,500 in first five years (300K total principal paid down at 2.5%), and that extra 300K not paying down principal would cost an extra $414,828 over the next five years if interest rates go up to 8.5% (4.5% year 6, 5.5% year 7, 6.5% year 8, 7.5% year 9 and 8.5% year ten) for a total of $437,328
Conclusion: if the great depression starts tomorrow and coincides with instantaneous interest rate jump to 8.5%, investing the 5K per month for initial five year period and simply not selling for next 5 years yields $26,527 more over than paying down principal.
Action Plan: only invest if I can avoid selling for 10 years.

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Re: market still best option for me i think!

Post by 123 » Sat Jun 16, 2018 11:52 pm

Past performance is not necessarily an indicator of future returns. More muted results could produce poorer results, say a 10% decline followed by 10 years of sub 1% gains or declines. Not out of the realm of reason.
The closest helping hand is at the end of your own arm.

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Re: market still best option for me i think!

Post by familydaddy » Sat Jun 16, 2018 11:57 pm

totally agree, which is why is chose the worst time in the history of the market combined with a worst case scenario interest rate. prior performance does not dictate future performance, but if it's equally as bad as the great depression in the 1930's it appears my numbers support investment.

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Re: market still best option for me i think!

Post by vineviz » Sun Jun 17, 2018 1:37 am

The worst case for your plan sounds like it wouldn’t be the Great Depression starting tomorrow.

The worst case would be a market crash year nine or ten, when it wipes out your savings with no time to rebuild.

You don’t even need to go back to the 1930s far to see the danger: if you’d started this plan in 1999, you’d have hit year 10 with only about $385k which is half the gain you calculated in your scenario, and nearly $100k worse than paying down the principle.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: market still best option for me i think!

Post by familydaddy » Sun Jun 17, 2018 7:25 pm

excellent point so i went back and punched the numbers in myself for the recent market crash. At year 5 I would be at 326,091 which is slightly better than paying down principal. As with the great depression of the 1930's, the great recession in 2008 was followed by 5 years of robust growth, more than compensating for the loss. perhaps my mantra should be, "if there is a stock market crash and you can hold onto the investment for 5 years after the crash without selling anything, then investing is superior to paying down this mortgage over the next five years." 9 years after the crash my investment would now be well over 1 million dollars. thoughts?

My investment balances with investing 5K per month starting in 1999
1999 +25.32% 68,900
2000 -6.18% 122,790
2001 -7.1% 172,091
2002 -16.76% 200,187
2003 +25.32% 326,091
2004 +3.15% 386,091
2005 -0.61% 383,743
2006 +16.28% 451,095
2007 +6.43% 489,971
2008 -33.83% 341,260
2009 +18.81% 411,285
2010 +11.02% 458,970
2011 +5.52% 484, 956
2012 +7.26% 521, 359
2013 +26.50% 677,599
2014 +7.51% 730,275
2015 -2.23% 714,155
2016 +13.41% 816,035
2017 +25% 1,045,122

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