Should I invest in stocks or pay down my mortgage?
If you’re a conservative investor, I’m sure you’ve had people try to convince you that “you should invest in stocks!” because, it’s true that, historically, stocks out-perform other types of investments.
Of course, that’s not the point to the conservative investor. The point is safety, peace of mind and capital preservation. There have been enough down-turns in the stock market, that it’s practical to be concerned about losing money if you might not have the time to wait out a down market. So, then what should you invest in?
Another similar situation is when you suddenly have money to invest - say from a tax refund or inheritance or… lottery winning… yeah, lots of people win the lottery :-/ . Again, you’ll hear from stock investors that “you should” invest in stocks… (I always say what my dad used to say: “Don’t should on me!” ;-)
But there’s another option that might be staring you in the face - and wallet - your mortgage (or perhaps another type of loan - home equity or auto loan)! Maybe paying off that loan is a better “investment” than buying stocks, or bonds, or bitcoin (what!!)? Interest you pay on a loan or mortgage is someone else’s gain, and your loss - and if you pay down the principal, you can pay less interest over time. That’s virtually the same as earning money on an investment.
I decided to do a comparison calculation - in a spreadsheet of course - to compare some scenarios of buying a stock as an investment versus paying down my mortgage.
So here was my approach:
Pick a stock - or an index (like the Dow Jones Industrial Index, or S&P 500)
Pick a date on which I would have hypothetically bought the stock in the past.
Calculate the total invested by multiplying some hypothetical number of shares by the stock price on that date (and work backwards if I have to based on how much I have to invest).
Pick a hypothetical SALE date - and calculate the gain or loss on that hypothetical investment in the stock.
Now take that amount of hypothetical dollars invested in stocks - and calculate what would happen in my mortgage if I paid down my mortgage by that same amount on that same investment date.
Entering the loan terms in the Mortgage Amortization Paydown spreadsheet gives me a basis for calculating interest saved on the paydown investment.
I already have a really useful spreadsheet calculator that tells me how much interest I can save by paying more toward my mortgage at any given payment period, so plug in my mortgage terms, and enter the total invested amount into the Additional Payment cell at the date I made the stock investment (hypothetical, of course).
Grab the total interest SAVED amount that was calculated in that sheet and compare it to the total return I got on the stock.
WHAM! Now I have a clear comparison! It’s not exactly correct - as the interest saved amount is over the whole life of the loan, but I could eventually just add some time value of money on the stock investment - or use my crystal ball to see where that stock will be on the same end date :-| - but this is close enough…
Here’s two scenario comparisons…
STOCK PURCHASE: Assume I bought 100 shares of Google (Alphabet) on 1/2/2015 - the price was $523.37 - so my total invested was $52,337.00 (whoa… hypothetical).
Let’s also assume I sold it on 3/12/2020 for 1,114.91 per share - for a total value of $111,491.00 - that’s a GAIN of $59,154 !! wow!
MORTGAGE PAYDOWN: So let’s assume I took that initial investment of $52,337.00 and instead paid down my mortgage on my Jan 2, 2015 payment.
That paydown in 2015 on my $250,000 mortgage (also hypothetical, BTW) would have resulted in a total interest saving of $66,691.59 !!! THAT’S MORE THAN THE STOCK GAIN - by $7,537.59 !!
In this scenario, the mortgage paydown results in a bigger “gain” (savings of interest over the life of the loan). The unfair part of this comparison is that the mortgage savings is over the life of the loan - which is shortened by the paydown, but the stock gain funds would be available again on the sale date - which is much sooner.
Now - just to put an exclamation point on the stock market variability - which of course this past week began to go extreme - If I sold that same stock ONE day later on Mar 13, 2020 (Friday the 13th) - the price would have been $1,219.73, the gain would have been $69,636 - and so the Stock investment would have exceeded the mortgage paydown option by $2,944.41 !! So - in stocks - timing is everything - and there is no crystal ball.
This is the March 13th example where stock investing “wins” by a slight margin.
I hope this helps to expose some new ideas on the options many of us have when it comes to investing available funds - but of course - there’s never a one-size-fits-all answer, so do your own analysis or, better yet, work with a professional, which I am not! ;-)
This post was inspired by a tweet from @LizOfficer on Twitter on this very subject :)
