A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Wednesday, May 11, 2005

Jonathan Clements' Getting Going Column

Jonathan Clements is finally writing about something ($)that I and Jack Miller, author of the Stocks or Bonds blog (see the comments to this post) have addressed: Using a mortgage to find money to invest. It is a pretty simple concept. A 30-year fixed mortgage can be found in the 6% range while the S&P 500 has averaged over 10% per year over the last 30 years. As a general rule, any time you can borrow money at 6% and get a 10% return, it's a good deal.

Now, what are the risks with such a strategy?

1. Property values have been surging as of late. If you take out the biggest loan possible and the property value decreases, you will lose money if you have to sell the property.

2. Although the S&P 500 has returned 10% on average over the last 30 years, there's no guarantee that those kinds of returns will continue. Therefore, it is important to diversify.

For those who are interested, here's a post I wrote last October with some analysis of 30-year and 15-year mortgages.

Anyway, I think Clements might be onto something here. But, it isn't a strategy without risks. Invest at your own risk!

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