3 Things 2-10-25

 Thing One

To Pay Down Or Invest, That Is The Question

To get to the answer you are going to have to balance potential returns against the cost of borrowing. Totally paying off debt is like earning a guaranteed return equal to the interest rate of the debt. For example, if you have a credit card debt with an 18% interest rate, by paying it off, you effectively gain an 18% return on your money, which is often higher than what many investment vehicles might offer in the short term. This approach reduces financial risk, as you're no longer paying interest, thus increasing your net worth and decreasing your financial liabilities.

However, investing while holding debt can also be advantageous under certain conditions. If the expected return from investments is higher than the interest rate on your debt, investing could potentially yield more wealth over time. For instance, if you have a low-interest mortgage at 3% but can invest in the stock market with an expected average return of 7%, over time, you might come out ahead by investing rather than solely paying down the mortgage. Just keep in mind that investments fluctuate.  If you choose this path, there will likely be times when it makes you feel scared or stupid.  For that reason, you should never consider investing money that you have earmarked for short term items.  It might not be there when you need it.

The decision also depends on the type of debt. High-interest debt like credit card balances or personal loans should generally be prioritized for payoff because the interest compounds quickly, making it more costly over time. Conversely, debts with tax-deductible interest, like certain home mortgages or student loans, might not need to be paid off as aggressively if the after-tax interest rate is low. Here, the psychological relief of being debt-free might not outweigh the potential benefits of keeping that money invested.

Another factor to consider is liquidity and emergency funds. Before deciding to aggressively pay down debt or invest, one should ensure they have an adequate emergency fund. This fund acts as a buffer against unforeseen expenses or income disruptions, which could otherwise force one into taking on more debt or liquidating investments at inopportune times. Paying off debt can reduce monthly obligations, freeing up cash flow for emergencies or further investment, but maintaining liquidity is crucial for financial stability.

As usual, the answer to the question of whether to invest or pay off debt is, it depends. It's a nuanced decision based on individual circumstances, including the interest rates of the debt, the potential return of investments, your individual financial goals, risk tolerance, and psychological comfort with debt and uncertainty. You should talk to an advisor to get into the specifics if you’ve been pondering this question.

Thing Two

Stocks Or Real Estate, Which Is The Better Investment?

Sorry if we’re starting to sound like a broken record, but the answer depends.  That said, our strong bias towards stocks is solidly supported in the details below:

Over the past 54 years (1970–2024), stocks have significantly outperformed real estate in total returns, but real estate has still been a strong asset class—especially when leveraged (using a mortgage).

Stock Market Performance (S&P 500, 1970–2024)

Average annual return (including dividends): ~10.7%

Total growth: The S&P 500 has increased by ~12,000% since 1970.

Example Investment:

A $10,000 in the S&P 500 back in 1970 would have been worth $4.4 million at the end of 2024 2024 (assuming dividends reinvested).

Why Stocks Can Win

Higher long-term appreciation (~10.7% vs. ~5% for real estate).

Dividends provide passive income.

Liquidity makes stocks much easier to buy/sell than real estate.

Lower cost of ownership – Real estate owners face ongoing expenses: property taxes (typically 1% to 2% of value annually), maintenance (1% of property value yearly), insurance, and possibly property management fees (usually 8% to 12% of rental income. By comparison, many stock index funds charge annual fees of just 0.03% to 0.15%.

Stock Downsides:

Market volatility (Worst crash: -50%+ drops (e.g., 2008, 2000, 1973–74) but always recovered)

No tangible asset like real estate

Emotional selling leads to losses for some investors.

Real Estate Performance (U.S. Housing Market, 1970–2024)

Average home price growth: ~4.6% annually.

Total growth: The median U.S. home price has risen from ~$23,000 in 1970 to ~$420,000 in 2024 (~1,730% increase).

Example Investment:

$10,000 down payment on a $50,000 home in 1970

At the end of 2024 that home would be worth ~$900,000 (with mortgage leverage magnifying the return on the initial $10,000 invested).

If used as a rental, additional cash flow boosts total returns.

Why Real Estate Can Win:

Leverage magnifies returns (can buy a $100K home with $10K down)Rental income provides cash flowTax benefits (mortgage interest deductions, depreciation, 1031 exchanges, etc.)Lower volatility than stocks

Real Estate Downsides:

Lower appreciation (~4.6% per year vs. ~10.7% for stocks)

High costs (property taxes, maintenance, commissions, insurance)

Illiquidity (selling a home takes time and effort)

Market-dependent—location matters significantly

Worst crash: The 2008 housing crisis (-30% in some areas).

Head-to-Head Summary

 

Appreciation Alone: Stocks Win

1. S&P 500: ~10.7% per year vs. Housing: ~4.6% per year

2. $10K in stocks (1970) equals $4.4M today

3. $10K in a home down payment (1970) → $900K home value

With Leverage & Rent: Real Estate Can Compete

1. A home bought with 80% financing (mortgage) grows the owner’s equity faster than unleveraged investments.

2. If rented, rental income adds an extra 5-10% return per year, potentially making leveraged real estate returns rival stock market gains.

Liquidity & Passive Growth: Stocks Win

1. Stocks require no management; real estate involves ongoing costs and effort.

2. Stocks are easy to sell, while real estate is illiquid.

Risk & Stability:  Real Estate Wins

1. Housing crashes are rarer than stock crashes (except 2008).

2. Real estate is a good hedge against inflation.

Thing Three

Just A Thought 

"It is our choices that show what we truly are, far more than our abilities." - J.K. Rowling