Comments on: Counterparties http://blogs.reuters.com/felix-salmon/2011/10/21/counterparties-450/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: TFF http://blogs.reuters.com/felix-salmon/2011/10/21/counterparties-450/comment-page-1/#comment-32239 Sun, 23 Oct 2011 20:46:46 +0000 http://blogs.reuters.com/felix-salmon/?p=10663#comment-32239 Heard on the radio today…

When asked prior to their wedding whether they would prefer a $30k wedding bash (roughly the average cost) or a $30k downpayment on a house, most brides preferred the big party. Once married, when the same brides were asked again, most wish they had taken the downpayment. This suggests a very basic disconnect in the way we are wired?

On the same show, an individual with substantial retirement savings, a fully-funded 529 plan, and a debt-free house was advised to borrow against the equity in his house “as long as the proceeds are invested in a diversified bundle of ETFs, not simply the stock market”.

I understand that rates are very low, however this advice essentially amounts to loaning yourself money (at a profit to the banking intermediary), with that simple fact buried in an investment tangle that neither the individual nor the advisor fully understands.

Is it better to have $400k in assets, wholly invested in stocks, or $500k in assets, invested 80/20 in stocks/bonds, offset by $100k of borrowing? The latter is certainly riskier — when you borrow against your home equity you risk losing your house if your cash flow wilts. Moreover, the expected return on the latter course is weaker, since low bond returns are below the present low mortgage rates. It only makes sense to borrow if you wish to bet on interest rates rising, and in that case you won’t be buying broad-market ETFs with the proceeds.

Especially ironic that the caller described himself as “highly risk-averse” and yet was advised to leverage his finances anyways.

]]>