Taking a Mortgage to Buy Stocks Is Risky Business
September 15, 2011
While it’s tough to advocate for the use of leverage to buy more stocks, the question of how aggressively to pay down a mortgage, or simply how to think about your primary residence and mortgage as part of your overall investment portfolio is critical. For example, you shouldn’t own low paying bonds if you are stuck in a high rate mortgage. And with rates so low, you also probably shouldn’t have a tiny stock portfolio in exchange for gaining a lot of equity in your home. The bottom line is unless you have enough money that you never have to worry about running out, it is critical to have an intelligent asset allocation based on your overall net worth – not just your liquid net worth.
Should you take out a new mortgage or home equity line of credit and spend the money buying stocks? The question may sound totally crazy. It’s certainly not for the unsophisticated. But events in the stock, bond and mortgage markets in the past few weeks have made it a question you have to ask. What’s going on? Mortgage rates have collapsed to unknown lows. Meanwhile the dividend yield on stocks has risen. Remember, too, that you get tax breaks on both. Bottom line: For many people the mortgage rate is now lower than the yield on a lot of blue-chip stocks. …
Read the full article at Wall Street Journal’s SmartMoney.
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