I'd like to have a discussion on the idea that it might not make sense to hold bonds that yield less than the interest you pay on a mortgage. I've heard a mortgage be referred to as a reverse bond, which might be related to this discussion. Here are the numbers.
Mortgage of 100k at 3.25%. This isn't anywhere close to being high enough to warrant itemizing over taking the standard deduction so writing off the interest is not a factor here. We'll probably stay in this house for at least another 6 years (maybe more). This isn't our retirement home, if that matters for this thought experiment.
The bonds I hold are $BND which has a current SEC yield of 2.39%. We are in a rising rate environment which means the value of these bonds will most likely go down, meaning the total return will probably be even less than this 2.39%. Additionally, not all of my bonds are in tax-free accounts, so some this 2.39% gets taxed at my marginal rate (15%) which brings it down to 2.03% (there still seems to be some argument over the most tax efficient asset allocation with regards to bonds and stocks).
I'm currently 90/10 stocks/bonds. So do you see the problem I'm running into? It seems like I'm giving loans to other people and getting ~2% in return (the bonds) with a possibility for even lower return if the value of the bonds decreases as rates rise. At the same time, I'm taking a loan myself for 3.25%.
Would it not make sense to go 100% stock and take the 10% that I would have put into bonds and instead put it into the mortgage until it is paid off? (letting my lower mortgage balance give me a guaranteed 3.25% return to take the place that bonds would have provided in my portfolio otherwise).
The only negative I can think of is that this plan hurts my ability to rebalance into stock in the event of a correction. Although, at 90/10 my ability to rebalance isn't great to begin with.
Thoughts? Anything I'm missing?
Submitted June 04, 2017 at 10:45AM by WoeToTheUsurper2 http://ift.tt/2s6TAoY
