Have you ever heard of this concept? I had a potential client contact me recently to get my take on whether “Missed Fortune” financial planning is as brilliant as its famed promoter (Doug Andrews) claims it is. Like many other financial advisors (and bloggers) I’m going to award Andrew’s concept a NO from my perspective. Granted, I’m sometimes referred to as a “conservative planner” but Andrew’s concepts seem more than risky–some are downright dangerous.
The quick summary: This concept is based on the premise that paying down your mortgage to eliminate debt isn’t necessarily the smartest money management technique. Rather, take either a line of credit against your home, or a second mortgage, and invest the money some place where it can produce returns. Your investment return is the spread between your interest rate on the home equity line of credit and the (presumably) higher return investing the money elsewhere. While the author often uses low-cost investment products as an example of where one might invest the money, you could be putting that money into any investment vehicle which you’re confident and comfortable with.
I will grant the strategy these three praises: it could, in theory, be a good decision for someone with an aggressive risk tolerance who believes that stock markets will continue their long-term history of positive returns. It could also be good for someone who can invest the money in themselves (for example a business of some sort) which they otherwise wouldn’t have the start-up capital for. I also think a careful application of insurance to the strategy could hedge the risk of loss-of-principal.
The giant question mark is whether the average person taking out a home equity line of credit can consistently earn a high enough return to pay back the interest costs, earn a profit, and sleep well at night. It is this “full cycle” which causes my hesitation to grant an approval. I think, especially in a rising interest-rate environment, these assumptions are quite dangerous. If the equity line (which is usually variable) costs you 7% and the market returns 8%, you’ve only made 1%. That assumes the advisor you’re working with isn’t taking too much of a bite from your invested capital. Using an expected return figure higher than 8% may be necessary to justify the concept. However, most advisors understand that using high figures (i.e. 12% or more) makes the illustration look better at the expense of unrealistic assumptions.
My advice is to keep a healthy balance between paying down your mortgage and investing your money in various other places. If you’re younger and oriented towards risk, you may want to play around with the equity in your home. If you’re older, looking towards retirement and very proud that you paid off your home, I’d steer clear of these “Missed Fortunes.” You might try setting up an automatic investment plan to utilize the capital you would have otherwise dedicated to paying back interest on the home equity line of credit.
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