Ask Money

Sell stock to pay down debt

Chris Farrell Apr 8, 2010

Question: My husband & I are both in our mid-50s. We have some money invested in the stock market, about $300,000. A few years ago we refinanced our house to make improvements, and now have a 30 year fixed mortgage with a rate of about 5.5%. We owe about $300,000 on the house.

To complicate things, my job ended in June, and I have been collecting unemployment as I try to figure out how to reinvent myself as an older worker. I am fortunate in that I own a small business, which has potential for expansion, and that has been part of my employment search effort. My husband is in construction and luckily still has a good job.

We are looking at ways to realistically plan for our future. One idea is to take a good portion of our money out of the stock market and pay down our mortgage so that our monthly costs will be reduced, and we will be able to stay in our house if our income were to drop more, or if the stock market dives again. We are trying to look at our own circumstances as an individual situation, rather than paint it with a broad brush of conventional wisdom. (i.e. keep the money in the market, it will go up.)

We realize that real estate should not be viewed as an “investment”, so we are looking at it as a way to realistically work with our current and probable future situations. Having said that, it is likely that the value of our property will not go down. We love our house and do not want to move. We are not saving anything at the moment. Comments?Thanks! LB, Seattle, WA

Answer: I like the way you’re thinking through your situation. You have a lot of concentrated risk in your household right now since you’ve lost your job, you’re trying to grow your small business, and you have a big chunk of savings in the stock market. Your right to devise a strategy to reduce your overall risk.

Of course, as you say the long-term returns to homeownership are minuscule. It’s at best comparable to the 2% long-term inflation-adjusted return on bonds. (Yale University economist Robert Shiller makes a persuasive case the true return on residential real estate is 0%. That’s right, zero.) Still, you’ll create a financial margin of safety for your household by slashing the strain of those monthly mortgage payments. And you’ll continue to enjoy the emotional and psychological benefits of home and neighborhood. “This is the true nature of home,” said 19th century art critic John Ruskin. “It is the place of Peace; the shelter, not only from injury, but from all terror, doubt, and division.”

At the same time, I also would set up an automatic program for siphoning some of your future cash flow out of your checking account into a safe savings account–even if it’s only a few bucks a month. Taken altogether, paying down the mortgage and boosting your safe savings should build a healthy financial buffer against life’s inevitable setbacks and the money to take advantage of intriguing investment opportunities when they come along. Safety and opportunity, like risk and return, are two sides of the margin-of-safety coin.

Good luck with the job hunt and expanding the business venture.

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