40% of Retirees Have Mortgage Debt; Why It Could Be a Bad Idea for Those Over 65 to Leverage Assets for Wall Street
The Dow Jones Industrial Average has been on a record-breaking sprint, drawing in investors from the sidelines with optimism and high expectations. With weak bond rates, there is growing sentiment that many retirement funds will only experience modest returns unless they park their money in the stock market.
At the same time, other investors are cautiously watching from the outside, wondering if there’s additional room to run.
It’s hard to decide where the market is headed. While the Dow Jones is on a tear, it certainly can’t be based on the underlying economic indicators. Unemployment remains high—so does personal debt. Gross domestic product (GDP) is essentially flat. And the outlook doesn’t look great either.
Despite record highs, the American Association of Individual Investors reports a bullish sentiment of just 31%; it was double that amount in early 2011. A low bullish sentiment suggests investors are not anywhere near the point of taking profits or divesting their holdings. (Source: “Sentiment Survey,” American Association of Individual Investors web site, last accessed March 8, 2013.)
That means that there are a lot of people who expect the Dow Jones Industrial Average to continue its nascent ascent. Which also means that some will be looking for ways to raise capital to invest in a market that they believe can only climb higher.
Over the last number of years, the easiest way for people to get their hands on a large cash investment position is to take out a home equity loan.
At the same time, there could be some retirees thinking of borrowing against their house simply to get out of debt. Forty percent of homeowners over age 65 had mortgage debt in 2010, compared with 18% in 1992. (Sources: “The State of the Nation’s Housing: 2011,” Joint Center for Housing Studies of Harvard University web site, last accessed March 11, 2013; “Mortgage Debt Is Rising Among Older Americans,” Reuters, January 2, 2013, last accessed March 11, 2013.)
Investors looking to reap huge financial rewards by borrowing so they can capitalize on Wall Street’s unbridled exuberance could end up in the poor house—or with no house at all.
Risk-averse investors who are uncomfortable with debt should avoid borrowing against their house or any other major asset in an effort to make money on Wall Street. Rather, they should consider the following first.
If you lost all of the money you borrowed against your house on the stock market, would it have a significant impact on your overall standard of living and long-term retirement plans? If the answer is “yes,” then borrowing is not a good strategy.
Thanks to an uncertain economic environment, if you leverage your home and an unexpected expense comes up, can you meet that obligation? Or if the markets tank, will you need to sell the home to recover enough money to pay off the mortgage?
When it comes to borrowing against your house or other large assets for the sake of investing in Wall Street, it’s better, at the very least, to start small and only invest what you’re willing to lose.
Leveraging your home and risking your financial future and retirement plans for the sake of investing in an economically disconnected market with unpredictable investors is never a good idea.
Losing money in today’s market might seem like a long shot with the Dow Jones Industrial Average hitting record-highs day after day, but that same sentiment was being thrown around during the summer of 2008—right before the housing bubble burst and the Great Recession began.
At the end of the day, it’s about risk and reward. Investors are well aware of the rewards of the stock market, but they underestimate the risks. After all, no one invests in the stock market thinking they’re going to lose money.