What I’m about to recount is what I wrestled with regarding a pretty big financial decision: whether or not to use stock investments to pay down mortgage debt. My intent is to give some perspective and advice to those of you who might be in the same situation that I was. I also hope to inspire you about the immense power and possibilities of stock investing.
The big realization … and the bigger dilemma
In mid-June 2019, I was looking at the value of the investments in my Canadian tax-free savings account (TFSA). Even though I’m a Canadian, I sought in 2013 to re-build this with strictly U.S. stocks and so I had always normally been concerned with looking at the U.S. Dollar value of my account. But on this one day, I glanced at the Canadian Dollar value in smaller print when it suddenly hit me: if was to cash out all the stocks in my TFSA, I would be immediately able to pay off about 80 percent of our remaining mortgage!
Before I continue, I should explain that my wife and I don’t have a traditional mortgage. Ours allows us to pay off any amount at any time without penalty. Specifically, we have a Manulife One account here in Canada (I’m sure there are similar mortgage options in the U.S. and elsewhere) which is basically a line of credit that is the amount owing on your home plus a $20,000 cushion. Another way to think of it is a bank account with a negative balance, but like with a regular bank account you can put money in and take money out.
So say you have an existing, traditional mortgage where you pay your monthly principal plus interest over a 25-year term and say your mortgage amount is $300,000. You can switch this to something like Manulife One and you’ll have a $320,000 line of credit, with your house as collateral, but now instead of paying a monthly principal payment you pay only interest, although higher than a traditional mortgage at currently 4.45% per year. You can deposit paychecks and the like to reduce your amount owing, and as long as you don’t go past your borrowing limit, you’re basically your own banker paying only 4.45 percent interest and no principal!
You also have no term: you can take as short or as short as you like to pay it off. If you came up with the $300K to pay off your mortgage today (inheritance, stock returns, etc.), then you could pay it all off today with no penalty! If you couldn’t pay it off today but you’re making a great income, then you could pay off any amount at any time, again without penalty. Basically, it’s perfect for money-misers like my wife and I who could pay it off within a few years as opposed to 25 years, but it’s a disaster-in-waiting for people who lack financial discipline.
So there I was, staring at my laptop screen with the realization that I could pay down about 80 percent of our remaining mortgage penalty-free in one fell swoop, also without having to pay any taxes on the 87-percent return that the stocks in my TFSA had gained in less than six years. Our monthly interest payments would be a fraction of what they were and that savings could go toward paying off the remaining debt faster than before.
However, at the same time, I didn’t want to know what I had just realized. I loved my TFSA stocks. I felt like I had been tending a garden for six years and they were my favorite, treasured plants. If I sold them all in one shot, it would be like plowing them under. How would I feel? More importantly, what if I sold out and my portfolio value got even higher, faster than the amount of money saved on interest payments? What if that money could have been used for an emergency or toward my kids’ first car or college tuition or home down-payment?
Searching for answers
These are the sorts of questions that began to race through my mind, so I decided to start searching for answers by consulting online opinions. Not surprisingly, they were pretty much split on the matter. Some felt that it was best to pay down debt while building up investments and increasing the latter as the debt got smaller. Others thought that using investments to drastically pay down debt in order to drastically reduce interest payments was the best idea, followed by a plan to used the saved money to aggressively re-build one’s investment portfolio. What I concluded is that everybody’s situation is unique and that the answer therefore depends upon the details of that situation.
Next, I consulted my brother-in-law who was formerly a financial planner. He felt that paying off that much debt in one shot was only a good idea if I made a definite plan at some point to begin to rebuild that tax-free savings account, sooner rather than later. He said that the biggest mistake people make is to pay off their debt and then neglect to re-build the portfolio that enabled them to get out of debt in the first place.
I’ll admit that I had been leaning toward the drastic, toward selling my entire TFSA from the beginning, and my brother-in-law’s advice confirmed this in my heart. Next, I needed to find an opportunity to do it.
Taking the plunge
I happened to not be working on July 8, 2019 and so this idea crept to the forefront once again as it had been doing for several weeks. Once again, the hesitations mentioned above also crept to mind. But then I thought of the amount of interest that I would be saving and how little future payments would be. I also wondered about whether I was getting too greedy; after all, my best investment had multiplied in value by ten times, followed by another that had tripled and others that had more than doubled. Why not put that money to good, practical use instead of using the growing value of my investments as some sort of badge of honor? The thought also flashed to mind about how I felt in 2009 when my original foray into stock investing left me with a fraction of what I had started with. I couldn’t stand the thought of a major correction leaving me with the same feeling of stupidity and failure that I had felt a decade before.
So one by one, starting with my least successful stock holding, I began to sell one at a time. When I finally got to my precious Shopify (SHOP) a few moments later, the best-performing stock I’ve ever held to this point, I clicked the Sell button one last time before I could change my mind.
What’s happened since then? I’ve largely felt a sense of relief, which is what I hoped for! But what I’m most glad about was dealing a blow to one of the most destructive forces tearing apart families all across North America in particular: debt.
I’ve always felt as though paying interest is like literally pi**ing money away or throwing it on a fire. Contrary to popular belief that a little bit of debt isn’t a bad thing or that even a lot of debt isn’t bad if you can get a low interest rate, I believe that ANY sort of mortgage or consumer debt, even pennies a month, is wasting one’s money! I HATE the notion of literally throwing money away – although it’s never really thrown away because it lands squarely in the hands of whatever institution you’ve borrowed from. I want it to be MY money, no longer theirs. I want the money to pay for MY lifestyle, not theirs and least of all their CEO’s. I want the house to be MINE, not the bank’s, and until a person pays off that last cent of debt, they technically cannot refer to themselves as a “homeowner” because their lending institution still owns their house.
If there’s only one thing that I would have done differently in terms of strategy, it would have been to practice what I preach elsewhere in this blog, and that is to have waited for a market peak and then a 10-percent pullback in each stock before selling. In the time since I sold everything, some stocks have risen over 10 percent beyond what I sold them for. If I had waited longer, perhaps I could have paid off a few thousand dollars more.
But as it stands right now, I believe that, given the situation I described before, I made a very good choice. Was it the right choice? Was it the perfect choice? I believe that for me it was right (nothing’s ever perfect), but I know that the number of opinions on the matter are as diverse as the number of personalities on this planet! Some of you reading this might have been waving your hands incredulously at your screen, wondering how I could have possibly missed out on huge potential future returns – the Greed Factor, as I refer to it. Others might have sold only their worst or best holdings, but certainly not everything. Yet others might have waited until the start of a major market correction and hopefully maximized returns until then.
That’s my story, but what about you: what’s the application to your situation? That is, what might you do in a situation similar to mine?
First, consider whether you’re confident that you can make a higher rate of return in your stocks than the interest rate on your debt. I reached the point where I felt I might be able to – my track record was only improving – but I also felt that the market had been on a hot streak, on a tear for so long that a major correction could occur at any time. If it had and it took, say, two years for my TFSA portfolio to recover, how much would I have paid on my mortgage interest during that time? Therefore, I decided to break with my normal investing mindset and to be more conservative and less daring.
You also need to consider what you plan to use your stock investments for. If you have definite goals that are still 3 to 5 years in the future, then maybe keep holding on no matter what the market does, being sure to have cash ready to load up on your favorite investments in the event of a market correction or crash. I really didn’t have any concrete goals for my TFSA other than thinking that I would use some or all of the money when an emergency or opportunity presented itself. I didn’t have a timeline, either. Therefore, I wasn’t too hard for me to use all of the money for an opportunity, in this case to drastically reduce our level of mortgage debt.
The Final Word
I had one more intent in mind by sharing this story: to add more credibility to this blog. Reaching the point of having an overall return of 87 percent in my TFSA in less than six years (with a just over tripling in value from September 2016 to July 8, 2019) resulted from practicing the things that I teach and preach in this blog. Where else can you read about the not-so-secrets to investing success and not have anybody try to sell you something? I have no qualms about sharing this stuff freely, so I hope that you can use these things to your own advantage.
But if you’ve read any of my other posts, you know that I don’t take credit for this. Specifically, I credit The Motley Fool’s “Stock Advisor” service for fantastic stock picks and, perhaps more importantly, for teaching me the proper or “Foolish” investing mindset that allowed me to get such solid returns. I also thank God for having led me to that service in the first place, a direct result I believe of praying for investing wisdom while in the pit of despair as an investor only a very short time before.
If you’re a brand-new stock investor – or still thinking about it – then I highly recommend the free e-book, Should You Consider Stock Investing? It could become one of the most beneficial 30-minute reads of your life.
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To new beginnings!