You've got to hand it to Adam Hoffman, CFA. In his latest article on SA analyzing the relative merits of paying off debt vs. investing, he seems to leave no stone unturned. His answer to this question is that it depends, and he goes through every manner of financial assumption to show how this sort of calculation can be customized for the particular circumstances of the investor.
I especially appreciate that he addresses variables that many might not think to consider, for example, that expected returns years into your program will likely differ from when first making the calculation. And yet, I would recommend simply paying off debt that is consumption-based (rather than investment-based, like a mortgage) prior to investing, even if that means leaving some money on the table (theoretically, since we can't really know how the investing will turn out).
The reason is psychological. Not so deep down inside, we know we should not consume more than we can afford. Thus, consumption-based debt is bad debt, and investing - which requires forgoing current consumption in order to build a future - is its opposite. In other words, the two activities represent opposing philosophies. It's commendable to start saving and investing for one's future, but my fear is that doing so while excessive consumption retains its grip on you weakens the overall effort. Fighting consumer debt as a fireman fights an all-consuming fire benefits from concentrated effort; winning the fight as cleanly and quickly as possible will interject a stronger determination to save, invest, and not revert to one's former ways.
So, it seems to me in any case, and I would welcome your take on this in our comments section. In the meantime, here are today's advisor-related links:
- Ian Bezek on the absurdity of 4x-levered ETFs.
- Jeff Miller's Stock Exchange panel shows a bit of rare agreement on one stock.
- Franklin Templeton Investments offers perspective on global developments over the past month.
- Charles Hugh Smith on bubbles blowing in Scandinavia.
- John Lohr doesn't like bitcoin.
- For more content geared to FAs, visit the Financial Advisor Center, sponsored by Franklin LibertyShares ETFs.