Invest in the market, not the mortgage

DEAR BRUCE: My husband and I are working on paying off our mortgage by September. We are putting everything we have in our savings toward the mortgage. We have decided to live on a very strict budget to meet this goal. The only other debt we have is a $5,000 truck loan. We also have a CD that will mature next year. Should we put this toward the mortgage to pay off our house even faster? As of today, we owe $14,000 on our house. Please share your thoughts. I am 37 and could use all the expert advice I can get. — L.A., via e-mail

DEAR L.A.: I don't think that you should be paying down your house in the way that you mentioned, and I would surely not take the money out of a CD to continue paying it faster. As these words are written, the marketplace is in disarray. You should know that there will be incredible bargains in the stock market in the next six to 24 months. At your age, rather than paying off the mortgage, I would be systematically placing my savings in the marketplace. Could the market go down demonstrably? Absolutely. You might wish to wait until there seems to be a bottom and the prices are increasing. There are some bargains that, when you're 50, you will look back on and kick yourself for not investing in. Will the market recover to its previous highs? No way to know. Will the market recover substantially and will good, solid American companies still be here paying dividends and growing? Without a doubt.

DEAR BRUCE: I am a 51-year-old woman who had about $300,000 in my 401(k) last summer. I don't intend to retire until I'm at least 65. I had a very aggressive portfolio, 90 percent in an S&P 500 index fund and 10 percent in international equities. I haven't had the heart to look and see what I lost in the last few months, but I have a pretty good idea what it is. Does the adage of "riding out the market" still make sense in this economic climate if I intend to retire in 15 years? I know that if I move my remaining funds to more conservative options, I will never recoup my losses. On the other hand, it's very difficult to watch 20 years of savings disappear. I probably should have been more diversified prior to the crash, but until recently, my strategy seemed pretty sound. Should I hang in there with my current allocations? — K.D., via e-mail

DEAR K.D.: The big variable here is that you are only 51 and you want to work to at least 65 or 70. The market will solidly recover during that period of time. Given that you have time on your side and I assume an income that will allow you to live a reasonably comfortable life and continued contributions, I would hang in there. Six months ago, I very likely would have a different answer for you, but the point is that history shows us that we go through recessions on a regular basis. Mercifully, we've had only one major depression. After a period of time passes, the markets do recover. At this point, given the damages done, I would be hanging in there. I do wish you well.

DEAR BRUCE: In 2005, my husband and I purchased a home for $174,000 with three bedrooms, two baths and fenced yard in a subdivision in Charleston, S.C., for my unmarried aunt. We were fortunate to be in a position to help her get out of an apartment in a bad neighborhood and encourage her to pay down some debt. It was an investment for us, and we allow her to live there rent-free. We have a mortgage on the property and still owe about $70,000 on the house. Only my husband and I are listed on the mortgage not my aunt. In order to get a lower property-tax rate, one of the owners of the home must live in the home. So in the title to the property, she was granted an undivided one (1 percent) percent interest in the property. Now, three years down the road, she has run up a considerable amount of debt on credit cards close to $17,000, some of which she had before we purchased the house. She has recently been diagnosed with a terminal illness but could survive another eight years. When my aunt passes, will the profit from the sale of the home in any way be responsible for her debt? Or will it just be her 1 percent of the profit that would need to go toward that debt? — P.B., Charleston, S.C.

DEAR P.B.: First, what nice people you and your husband are to have helped your aunt out the way you did. It's likely that the creditors would be entitled to 1 percent of the sale price of the property, since she is an owner, obviously deducting the mortgage that would have to be retired upon the sale. If that's the case, the 1 percent would in no way cover her obligation. That is the only obligation that you would have toward her debts, assuming that there's nothing you failed to disclose.

Send your questions to: Smart Money, P.O. Box 2095, Elfers, FL 34680. E-mail to: Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.

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