Originally posted by: markgm
Common wisdom is that over the long term, the stock market will pay a 10% return on your investment, which in turn is what your index fund attempts to match. I went with 8% to be conservative. If you're okay with at least 9.6% less money at retirement, with less time to let the market work for you, afraid of taking any risk, then yes, it makes sense to pay more on your mortgage.
When the economy is tanking is when you should feel the best about investing. Things are cheap. When things are doing well it's already too late. I don't try to guess the market, I just put 26% of my salary into a Roth IRA, my 401(k) and an index fund and I'll check back in 20 years to see if I can retire.
Your attitude and strategy are correct. However, few experts are expecting an annual return of 10% anymore. That 10% number included years when dividends were about 2%-3% higher than they are today. Sure, we may do quite well and do far better than 10%. That is especially true if the stock market tanks and you start from the new low bottom.
But, look at the long term picture. Stock market gains have been nil over the last decade for any investment that you had a decade ago (Note: you still did get the drastically reduced dividends so it wasn't exactly flat). What I mean is what are the 10 year or even 15 year returns for funds? As you mention, 10% (or better) has occured for some funds. But less than 10% is more typical. For example,
https://personal.vanguard.com/us/funds/vanguard/index">Vanguard</a> is popular due to their low fees. I linked their index funds as you suggested buying. What are their 10 year and longer returns?
Fund from top to bottom of link, 10-year return, lifetime return
1) 5.24%, 5.51% (14 years)
2) 6.48%, 6.76% (14 years)
3) 5.78%, 6.98% (21 years)
4) 6.96%, 7.60% (14 years)
5) 5.02%, 8.61% (15 years)
6) 3.43%, 11.55% (32 years)
7) ----, 4.46% (2 years)
8) ----,
negative 2.09% (8 years)
9) 2.47%, 8.91% (15 years)
10) ----,
negative 2.45% (1 year)
11) ----, 6.24% (4 years)
12) 3.89%, 9.67% (16 years)
13) 4.51%, 10.37% (15 years)
14) 5.35%, 11.18% (20 years)
15) ----, 7.17% (1 year)
16) ----, 9.69% (10 years)
17) ----,
negative 0.74% (1 year)
18) ----, 6.72% (10 years)
19) 5.70%, 10.71% (47 years)
20) ----, 7.30% (10 years)
21) 10.51%, 12.79% (12 years)
22) ----, 4.98% (8 years)
23) 12.96%, 10.15% (14 years)
24) 6.67%, 10.18% (18 years)
25) ----, 5.42% (1 year)
26) 5.35%, 2.13% (18 years)
27) 7.04%, 7.00% (12 years)
Median lifetime return of the 27 Vanguard index funds: 7.17%.
Average lifetime return of the 27 Vanguard index funds: 6.92%
There are the index funds. Of 27 of them, only 7 beat 10% lifetime returns (and they just barely beat 10%). Note: the best lifetime there 12.79% was the real estate fund that is tanking right now, so that 12.79% isn't going to last.
Now consider that the baby boomers are going to stop contributing in the next couple of years and start withdrawing from the stock market. Combined with cut dividends, the 10% number is just not a realistic estimate any more. Your 8% number was ok and is what many experts use, but it wasn't conservative.
For a diversified portfolio (a good thing), you need some stable investments. Typically bonds are recommended. Bonds do carry risk (especially bond funds) and their return isn't that great. Moving some of your bond money into a guaranteed return on your debts is something worth considering. And if your mortgage (or other debt) is 6% or higher, it is doubly worth considering doing so. Still invest in stocks that will likely return closer to 8%. But, don't exclude stable nearly risk-free returns.