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Investing Insights: Utility Values, Mortgages in Retirement

We discuss behavioral mistakes, a muni fund pick, large-value funds, and the oversold benefits of ETFs on this week's episode.

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Editor's note: We are presenting Morningstar's Investing Insights podcast here. You can subscribe for free on iTunes.

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Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Exchange-traded funds have gained market share at the expense of traditional index funds, but have some of their benefits been oversold? Have some of their benefits been undersold? Joining me discuss that topic is Ben Johnson. He is director of global ETF research for Morningstar.

Ben, thank you so much for being here.

Ben Johnson: Thanks for having me, Christine.

Benz: You wrote a great piece in Morningstar ETFInvestor, we also ran it on Morningstar.com, looking at maybe some of the underrated elements of ETFs as well as some oversold or overrated elements. One of them you say is liquidity, the ability to trade ETFs intraday. Talk about why you think that maybe kind of an oversold benefit.

Johnson: Liquidity and the ability to trade all day every day is simultaneously somewhat overrated and out of frame. It doesn't paint the whole picture of the flexibility of ETFs as an investment wrapper. Because at the end of the day, that's all they are. It's a form of packaging, a way of wrapping up and delivering an investment strategy to investors. Liquidity, I would argue, is overrated to the extent that who really needs to trade exposure to the S&P 500 all day long. If anything, there's the risk of temptation, if you will, that investors might trade more than they would have otherwise using an ETF as opposed to a mutual fund format.

Now, I would argue that there's scant evidence that this is indeed the case. The research that is out there shows that--to paraphrase Taylor Swift--traders are going to trade, irrespective of whether they are using ETFs, individual stocks, cryptocurrencies, you name it. If that proclivity is there, ETFs aren't going to make them anymore likely to trade than they had been previously. So, overrated.

Also, as I mentioned before, somewhat mischaracterized. Because ETFs are stocklike instruments, the "ET" stands for exchange-traded, there are other ancillary benefits that accrue to, especially long-term investors, in that respect too to the extent that ETFs like stocks can be sold short; owners of ETFs can lend them out and actually earn revenue for lending out ETFs as much as they might lend out other securities; ETFS often have options associated with them. What all of these other elements of sort of flexibility, these dynamic elements of the wrapper lend themselves to is a much wider investor base than you might have with a traditional mutual fund. The greater the pool of prospective investors, the greater the liquidity in the ETF, the larger that ETF will become. Thus, the overall cost of owning that ETF, in theory, will be driven ever downward because transaction costs would be lower, the greater the investor base, the greater the asset base. In theory, the lower the fees will be on that ETF. that's a huge benefit to long-term investors in those funds.

Benz: That flexibility, the ability to do a lot of different things within ETF broadens the pool and then some additional benefits come on board?

Johnson: It can begin to snowball to the benefit of long-term buy-and-hold investors.

Benz: Transparency is a benefit that you see is somewhat oversold, this ability to see an ETF's portfolio in real time. Why do you think that's not such a big deal?

Johnson: I don't know about you, Christine, but I personally have no interest in knowing what 500 stocks are in the S&P 500 all day, every day. What I take heart in is knowing that there are rules that guide the construction of that portfolio that it's fairly predictable. Transparency is oversold.

What might be undersold in this case is a term that Jack Bogle has used before, which is "relative predictability"--knowing what to expect, knowing what you are going to get. In the case of index-tracking ETFs and those tracking broadly diversified market-capitalization-weighted indexes in particular, you know exactly what you are going to get. More often than not the label on the tin is going to match its contents. That said, there are important exceptions, areas where you are going to have to dig more deeply. But even still to the extent that those are index-tracking products. There is this incremental element of relative predictability that you might have, say, over an actively managed fund.

Benz: It certainly gives you a great ability to get your arms around your exposures in your portfolio. You can see what your equity weighting is in real-time which can be important information for you as an investor.

Johnson: Incredibly important information, especially when you zoom out and move away from fund selection and toward portfolio construction to have a better sense of what's the stability of these building blocks, to what extent might there be overlap between what I would otherwise assume to be distinct strategies.

Benz: Right. Let's talk about tax efficiency. There's a lot to like from the standpoint of tax efficiency for ETFs. You think that the benefit relative to traditional market-cap-weighted index funds has been perhaps little bit oversold.

Johnson: Definitely. We've discussed this in the past, which is that, when it comes to tax efficiency, ETFs have two key sources of tax efficiency. One has to do with their strategy. A market-capitalization-weighted U.S. stock index is going to turn over 3% to 5% a year, which is a fraction of the level of turnover you'd see in your average U.S. large-cap fund. That low turnover yields large benefits in terms of tax efficiency. There's an incremental layer that isn't unique but far more commonplace in ETFs than it is in other fund types, which is structural in nature. ETFs have the ability to take securities into the portfolio and purge them from the portfolio on an in-kind basis. They are not necessarily actively-buying and selling those securities. Particularly, when it comes to redemptions from the fund, what you see is the ability to send stocks out of a stock portfolio in kind, thus avoiding unlocking embedded gains, yields a huge structural advantage that certainly is there in the case of ETFs tracking market-cap-weighted indexes, but I think is much more prominent and where the ETF structure really flexes its muscles is in the case of underlying strategies where the turnover is in excess of 100% per year. What you see is if you look at the data on strategies that fit that description, going back over the course of the past five years, is that capital gains distributions among those funds have been few and far between. I think that's really where ETFs' tax efficiency is on full display.

Benz: To the extent that you want some sort of high-turnover strategy in your portfolio, the ETF wrapper can actually shield you from some of the taxes that you might pay in a traditional open-end format?

Johnson: Absolutely. And further to that, what I would say is, it's also an additional insurance policy even in the case of funds that might be tracking a market-cap-weighted index. What we've seen in recent years is that there are a lot of cap-weighted index mutual funds that have been spitting out huge taxable gains distributions, largely because they have seen shareholder exoduses. To the extent that the structure will, again, add an incremental layer of insurance in the unlikely event that some total stock market mutual fund sees a huge shareholder exodus, the ETF has an advantage in that respect as well.

Benz: We've done a separate video on this topic--Vanguard's ETFs may be an exception to that--for some reason they did see some mass shareholder-related redemptions.

Johnson: Right. To the extent that they are unique in being a separate share class of Vanguard mutual funds.

Benz: Let's talk about fees, because of the big attractions for ETFs is the fact that on many of the big market-cap-weighted products fees are very, very low. But you say relative to the true peer group of traditional index funds, the fee advantage may be a little bit overblown.

Johnson: Fees maybe equal. The poster child for this would be the Vanguard ETF share class and the Vanguard admiral share class, where the fees charged across both for the same exposure, for access to the same fund will be at parity. The fee advantage really isn't there, and if any anything, in the case of the ETF, there are the incredible costs that might be involved in transacting in that fund. The advantage that ETFs have over index mutual funds in some cases--though I would say, as minimum investment requirements for mutual funds come down ever further and in some cases are now zero--ETFs can have an advantage in that they are more immediately accessible, that you can invest in an ETF an amount as low as a single share and get pricing that, going back to the Vanguard case, would require $10,000 minimum investment in the case of their admiral share class.

Benz: Always great to get your insights, Ben. Thank you so much for being here.

Johnson: Thanks for having me, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar.com. Investors don't usually associate technology stocks with value investing. But given the many different ways one can define value, it's not unheard of for value investors to own technology stocks. Here are three Morningstar Medalist funds in the large-value category holding more than 20% of their portfolios in the tech sector.

Greg Carlson: Bronze-rated Artisan Value is a large value fund that's held a significant stake in tech stocks over time. For example, for the past several years, both Alphabet and Apple have been near the top of the portfolio as its managers feel those companies still look attractive based on their cash flows. The fund also bought Facebook in the second quarter of 2018 after the stock was hit hard over regulatory concerns. As a result, the fund's tech weighting is recently 22% of assets, roughly double that of the Russell 1000 Value benchmark as well as the typical large-value fund.

Alec Lucas: Boston Partners All-Cap Value, managed by Duilio Ramallo since 2005, uses the firm's firmwide approach which focuses on stocks with a combination of an attractive valuation, sound business fundamentals, and positive business momentum, and that's led Ramallo to tech stocks much more than its Russell 3000 Value Index. He has had a 10 to 15 percentage point overweight in tech stocks consistently since early 2012. As of June of this year, 2018, he had about 24% of the fund's assets in tech stocks which was in line with the broader market but about 14 percentage points more than his benchmark. He held Cisco and Alphabet, for example. Ramallo has a good track record under his tenure including good performance during the financial crisis, and we think this is an attractive long-term option.

Gregg Wolper: Sound Shore Fund is an unusual offering in several ways. First, its managers have been there an extremely long time. Two of them actually founded the fund in the mid-1980s and the third one joined them in the 1990s and became a listed manager 15 years ago. None of the managers have left. Their analysts have also been there a long time. Their four analysts have been there 10 years at least. They use a flexible value approach. That means that while they are fairly value-oriented, they don't want broken-down companies. They want good-quality companies. That leads them to have more technology than most value funds ordinarily have. It's a fairly compact portfolio, only about 40 names typically; now it's actually 35. That could be risky, overly concentrated. But by holding only 4% or even less in the top holdings, they mitigate that risk and give you a smoother ride.

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Christine Benz: Hi, I'm Christine Benz for Morningstar.com. How can investors protect themselves against some common mental mistakes? Joining me to discuss that topic and to discuss his latest book is Brian Portnoy. He is the author of The Geometry of Wealth.

Brian, thank you so much for being here.

Brian Portnoy: It's great to be here, Christine.

Benz: Former Morningstar analyst. You've written a few books so far and the latest, The Geometry of Wealth, is really a personal finance book, and you attempt to help investors think about their goals, you attempt to help them find a way to simplify their financial lives a little bit with an eye toward those goals. 

In your work you focus a lot on behavioral finance and some of these behavioral mistakes that we all make as we go about our financial lives. I'm hoping we can cycle through some of the common ones that you think can trip investors up in managing their finances. You say not starting at the beginning is a big problem with a lot of people.

Portnoy: We tend to pay attention to things that are right in front of us. It's just the way we are wired, and it make makes a lot of sense. When it comes to money and investing, what's right in front of us--the market. The ticker across the bottom of the screen, the splashy headlines. We collectively as investors become attracted to the day-to-day noise. I think the biggest mistake that most investors, most people make actually, is not starting at the beginning of the process.

The beginning of the process is not beating the market or figuring out stocks or bonds or anything like that. It's taking a step way back and looking in the mirror and asking the big picture questions as to, what am I trying to do with my life, what is really going to make me happy? I develop a concept in the book called funded contentment …

Benz: And I love that.

Portnoy: Thanks.

Benz: Let's talk about what that means.

Portnoy: It's the idea that what we're really trying to do the question that we're really trying to answer is, am I going to be OK, are my family and I are going to be OK. To get at that--that's really not a money question first, that's a broader philosophical question--we want to find contentment through our community, through our ability to determine our own life's path, through being good at a job, and being connected to something bigger than ourselves. The frustrating part is that we can think about those pie-in-the-sky philosophical issues, but money comes into the story inevitably. We need to underwrite the sources of meaning in life. That phrase "funded contentment" is there to help people capture that notion that--focus on contentment but recognize that from a practical point of view you need to get your money house in order to get there.

Benz: This concept of funded contentment obviously what makes me content is not necessarily what makes you content. How would you advise people to go about thinking about what contentment they are seeking and then how they might get their finances to align with that?

Portnoy: You're correct to suggest that there's not a recipe or one-size-fits-all. This is a personal exploration. Different important factors will vary throughout the course of your life, whether it be the type of community you participate in, your connection to others. The effort and seriousness that you put into your career, your vocation, the flow that you find, your ability generally to write your own story and chart your own course.

If you go through a little bit of reflection about your life, you'll realize, well, those kind of come and go and they ebb and flow and there's different relationships between those various forms of contentment. We shouldn't try to think of this as an algorithm. We should try to think of this in terms of--our story is changing through time, and we are the authors of that story. We are in control, where do we wanted to go. Once we have that, then we can sort of dive into the financial planning part and have a really great base for what we want to work on.

Benz: I think an important component of this is that what people around me are doing or defining as contentment for themselves, I should not use that to guide my own contentment. If my neighbor is putting in a sprinkler system, I don't necessarily have to do that unless I really don't want to water or really prioritize green grass, right?

Portnoy: Absolutely. Social connections define the human experience. That's a really positive thing. The negative edge to that is that we look around to others for validation. We feel envy and jealousy. That's a really hard thing to transcend. But we have to remind ourselves that one person's path isn't ours. We can certainly look for others that we want to model because they seem to be doing things right. That doesn't need to be the way we go. Charting your own story is the key or at least the first step on the road to funded contentment.

Benz: Another thing that I want to talk about is the difference between having goals, having financial goals, and having a plan. You say that this is another thing that can trip people up, that they maybe just get to the goals piece and don't translate that to a plan?

Portnoy: Unfortunately, this exercise is a little harder than it might seem. If you think about goals, we can probably agree on the big ones for most people in terms of having a nice home, paying for your kids' college, retirement. Retirement is obviously the big one. Great to have those goals. In fact, a lot of people don't even think about them. But having a goal is not the same thing as having a plan.

To say that, generally, I want to save and over time I will have some money in the bank to pay for stuff as it comes along, there's a lot of levels of financial planning that can really increase the likelihood that you're going to meet those goals if you take them seriously as opposed to just having them simply on a piece of paper.

Benz: And you've got to prioritize goals too, right, because you might have goals but they may not all be achievable?

Portnoy: Absolutely. I think the prioritization that many people don't think about as much as they should is risk or risk management. Part of the way our brains are wired is that we actually achieve a higher level of happiness or deeper sense of contentment from minimizing regret as distinct from maximizing joy. We are naturally loss-averse creatures. A $100 of loss is twice as painful as a $100 of gain is pleasurable. That principle of loss aversion whether we like it nor not, drives our decisions and how we respond to the outcomes that stem from those decisions as we think about the things that can go wrong and I'm not just talking about buying insurance for your house. 

I am thinking about how you plan in your career; do you want to be an employee versus and entrepreneur. All those sorts of big topics thinking about risk first is a great way to minimize regret and that kind of clears an open space for you then to really pursue aspirational goals.

Benz: Thinking about risk minimization, not just in the context of my portfolio, although it's important there, but in other aspects of my financial life?

Portnoy: Risk sounds like a technical word that applies just to portfolios and investments. I'm talking generally about the possibility that things don't go according to plan, which we all know that they do, right? It's really about adapting to life's twists and turns when things don't go as you expect. But putting some thought into your relationships, into your career, into your community, and OK, where do I want things to go and just taking a little bit of time to think, if this doesn't go as I'd like it to, what's my reaction going to be.

Benz: Being thoughtful about all of your allocations, not just your money allocations but your time allocations, human capital allocations, and everything else.

Portnoy: Yeah. Time capital and human capital, something you've written about a lot, are really important forms of capital. We sometimes don't like assigning capital to those things. But they are things that we invest in, that we grow over time and that can be used to so-called purchase other things that we want. So, we got to take them really seriously.

Benz: Yeah. One topic that comes through loud and clear in the book--which I love and I'm a big believer in myself--is the idea of not getting bogged down in complexity, trying to simplify. You say that that's a common error that you see people fall into that they think if I'm working on financial stuff, it's got to be complicated. Let's talk about that.

Portnoy: Big topic. Really big topic. The market is very complicated. Stocks and bonds and funds and ETFs and all of the vehicles that we might invest in. There's almost an incentive in the market to make things complicated. We have the opportunity to fight back. The fact that we might find investments and insurance and other elements of financial planning to be complex, that's totally fine. But we have to …

Benz: It is.

Portnoy: It is, but we can cut through. One thing I do in the book is talk about a few very basic principles or ideas for simplifying our investment life. I firmly believe that what we are trying to do with our portfolios specifically is achieve our expectations. We need to set and manage expectations. When we say, I want to beat the market, or I want to choose a manager who is doing better than others--honestly, those aren't totally appropriate expectations. What we are really trying to do is fund contentment. We want our portfolio to be tied to our goals, not arbitrary benchmarks. Our life is the benchmark, the market is not the benchmark.

As a result, there are some basic things that we can focus on in terms of return potential, how volatile an investment has been historically and things like that. Volatility, for example--you will hear Warren Buffett and others say, volatility isn't risk, it's just permanent loss of capital. Respectfully, I'll disagree, because when markets get choppy, when our investments go up and down, we are much more likely to sell at the bottom. As a result, we bolt from our portfolio and we are left out of the market when it rebounds, and we are much less likely to achieve our goals. Volatility is a form of emotional risk that we should take very seriously.

Benz: The book is built around geometric shapes. You touched on two components of the square which you discuss in the book. You talked about volatility as well as growth or return potential. Let's talk about the other two corners of that square and why it's important for investors to keep those in mind when they are thinking about their investment portfolios.

Portnoy: Let's keep in mind that the theme here is simplifying the complex. Four corners of the square, four principles to set expectations. In addition to growth potential and emotional volatility we also have something I call fit. I think wonks would call it correlation. Correlations from a technical perspective are unstable, and there's a lot of details behind the scenes there. What we need to do as individual investors is just think about, OK, if I'm going to add something else to my portfolio, does it fit, am I just doubling up on something that I already have? We tend to shop for the same things over and over again. So, when we go to Costco or Nordstrom …

Benz: Totally. Black pants or …

Portnoy: Yes. Black pants for one. We keep buying them over and over again. We do that with our investments. It's like, oh, I really like the themes in this investment. I love growth stocks. I don't need just one fund. I need four funds that do the exact same thing.

Benz: I see that a lot. 

Portnoy: We tend to then believe that we are diversified because own four growth funds instead of one, but all we've done is quadruple our exposure to the same stocks.

Benz: And add complexity.

Portnoy: And add complexity. Line items in a portfolio is not diversification. Much of the times it's actually just more complexity. 

The fourth corner of the square is what I call flexibility. The wonky term would be liquidity. What I'm really talking about is the ability to change your mind. We are on this adaptive quest to fund contentment. Life doesn't always go as planned. As a result, you need to pivot from time-to-time. When it comes to our portfolios, are we able to change our mind, and can we move out of harm's way when we sense that it is coming, or can we move toward opportunity? 

One thing that I wouldn't want to leave investors with the impression is that total flexibility is a great thing. We don't want to trade every moment of the day. Having that sort of flexibility is not a great thing. People in retirement accounts who have a preset allocation and every paycheck they are chipping away, they tend to have better outcomes precisely because they don't have flexibility to move out of the way immediately when something happens in the market. It's not a question of more flexibility or more liquidity is better. It's a question of--you have a plan that you want to stick to, how much can you change it on a moment's notice and is that a good or a bad thing and that's a very personal decision.

Benz: And that's the fourth corner of that square?

Portnoy: Correct.

Benz: Brian, so many great insights in this book. Thank you so much for being here.

Portnoy: It's a pleasure.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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Travis Miller: For utilities investors eyeing the macro landscape seeing interest rates rising, typically they might think that that will mean utilities will fall. We looked at 25 years of data and found that utilities were just as likely to rise as interest rates were rising as they were to fall when rates were rising as well. What we think investors should do is turn to the fundamentals--look at growth, valuation, and income when assessing utilities, and forget about which direction interest rates will go.

For income investors, we like two names: PPL and Duke Energy. For PPL and Duke, both trade well above a 4% yield. We think there's 4% earnings and dividend growth available there. We also think they trade at substantial discounts to their fair value.

For value investors looking to take on a little more risk, we like South Carolina utility Scana. Scana faces some regulatory and political challenges with its new nuclear project that it abandoned last year. The stock trades around $40 per share, but if it can resolve those regulatory and political challenges by year end and get near-full recovery of those project costs that's invested, we think that it could have a lot more upside.

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Brian Moriarty: Long-term muni bonds are not for everybody, but if you are in the market then Nuveen All-American Municipal Bond fund is a strong choice.

The fund has a duration of over eight years, which means it is very exposed to changes in interest rates and will likely lose money if rates rise sharply. But for tax-conscious investors with a long-term holding period, the fund should outperform. As of July 31, the fund's trailing 10-year return of 5.6% annualized beat out more than 90% of peers.

Nuveen's municipal funds are managed through a combination of top-down and bottom-up approaches, and this has been very beneficial for shareholders over time. The analyst team is also extremely deep--one of the deepest in the category--with over 25 analysts that average nearly 20 years of experience.

Fees are also competitive across most share classes, which adds to this fund's appeal.

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Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Should you pay off your mortgage prior to retirement? Joining me to discuss that question is Ilyce Glink. She is CEO of Best Money Moves, and she is also author of a new book, 100 Questions Every First-Time Home Buyer Should Ask.

Ilyce, thank you so much for being here.

Ilyce Glink: It's a joy. Happy to do it.

Benz: Ilyce, a lot of pre-retirees look at whether they should pay off their mortgage versus continuing to plow more into their retirement accounts, and I want to talk about that. What are the key benefits--aside from the psychological one of maybe being debt-free--of paying down a mortgage prior to retirement?

Glink: The first question is, what kind of cash are you going to have after you retire. Some people don't really retire. They just go from full-time jobs to sort of part-time income or they start up something in their garage, but they are still making some money coming in. Your first question is, are you even going to have a loss of cash flow? Is that going to go down? And if it is, OK, now, let's talk about paying off your expenses and what expenses can you get rid of before you hit retirement? What new expenses will you have coming into retirement? Some of those might be an increase in healthcare benefits. 

If you are trading off, let's say, mortgage debt, but you are going to have an equal amount of healthcare cost, but the income is going to roughly stay the same, you are probably in good shape. But if you aren't going to be in good shape or you think that you might need to reduce somewhere else, getting rid of that mortgage debt is a nice way to go.

Benz: Let's talk about the new tax laws, because that's in the mix where many fewer people will be itemizing their deductions very likely than in the past. Let's talk about how tax law changes might in fact embellish the case for prepaying or paying off the mortgage altogether prior to retirement.

Glink: Under the new tax law everybody is limited to the amount that you can write off. And we talk a lot about the SALT deductions, state and local taxes. When you look at what you pay in a state that is a higher-tax state--New Jersey or New York, Illinois, California--you are well over the threshold that's now been set to be able to write these things off. And so, for many people, they are looking at their mortgages and they are thinking, we used to be thinking that that write-off was going to help us finance a much larger mortgage and so, we'll just get a really big mortgage. It doesn't matter how much interest rate, you know, what we are paying. But now, it does matter. It's all limited.

When people are thinking against about paying down their mortgages, I'm a big fan of prepaying mortgages. For the investment properties I have, we've continued to throw the excess cash at those mortgages and paid them down. For our own home loan as well, every time we refinanced, we left the payment the same even though the interest rate went down, and we've been prepaying as well. We want to be done. To your point, there's just this great psychological benefit to being done, but there are also some real world consequences to not being done in an era where deductibility is so severely limited.

Benz: The interest deductibility may be less beneficial to people, too, especially if they are later in their mortgages, with the new tax laws, but also the interest is just a less of an amount of their payment, right?

Glink: It is. You know, as you are paying off your mortgage, everything is amortized. The first month of your mortgage payment, you are paying the most interest you are ever going to pay on that payment. And the last interest payment, you are paying almost nothing. There's this really nice cross paths, you pay less in interest as you go along. Your deductions would be less anyway. Well, your taxes are going up, so there is more of there, but overall, when you look at interest you pay, you are paying down, it's a declining liability.

You want to think very carefully about what you are writing off, what you are paying down. And again, going back to that real question, which is, how much income are you going to have in retirement and what do you want to do with that income. If it were me, I would really not want to be paying my mortgage.

Benz: Some people might say, they might look back on their investment returns like over the past decade and say, well, I've easily out-earned that mortgage rate with my investment portfolio. What's your response to that way of thinking? Is that a good comparison, what my long-term investment portfolio has earned versus what my mortgage interest rate is?

Glink: The last 10 years have been just a remarkable time. We have seen mortgage interest rates fall to 45-year lows. We've seen the stock market triple since--well, more than triple--since 2009. If you were lucky and you bought on March 9, 2009, all the more power to you. Here we are today in the mid-20,000 mark. So, the real question is not that did you make money by paying just the interest only and investing the rest; if you didn't make money, there's a problem.

The question is, what happens going forward. We are seeing a lot of instability now in the stock market. There's a lot of reaction to tariffs. There's lots of news about tariffs. There's news about everything these days. The market is wobbling along. A lot of people feel like we are way overdue for a recession. What is your portfolio going to look like if we have another recession? Maybe it won't be as bad as 2009, but it could be serious enough where you will be very happy not to have the extra expense of a mortgage on top of everything else.

Benz: And the mortgage paydown is sort of a guaranteed return versus whatever my long-term investment assets might do?

Glink: Absolutely. I mean, my mortgage, I think, is about, let's say, 3%. When I prepay my loan, every single dollar I prepay earns 3%, which is great. It's 3% though. We are not talking about 11%, which is where it was back in the '80s. You have to look at sort of what returns you are going to be able to have. And it is important to look at where CDs are and have a balanced portfolio. But you know, a little sure thing, that's nice too.

Benz: How does my intent for my home, whether I intend to stay in it or not stay in it, does that factor into whether I prepay or whether I just kind of pay the minimum that my lender requires?

Glink: Prepaying your mortgage gives you options. A lot of people opted for--interest rates were this low--they opted for 15-year mortgages. They were paying under 3% for those. Some people even got 2.5% on a 10-year loan. Those people are nearly almost done paying off those mortgages anyway. And if you had a 15-year mortgage that you got in 2009 or 2010, you are well into--you almost have no interest left anyway. You have to think about where you are and again, where you want to be, where you want to be going and how all of the income that is coming in now, how that's going to factor into where you parcel out your retirement dollars. I'd be very cautious about thinking about it.

Benz: How about people who are under water in their mortgages, where they bought in at an inopportune time, maybe they bought in the mid '00s, what do you say to them in terms of the prepayment and the wisdom of prepayment?

Glink: Pay down your mortgage as fast as possible. There are still a huge number of people who are under water. Some estimates are as many as 10% of mortgages are still under water. And by that they mean functionally under water as well. 

Benz: Well, define that if you would.

Glink: Sure. Under water is when you owe more than your house is worth. Functionally under water means that your mortgage amount and the amount you could sell are probably the same but after closing costs and things like paying the commission to the agent, you are under water, you will have to bring a check to the closing. 

In Chicago, for example, the city just has a huge number of--I won't even call them foreclosures anymore--but the under water homeowner areas of the city that have just not recovered. And even in the North Shore, the gilded North Shore, right, some of the fanciest ZIP codes in the country, properties there are selling for what they were selling for 15 and 20 years ago. That is well before the '00s. Now, you are looking at the mid-'90s. 

Property prices around the country while you keep hearing that they are going up and up, the truth is in every single market there are areas where people are not seeing that kind of price appreciation. The message to all of them is, pay down your mortgage as fast as possible because once you are no longer under water or functionally under water, you can sell your property, have more options and opportunities available to you, and not have to come with a check to the closing.

Benz: Ilyce, it's always great to hear your insights. Thank you so much for being here.

Glink: It's a pleasure.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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