According to the financial planners, investors should be cautious with their investment habits. They should keep a well-balanced portfolio with proper asset allocations. In addition, there should be an emergency fund that will act as a financial life boat in order to prevent insolvency in the wake of a major loss in investment. Investors with mortgage loans should especially be aware of the implications with regards to their long-term investments in equities.
The return on investments from equities like stocks, exceed the rate of interest paid on the mortgage loans. Investing in stocks has been preferable by the traders because they expect a greater long-term return which is relatively lower in government bonds. However, investors with mortgage loans should invest in the stocks only if they can reap a guaranteed profit of about 4%-5%.
Hence, it is very important for the investors to understand the implication of these 2 assets – stocks and mortgage, in their investment portfolio.
The pros of stock investment
Investing in stocks can potentially provide huge return on investments. For instance, employee stock investment is a great profitable option. This is because employees can trade in their employer’s stocks in accordance to a suitable savings and/or deferral program.
Actually, employee stock plans ensure log-term profits and have a systemic investment strategy that makes it a highly lucrative investment tool.
The cons of stock investments
Though it is good for people with a fixed monthly income as a part of their retirement plan, yet it has its own drawbacks. For instance, investing in company stocks will not help into diversify an individual’s investment portfolio. As a result, employees run the risk of losing all their savings, in case the stock market goes topsy-turvy.
Hence, financial planners advise people not to keep more than 15% of their company’s stock in their portfolio. This will help them to avoid putting all their nets eggs into one basket, subsequently preventing any major loss.
The pros of borrowing mortgages
Repaying mortgage loans will help the borrowers to own a piece of real estate, besides giving tax breaks. It should be noted that interest paid on the loans, property taxes and all such tax concessions help in to reduce the taxable income of an individual. This is because these mortgage payments are considered as deductible.
Borrowers can get instant cash in hand, if they adjust the federal withholdings against the amount saved from the tax breaks.
The cons of borrowing mortgages
As of now, mortgage borrowers can take advantage of the Mortgage Debt Relief Act and Debt Cancellation, and invest that forgiven debt amount in financial tools. However, there are considerable amount of risk involved with use of an emergency fund and investing that money in the financial markets.
In case of any untoward event in the financial markets, lifetime’s savings of the borrowers may get wiped out. Due to this reduction in financial resources, mortgage borrowers may lose their home as a result of a foreclosure.
Hence, it is not all advisable to invest in stocks without a prepaying the mortgage that may invite lesser penalties. This will be better than losing one’s home altogether.