Your Lying Eyes

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06 December 2010

Good Investment Advice?

Gold set a new record today, closing at $1422. Back in September 2008, when the homeowner's bailouts were first being proposed, I highlighted Peter Schiff's cynical take on it - namely, recommending that people should stop paying their mortgage and use the money to buy gold. He pointed out that you could probably go a year or two without getting kicked out of your home, so why not take advantage of the situation. He was probably right about being able to last 2 years without losing the house - at least that seems to be what often happens. But as pure financial advice, how would it have worked out?

Well, not bad as it turns out. Let's assume you had a 5.5% mortgage with a $300k balance and a $2500 monthly payment, and you immediately took advantage of this advise and bought shares in the SPDR GLD ETF starting September 5, 2008, and continued to do so (on the first Friday of each month) right up thru last Friday, 12/3/10. You'd be up around 20k on the deal. Here's how it looks each month:
The above also assumes a $100 late fee for each month rolled into the mortgage and assumes no other interest penalties. Essentially, the mortgage cost is the value of the monthly payments plus late fees accumulated at the assumed 5.5% rate each month. Now as to whether this $20k bonanza would be worth trashing your credit rating I wouldn't know - but I'm guessing not, but don't really know what a credit rating is worth. I wonder if anyone literally did take Mr. Schiff's advice and took such a brazen move?

But even investing in the S&P 500 would have been fruitful - a plopping your mortgage into the SPY ETF would have garnered a $10k gain:


Anonymous Dano said...

the Dec 30 wall st jornal has an oped by shift about housing prices and what it will take to get them to the normal trend line. Not encouraging for those trying to sell.

December 30, 2010 6:24 PM  
Anonymous Dano said...

Sorry I meant Schiff

December 30, 2010 6:24 PM  

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