As a lead-off show for 2013, we decided to answer some email questions from our listeners. We love receiving your email questions and always enjoy when we get to share them on the show.
The first email we shared was regarding pre-paying a mortage. Is it a good idea? The short anwer… it depends on your specific situation. If your home is paid for, as long as you can cover the property taxes, you will cut out a big part of your annual cash outflow. Considering how low interest rates are right now, money is cheap! On the other hand, if you are about to retire, you should be very aggressive with paying off debt, including your home. When you retire, you should be debt free, and you will sleep a lot better if you own your home outright. If you are financially able, after saving for retirement and college funds, there is nothing wrong with paying a little extra on your mortgage each month.
The next email was about Dollar Cost Averaging.
Does DCA even out some of the unpredictability of the market? Does DCA reduce the probability of reaching goals, thus increasing risks since you will be in the market less time and, on average, buying higher?
DCA does not only apply to windfalls, but it is actually what you do naturally by investing in your 401k, saving monthly in an IRA, or even throwing money into a taxable brokerage account. In our opinion, windfall investments should be done over a period of time. If you invest a large amount at one time and the market goes through volatility, you could potentially lose a lot of your initial investment.
The last email was a fun one. This listener asked about how much he should spend on an engagement ring for his girlfriend. We suggest that you choose a ring that fits the person you are marrying. Your future wife should not only love the ring when you give it to her but also love it after 20 years of marriage. Size is important, as well as, quality. Just remember who came up with spending 2 month salary on a ring… the jewelers did! Spend an amount that you are comfortable with, and get something that you think will make her happy for a lifetime.
On a final note, we are posting our 4th Quarter commentary this week. As a whole, 2012 was a pretty good year. The S&P 500 made 16% in 2012, the EAFE Index made 17.9%, and the Barclays Aggregate made 4.2% last year. 2012 was a year of uncertainty including the election, the end of the world according to the Mayan calendar, the Facebook IPO hype and fall, the fiscal cliff, Superstorm Sandy, the China slowdown, LIBOR scandal, MF Global, the London Whale, the crazy European mess, we could go on and on….. There were a lot of things facing our country in 2012, yet the market still made 16%. What can we learn from this? There is a lot of noise out there. The news media is out there to sell advertisements, and they can take us off track. One of the most important factors to having a successful investment experience is being proactive in planning and not reacting to short-term noise. Plan for what could go wrong, but also put yourself in a position for what could go right. Don’t get caught up in the sensationalism. As another commentator put it, “Rarely does the asteroid really hit earth!” It’s easy to focus on the mistakes of countries but remember, the equities are driven by what’s happening with the companies. Keep focused on your long term goals.