Saturday, February 28, 2009

Poll Results

The survey for January was: What Are Your Plans For Your Money In 2009? The results were all about paying down debt. Now, given there were about five participants, that doesn't mean much, but it is interesting.

There's a concept called 'expensive money', and it's based on how much you have to pay to borrow money - i.e. interest rates. If interest rates are high, you have to pay more to borrow money, and if they're low, you pay less. Talking to long-term investors, the break-point is around double digits. If you can pay less than 10% on borrowed money, it's pretty cheap. If interest rates are higher, it's expensive.

In What Is an Investor, I put forth that an investor is a person who understands ROI, implying that they'll be on the winning side of that comparison. So as an interesting aside - if under 10% interest is considered 'cheap', then that implies a professional investor is confident that they can make over 10% on their investments. Otherwise 'cheap' would have a different level.

Now, most people out there can get interest rates under 7%, and many can get under 6%. This means that money is quite cheap. And yet people are still looking to pay down debt... So this survey tells me two things:
  1. That fear makes cheap money still look risky.
  2. That those surveyed are not professional investors, or have too much debt already.


  1. Maybe this only shows how much of a non-investor I am, but I think that you have to consider two things: most private people have debt for 'luxuries,' not 'assets.' (I know, a house or car doesn't seem like a luxury, but it's not earning you money.) And so it makes sense (to me) to pay that debt down as soon as possible.

    Also, I think returns above 10% require a lot more knowledge than I--or the people I talk to about money--have to offer. I'm sure they're possible, but I think they're scarce with the kind of 'passive' investing I do.

  2. @ Toby
    In the previous post, I mentioned that an Investor (by my definition) looks at ROI and puts him(or her)-self on the right side of it. So if you can find investments that make 7%, then you would pay down debt that costs over 7% and leave debt that was under 7% (after taxes, etc.). Find what you feel comfortable making, and use that as your breakpoint. Part of the idea in this post is that a 'professional' investor seems to use 10% as a breakpoint, so they must be comfortable with returns greater than that.

    As to your yield, look at closed funds or ETFs and search for yields over 10%. There's several right now, and some that sell at a discount to NAV - just make sure they're not dropping because they own the wrong assets right now!

    Good luck!