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:
- That fear makes cheap money still look risky.
- That those surveyed are not professional investors, or have too much debt already.
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.
ReplyDeleteAlso, 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.
@ Toby
ReplyDeleteIn 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!