Reply to Single parent in need of debt management/savings advice

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]I would not assume an 8 percent return, or even 6 percent return. The risk-free rate is currently 3 percent, so something like 5 percent is a safer bet for a balanced portfolio.[/quote]

You don't invest in a risk free portfolio at 39. At 60-65, sure, but not at 39. The 15 year, 20 year, and 25 year annualized returns from 1970 to now show a median of 12%. If the money if left in for the long run and you don't get emotional or try and time the market the return should be there based on historical results. There is a risk, of course, but there is never a reward without risk. If she stick to index and etfs and leaves the money in the market for the long haul 6-8 is not unreasonable. If the market returns 3% or less over the next 25 years then either none of us will ever retire or we are in a global crushing depression and we will be murdering people for drinking water.

Http://en.wikipedia.org/wiki/S&P_500[/quote]

I didn't say OP should invest in a risk-free portfolio. but a balanced portfolio includes a significant element of government bonds, and that is what long-term bonds pay now.

Remember how everyone used to say that a fall in house prices across the US had never happened, and was extremely unlikely? 1970 to now was a somewhat unusual period for the global economy. Deregulation, deunionization, and the arrival of 1 billion east asians into the global workforce meant that the returns to capital increased greatly at the expense of returns to labor. I would not extrapolate based on this period. If you took the period 1850-1900, you would find that 3-4 percent returns would not be unusual.

We are comparing an uncertain return against a guaranteed return of 2.875 percent in paying down the debt. Personally, if it were me, I would do some of both - pay down the debt while investing cautiously in the stock market/bonds. But borrowing (or even maintaining) debt to pour money into the stock market is really blurring the line between investing and gambling.
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VWELX is balanced (2/3 stock, 1/3 bonds) and has returned 8.29% since 1929. 6-8 is not unreasonable, you could get CDs at 5% 5 years ago and probably will be able to again in a few years. Interest rates are at ridiculous lows, may as well take advantage of it.

The returns may have been low in 1850-1900 (no idea, i'll take your word for it), but I don't anticipate another US civil war where we spend all our blood and treasure burning the rest of our country to the ground and killing our countrymen. If another civil war does happen here 3-4% market returns will be the least of my worries, but even at 4% it still makes sense to put money in the market over paying the loan.[/quote]

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