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Post by xray on Dec 11, 2021 11:50:50 GMT
If you owned your house outright, but were offered a cash-out refi under 2%, would you take the money, and invest it in stocks instead? Updated: Dec. 9, 2021 at 4:27 p.m. ET Brian J. O'Connor
With mortgage rates still near record lows (some 15-year rates are near 2% and 30-year rates below 3%, as you can see here) and stocks performing solidly, this question from a reader of MarketWatch Picks intrigued us:
“I’m 60, retired and debt-free, including my South Florida condominium. I’ve received an offer for a 15-year mortgage at 1.75%. I’m making significantly more than that in my investment account. I’m considering refinancing, taking some cash out and investing that money. My investment advisor is firmly against the idea. He doesn’t want me to take on debt and thinks I should preserve my equity in case I need it later in retirement. Who’s right?” We asked financial planners their thoughts on that question, and whether others with substantial home equity might want to consider a similar move. Here’s the verdict. Yes, it’s true that mortgage refi rates are near historic lows, and those with excellent credit scores may be able to find refi rates around 2% right now. And your investments could easily earn more than 2%: As of the end of October, the Standard & Poor’s 500 Index is up more than 21% for the year.
But while the return on even a low-cost ETF might easily top 2%, there’s more than just the interest rate involved here. That’s because you’d also be repaying the loan principal along with that low-rate interest.
Example: You get $50,000 from a cash-out refinancing and invest it in an ETF that tracks the Standard & Poor’s 500 index, producing a 20% gain for the year. (Note that the average return since the mid-1950s was between 7% and 8%.) That’s a tidy gross return of $10,000. However:
The payment on the new $50,000 mortgage at 1.75% is $316.03 per month, a total of $3,792 for a year; You’ll have one-time closing costs on your refi or home equity loan. Typically, that’s 3% of the loan balance, or $1,500 in your case; Now your net profit is cut to about 9% — and that doesn’t include the trading costs and taxes on your investments. Still, you’ve made $4,708 in the first year, which is a nice chunk of change. That won’t happen every year, warns Greg McBride, chief financial analyst for Bankrate.com. If the $50,000 you invest returns 7% for one year, you’ll make $3,500. That means your investment produces $300 less than you’ll pay on the new mortgage in a year. But, thanks to the magic of compounding, you’ll still make money over time. That’s because $50,000 invested at an annual return of 7% will generate nearly $88,000 in returns over 15 years. Even if you withdraw the money for the mortgage payment at the beginning of each month, you’d still come out at the end of 15 years with a profit of more than $39,000.
“For the savvy investor who thinks long-term, the rate of return possibilities can pay off handsomely with such a low borrowing cost,” McBride said. “But we’re talking about buying an S&P 500 or total market index that can go on for decades. This is not a strategy for day-trading or investing in some meme stock.” Another consideration is your ability to stay current on your new mortgage without touching any of the money you invest. You also should consider how investing home equity fits into your overall financial plans, said Scott Smith, a certified financial planner and senior advisor at Lifecycle Financial Planners in Bloomfield Hills, Michigan.
“I don’t recommend taking the entire 80% of equity that can be borrowed but if it was 40% to 50% of the equity — especially since he can pay the loan off if he needs to — I would likely recommend that,” Smith said. “We recommend that to clients frequently.” Typically, financial planners advise using home equity loans to finance home improvements or to pay down credit-card balances or other high-rate debt, but you don’t have those issues. In the end, your own planner will be the most familiar with your finances and likely knows best.
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Live Long and Prosper....
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Post by uncleharley on Dec 11, 2021 13:40:40 GMT
I not only would, but I have. The caveat is that this has to be a long term plan, not a day trade or even a swing trade. I am convenced that that inflation is here for the next several yrs and the current mtg rates will look extremely cheap in the future. Inflation tends to be a positive for the stock market, consequently, if one can tolerate some volatility along the way, stocks should return considerably more than the cost of the mtg.
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Post by yogibearbull on Dec 11, 2021 14:21:37 GMT
Top of the market sign - borrow from home and invest in stocks. Be sure NOT to tell this to mortgage banker because your loan application will be REJECTED as per regulations.
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Post by Mustang on Dec 11, 2021 14:49:17 GMT
No. There isn't any way in the world that I would do it. I like living debt free. It significantly reduces our living expenses placing less demand on our retirement income. Being debt free is one of the reasons that at 71 we are still accumulating and not withdrawing from investments.
Back when I was working and interest rates were dropping I refinanced our house three times in 18 months. At the time we had owned the mini-ranch maybe 15 years. We never reduced what we were paying. At 60 the house was paid off and I retired teaching classes part time at a nearby university. 11 years later I'm sitting on a sizable profit from downsizing and our new house is still paid off.
I really don't know why you want to go into debt to jump into the market at the top of a long bull run. The S&P 500 P/E ratio is around 30. I've read that the average is 20. Every financial advisor in the world is writing that stocks cannot continue to rise at the same rate. That future returns will be lower. Most are saying that the 4% Rule is dead. Morninstar analysts are basically shouting it from the roof tops. They say 3.3% is the maximum sustainable initial withdrawal rate. That is why I'm sitting on cash using dollar-cost averaging moving a little at a time. I have no idea what the market is going to do. If this were 2008 and we were at the bottom of a crash when the P/E ratio dipped below 10 then I could understand it but not now.
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Post by uncleharley on Dec 11, 2021 14:54:13 GMT
Allow me to modify mt reaponse; My assured income is more than enough to cover the monthly mtg payment. It would be very foolish to commit to a mortgage payment while relying on income from stocks or bonds to make that monthly payment. The returns could easily exceed the interest payment over time, but those returns can be sporadic and one could go broke waiting for them. Also, I took out my mtg a yr ago before rates began creeping up again. The rates and closing costs which are mentioned in the article are optimistic at best.
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Post by steadyeddy on Dec 11, 2021 15:32:14 GMT
Allow me to modify mt reaponse; My assured income is more than enough to cover the monthly mtg payment. It would be very foolish to commit to a mortgage payment while relying on income from stocks or bonds to make that monthly payment. The returns should easily exceed the interest payment over time, but those returns can be sporadic and one could go broke waiting for them. Also, I took out my mtg a yr ago before rates began creeping up again. The rates and closing costs which are mentioned in the article are optimistic at best. uncleharley, would you mind expanding on "assured income?" who/what is assuring it?
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Post by steadyeddy on Dec 11, 2021 15:33:23 GMT
I would NOT enter into debt to invest in the market - it is very important to keep stress level low when approaching/in retirement in order to stay healthier than otherwise possible.
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Post by Capital on Dec 11, 2021 15:42:20 GMT
Current plan is to retire with no debt. Current interest rates will not change that plan.
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Post by uncleharley on Dec 11, 2021 16:10:40 GMT
Allow me to modify mt reaponse; My assured income is more than enough to cover the monthly mtg payment. It would be very foolish to commit to a mortgage payment while relying on income from stocks or bonds to make that monthly payment. The returns should easily exceed the interest payment over time, but those returns can be sporadic and one could go broke waiting for them. Also, I took out my mtg a yr ago before rates began creeping up again. The rates and closing costs which are mentioned in the article are optimistic at best. uncleharley , would you mind expanding on "assured income?" who/what is assuring it? I have a hybred pension that has a guaranteed minimum monthly payment and a feature that allows for annual increases that are dependent upon market performance. That pension is guaranteed by the state of Wisconsin. Of course I also get Social Security which I am confident will continue in spite of what some people have been saying since I was born. My wife and I easily support our chosen lifestyle.
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Post by steadyeddy on Dec 11, 2021 17:06:47 GMT
uncleharley , would you mind expanding on "assured income?" who/what is assuring it? I have a hybred pension that has a guaranteed minimum monthly payment and a feature that allows for annual increases that are dependent upon market performance. That pension is guaranteed by the state of Wisconsin. Of course I also get Social Security which I am confident will continue in spite of what some people have been saying since I was born. My wife and I easily support our chosen lifestyle. uncleharley, excellent! I agree that pension (guaranteed by a state) and SS are assured income. Thanks for clarifying!
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Post by Capital on Dec 11, 2021 17:29:19 GMT
My hat is off to uncleharley for having a pension in his tools for retirement. Unfortunately for me that will never be a part of the story of my retirement. If it were to be so I might think differently about carrying debt into retirement. Just goes to further show us that there is never going to be a single right answer that works for us all. We each have different lives and situations and must make decisions based upon our specific circumstances.
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Post by steadyeddy on Dec 11, 2021 18:19:53 GMT
My hat is off to uncleharley for having a pension in his tools for retirement. Unfortunately for me that will never be a part of the story of my retirement. If it were to be so I might think differently about carrying debt into retirement. Just goes to further show us that there is never going to be a single right answer that works for us all. We each have different lives and situations and must make decisions based upon our specific circumstances. Even with assured income, it is not a good idea to carry debt with the sole purpose of investing.
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Post by Chahta on Dec 11, 2021 21:07:12 GMT
My hat is off to uncleharley for having a pension in his tools for retirement. Unfortunately for me that will never be a part of the story of my retirement. If it were to be so I might think differently about carrying debt into retirement. Just goes to further show us that there is never going to be a single right answer that works for us all. We each have different lives and situations and must make decisions based upon our specific circumstances. Even with assured income, it is not a good idea to carry debt with the sole purpose of investing. No reason to be so aggressive if you are retired. But then again some folks need a thrill.
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Post by chang on Dec 11, 2021 23:37:27 GMT
My hat is off to uncleharley for having a pension in his tools for retirement. Unfortunately for me that will never be a part of the story of my retirement. If it were to be so I might think differently about carrying debt into retirement. Just goes to further show us that there is never going to be a single right answer that works for us all. We each have different lives and situations and must make decisions based upon our specific circumstances. Even with assured income, it is not a good idea to carry debt with the sole purpose of investing. I have to agree. If Fidelity thought they could make more money by investing their capital rather than lending it to you at margin rates, they would probably do it. I've never carried margin debt more than 1 day, except for one very embarrassing time when I carried it accidentally for about a month and a half, because I messed up and didn't know it; and TDA very generously refunded the interest charges to me.
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Post by Chahta on Dec 12, 2021 3:10:31 GMT
But in a way 5% down and a mortgage is a leveraged investment with generally a low return.
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Post by steelpony10 on Dec 12, 2021 11:43:16 GMT
If you’re reasonably sure you have enough now why? I currently have about 50% of our investable assets in some type of bond that in hindsight would have been better off in equities the last ten years. In reality way longer then that. The big reason that would be a big no no for me is I really don’t want to dump that situation on a spouse or heirs although they would probably run right to a financial advisor. A similar situation just happened 2 months ago with a good friend of 50 years who passed at 73.
I did dump all my parents house value into CEF’s and equities once my dad passed and my mother entered an independent living facility around 2000. That stretched their portfolio longevity out another 17 years.
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Post by retiredat48 on Dec 12, 2021 15:23:29 GMT
But in a way 5% down and a mortgage is a leveraged investment with generally a low return. Why is this so? First, a house (and mortgage) is not truly an investment, because by definition it does not provide any current annual income, and it does not grow into two houses...or four. What the home is, is a storage of value. It doesn't go bankrupt; it doesn't go to zero. It is often called the poor man's only investment, because he stays even with the cost of living/prices. So I had a 5% down home purchase in 1970, for about $30,000 that has initial mortgage paid off, and is now worth north of $300,000. Not such a low return. But wait, I have had a HELOC on that house for almost three decades (currently 3% fixed rate/16 years left), that has been primarily invested. The arrangement is so valuable that it is keeping me from disposing that initial NY home (of 3). But wait--that home is also increasing in price 10+% a year. Why sell now--the inflation hedge is kicking in big-time. And if I sell, where can I safely put the money for comparable total return? I thus have the home, and a large HELOC. Full disclosure: I actually am now investigating giving this home to charity, and making a large conversion from a Trad IRA to a ROTH IRA (generating income to deduct the charitable contribution against). I'll keep readers posted. R48
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Post by retiredat48 on Dec 12, 2021 15:55:50 GMT
Absolutely, certain posters should explore taking cash equivalent out of homes via refinancing, and invest it. IMO there is no better time in history, than today, to do this, especially with inflation kicking in big-time, and rates at historic lows.
But first, we have had many threads on this issue in the past. The key is that it involves a behavioral/psychological component that can't be ignored. Simply stated, many people can't stand the thought of debt--they abhor it. No amount of financial numbers/aspects persuade them. And I agree, the first rule is one needs to be able to sleep at night.
So this post is for those who want to assess this matter for potential benefit. For starters, I have had two large HELOCs (own three homes) for at least a couple decades. Rates have been falling. My current rates are 2.5% variable; 3% fixed. I have used these for various purposes, but lately it is 100% invested.
For instance, from age 62 social security kick in, I reduced greatly my takeout from Trad IRAs, using the HELOCs to live on, enabling less of a takeout. Obviously, these IRAs have grown greatly in wealth. With refinancing HELOCs every decade (lower rates), these are the two helocs I discussed. I likely will not pay them back until I die--too valuable to have such cheap money in an inflationary time we are entering. And BTW I consider gvt has UNDERSTATED inflation all along my retirement.
One way to look at this is: Where is the risk if you spread the monies over your entire portfolio? Let's say you have a million dollar portfolio. You borrow $25,000 from a HELOC. You add it proportionally to all your holdings. So you now have $1,025,000. With exact same allocations and holdings, where is the increased risk?? There is simply little risk you will default on a $25,000 HELOC payment of about $1000 annually. Start with baby steps.
But how about this example: I posted this on another forum:
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"So a little of my two major HELOCs money borrowed at 2.5% (another 3% fixed), will now go into 7+% Treasury Series Bonds.
And I will keep renewing as long as the fed keeps deleted, the word "transitory", from its inflation lexicon.
BTW an enabler of my retiring early, about 28 years ago, was Long Term Treasury Bonds yielding 15+%.
What a country!!"
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So, where is the risk here? That the Treasury will default!? If yields drop to where not above your HELOC rate, you close down the deal and pay back the heloc. As long as profitable to you, you retain it.
Thus, get and tap your HELOC for $20,000; you and spouse buy Treasury I Bonds at 7+%. Assess every 6 months re renewing (likely). Sit back and drink some pina coladas.
Full disclosure...I also tap Credit Card offers of 0% rates, and do same. Like, I have two currently at 0% on purchases to Jan 2023 (no fee loans). I pay for nothing now; will pay in 2023. My gain, as long as I make monthly min payments, which I do.
Whew...too much posting--I gotta cut back.
R48
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Post by Fearchar on Dec 12, 2021 17:09:01 GMT
retiredat48, Neither I or my Mom have outstanding loans, mortgages or margin debt. However, PIMIX is 16.87% of my Portfolio, TQQQ 0.78% and real cash 0.51% Morningstar X-Ray says that means my portfolio is 6% short of Cash and 26% short of Bonds My 91 year old Mom, whose Portfolio I manage has 11.34% PIMIX with 2.81% real cash. X-Ray says she is -3% Cash and -18% Bonds So, there are other ways to smartly leverage oneself.
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Post by Capital on Dec 12, 2021 22:11:03 GMT
My hat is off to uncleharley for having a pension in his tools for retirement. Unfortunately for me that will never be a part of the story of my retirement. If it were to be so I might think differently about carrying debt into retirement. Just goes to further show us that there is never going to be a single right answer that works for us all. We each have different lives and situations and must make decisions based upon our specific circumstances. Even with assured income, it is not a good idea to carry debt with the sole purpose of investing. steadyeddy you are correct. Thanks for the reminder. Retire with no debt and sleep well at night. I look forward to those days. It's bad to lose money - even worse to lose borrowed money.
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Post by steadyeddy on Dec 12, 2021 22:45:14 GMT
retiredat48 , Neither I or my Mom have outstanding loans, mortgages or margin debt. However, PIMIX is 16.87% of my Portfolio, TQQQ 0.78% and real cash 0.51% Morningstar X-Ray says that means my portfolio is 6% short of Cash and 26% short of Bonds My 91 year old Mom, whose Portfolio I manage has 11.34% PIMIX with 2.81% real cash. X-Ray says she is -3% Cash and -18% Bonds So, there are other ways to smartly leverage oneself. Fearchar, PIMIX used to be the dah-ling fund for many years but of late not so much. What is your thesis in holding PIMIX? Is that your only bond holding? Thanks
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Post by Chahta on Dec 12, 2021 23:41:31 GMT
retiredat48, Neither I or my Mom have outstanding loans, mortgages or margin debt. However, PIMIX is 16.87% of my Portfolio, TQQQ 0.78% and real cash 0.51% Morningstar X-Ray says that means my portfolio is 6% short of Cash and 26% short of Bonds My 91 year old Mom, whose Portfolio I manage has 11.34% PIMIX with 2.81% real cash. X-Ray says she is -3% Cash and -18% Bonds So, there are other ways to smartly leverage oneself. PIMIX might be slightly leveraged. Buy CEFs and really be leveraged.
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Post by rhythmmethod on Dec 13, 2021 0:40:47 GMT
retiredat48 , Neither I or my Mom have outstanding loans, mortgages or margin debt. However, PIMIX is 16.87% of my Portfolio, TQQQ 0.78% and real cash 0.51% Morningstar X-Ray says that means my portfolio is 6% short of Cash and 26% short of Bonds My 91 year old Mom, whose Portfolio I manage has 11.34% PIMIX with 2.81% real cash. X-Ray says she is -3% Cash and -18% Bonds So, there are other ways to smartly leverage oneself. Fearchar , PIMIX used to be the dah-ling fund for many years but of late not so much. What is your thesis in holding PIMIX? Is that your only bond holding?Thanks Speaking for myself it would trigger a big CG. It's not what I'd buy now, probably, but for my purposes it's okay.
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Post by Fearchar on Dec 13, 2021 0:43:10 GMT
steadyeddy , PIMIX goes short (and long) both cash and bonds. That makes a lot of sense to me considering that current real interest rates are below zero for both cash and bonds. While there may be some bonds funds that also go short, I believe PIMCO has much more experience at it. Also, considering how small spreads are with high yields, I am not especially keen to take on a lot of credit risk. I realize that they have not been hitting it out of the park lately, but I'm owning them for both stability and reasonable long term returns. I'm open to considering other debt funds, but that is my thinking. It's the only Bond fund that I own.
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Post by steadyeddy on Dec 13, 2021 1:03:33 GMT
retiredat48 , Neither I or my Mom have outstanding loans, mortgages or margin debt. However, PIMIX is 16.87% of my Portfolio, TQQQ 0.78% and real cash 0.51% Morningstar X-Ray says that means my portfolio is 6% short of Cash and 26% short of Bonds My 91 year old Mom, whose Portfolio I manage has 11.34% PIMIX with 2.81% real cash. X-Ray says she is -3% Cash and -18% Bonds So, there are other ways to smartly leverage oneself. PIMIX might be slightly leveraged. Buy CEFs and really be leveraged. Chahta, yes many CEFs typically lead to NAV destruction in spite of the alluring distributions and prem/disc variability.
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Post by steadyeddy on Dec 13, 2021 1:04:24 GMT
Fearchar , PIMIX used to be the dah-ling fund for many years but of late not so much. What is your thesis in holding PIMIX? Is that your only bond holding?Thanks Speaking for myself it would trigger a big CG. It's not what I'd buy now, probably, but for my purposes it's okay. rhythmmethod, just so I am clear are you saying you have PIMIX in a taxable account and want to leave it alone because of CG taxation?
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Post by steadyeddy on Dec 13, 2021 1:06:26 GMT
steadyeddy , PIMIX goes short (and long) both cash and bonds. That makes a lot of sense to me considering that current real interest rates are below zero for both cash and bonds. While there may be some bonds funds that also go short, I believe PIMCO has much more experience at it. Also, considering how small spreads are with high yields, I am not especially keen to take on a lot of credit risk. I realize that they have not been hitting it out of the park lately, but I'm owning them for both stability and reasonable long term returns. I'm open to considering other debt funds, but that is my thinking. It's the only Bond fund that I own. Fearchar, thanks for a thoughtful response. I am now with Fidelity where PIMIX is not available (I do not want to own the other classes of that fund due to ER). If I want to buy it, I need to go to Vanguard and buy it there for $25K minimum or Schwab for $100K minimum. I have reduced my bond holdings quite a bit and now hold half IT bond and half ST bond index ETFs.
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Post by Fearchar on Dec 13, 2021 1:14:19 GMT
Chahta , Actually, CEFs take on more risk than they do leverage. Here is a comparison of two 90-10 portfolio's 90% IYW: 10% PIMIX Long 118% = 3% Cash, 89% US Stocks, 1% Foreign Stocks, 25% Bonds Short -18% = -3% Cash, 0% US Stocks, 0% Foreign Stocks, -15% Bonds NET 100% = 0% Cash, 89% US Stocks, 1% Foreign Stocks, 9% Bonds 90% IYW: 10% PDI Long 117% = 5% Cash, 90% US Stocks, 1% Foreign Stocks, 21% Bonds, 1% Other Short -17% = -15% Cash, 0% US Stocks, 0% Foreign Stocks, -2% Bonds NET 100% = -10% Cash, 90% US Stocks, 1% Foreign Stocks, 19% Bonds, 1% Other Now, I've already noticed that Morningstar's NET math is off by 1 (+/-). However, the largest difference between the 2 versions is primarily in the NET exposure to Bonds (=Risk).
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Post by Chahta on Dec 13, 2021 2:02:43 GMT
steadyeddy , PIMIX goes short (and long) both cash and bonds. That makes a lot of sense to me considering that current real interest rates are below zero for both cash and bonds. While there may be some bonds funds that also go short, I believe PIMCO has much more experience at it. Also, considering how small spreads are with high yields, I am not especially keen to take on a lot of credit risk. I realize that they have not been hitting it out of the park lately, but I'm owning them for both stability and reasonable long term returns. I'm open to considering other debt funds, but that is my thinking. It's the only Bond fund that I own. Fearchar, thanks for a thoughtful response. I am now with Fidelity where PIMIX is not available (I do not want to own the other classes of that fund due to ER). If I want to buy it, I need to go to Vanguard and buy it there for $25K minimum or Schwab for $100K minimum. I have reduced my bond holdings quite a bit and now hold half IT bond and half ST bond index ETFs. $1000 min at Schwab. Just $49.95 TF.
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Post by steadyeddy on Dec 13, 2021 3:17:13 GMT
Fearchar , thanks for a thoughtful response. I am now with Fidelity where PIMIX is not available (I do not want to own the other classes of that fund due to ER). If I want to buy it, I need to go to Vanguard and buy it there for $25K minimum or Schwab for $100K minimum. I have reduced my bond holdings quite a bit and now hold half IT bond and half ST bond index ETFs. $1000 min at Schwab. Just $49.95 TF. Chahta, thanks. Looks like min is $2,500 but still thanks for the info.
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