Go Not to the Elves for Counsel

Early in Tolkien’s telling of the Lord of the Rings, Frodo and his little band meet some elves in the woods. In the course of their discussion of the current situation and possible future events, Frodo has occasion to quote the Proverb, “Go not to the elves for counsel, for they will say both no and yes.”

Laughing, the leader of the elves replies, “Is it indeed? Elves seldom give unguarded advice, for advice is a dangerous gift, even from the wise to the wise, and all courses may run ill.”

I do not believe in one size fits all answers to questions of personal finance or any important component of the good life. There are some immutable principles like debt is a curse, but how you work out the details of your life is ultimately your business.

Consider the question, “Should I pay off my mortgage early or use that money to save for retirement?” The answer depends on your personality as well as your understanding of your current and future condition. I hate and fear debt. When I was working off my 30 year mortgage, rates stood at 9%. To me paying down that 9% loan rather than doubling down on retirement savings was a no brainer. I still believe I made the right decision. Not only did I get my house paid off in less than 10 years, but I avoided the dotcom crash of 2000. Not all my coworkers were so lucky. The decision was the right one for me at that time, but the outcome contained a measure of luck.

Let us move the clock forward 25 years to the present. A hypothetical young couple paying down a 3% fifteen year mortgage face the same question, “Should we pay off the mortgage or invest the money for our retirement?” Now the question becomes a lot harder. A 3% mortgage is almost unbelievably low. Who would be in a hurry to pay off such a loan? Siegel’s constant tells us we can expect 7% to 7.5% return on our investments in the market over sufficiently long periods of time. It looks like it is time to double down on the 401(k).

Or is it?

This morning the Shiller PE Ratio stands at 25.6. Historically that is a dangerously high number signaling a correction or possibly even a crash. But will it happen this year? “Don’t fight the Fed,” is right up there with, “Don’t spit into the wind,” as sound advice. The Federal Reserve Bank is doing everything in its considerable power to keep the Shiller PE Ratio at artificially high levels. Maybe it is a good time to invest? Or not? John Hussman, the erudite manager of a family of funds, using very sophisticated predictive tools is looking at a 2% return on a balanced portfolio over the next ten years.

If the bank thought it could get a guaranteed 7.5% in the market over the next fifteen years would they lend money to you at 3%?

If you job security is a little on the shaky side, maybe paying down that mortgage would be the safer path? If you have a very secure job it might prove a good time to roll the dice with your 401(k). Although it doesn’t feel like it, at your young age you are playing with relatively small amounts of money over very long time periods. The odds of reaping Siegel’s promised rates of return by your 65th birthday are pretty good. If you are close to retirement and still carrying a mortgage, I might recommend a different path.

I want to teach myself and my readers how to make wise decisions. Ultimately, we all need to make our own financial decisions and accept personal responsibility for those decisions. I can’t make those decisions for you any more than you can make my decisions for me. Be comfortable with who you are. Walk your chosen path to the best of your ability in the light given to you by our Lord and Savior.

Then, perhaps, one day we can say with confidence:

2nd Timothy 4: 7-8

I have fought the good fight, I have finished the race, I have kept the faith. Now there is in store for me the crown of righteousness, which the Lord, the righteous Judge, will award to me on that day—and not only to me, but also to all who have longed for his appearing.