Investing within your Comfort Level

Aug 2017


I recently met with some new clients. They were both in their mid-60s and because of his health, he decided to retire. His wife, on the other hand, will continue to work for a few more years. His pension, along with his wife’s salary, will more than cover their living expenses. Therefore, income is not a problem. As I was reviewing their situation I noticed that they had a substantial amount of money in cash. Between their checking, savings, and CDs, they had nearly $200,000 in cash. When I asked them about it they explained that they have always had a lot of cash and that it made them feel comfortable. As they were explaining this to me it was almost as if they felt guilty and needed to justify keeping that much money in cash.

I explained to them they shouldn’t feel guilty at all. After all, money should bring you comfort and if keeping a lot of money in cash buys you comfort, then it’s doing its job. I never understand people who make investments in things that they know will cause them discomfort; it just doesn’t make sense. I have always said that one of the key ingredients to being a good investor is to stay within your comfort level. I don’t invest in certain things because it makes me feel uncomfortable; therefore, I avoid those investments and I recommend that if there’s any investments you feel uncomfortable with, you also avoid them.

We all know that the return banks are paying is incredibly low. That doesn’t mean you should take your money out of the bank and invest in things you don’t feel comfortable with. However, it also doesn’t mean you should just let the money sit in the bank, getting a very low rate of return. You need to look outside the box for ways that you can be more productive with your money. In the case at hand, I recommended they take some of their cash and pay off their mortgage. The clients’ interest rate on their mortgage is 4¾ percent and they owed about $100,000.

When I mentioned to the client about paying off their mortgage, they looked at me in stunned silence. Their question to me was, don’t we need the tax breaks?

As I explained to them, they should never let the tax tail wag the dog. I’ve always believed that you should never do anything for tax reasons and tax reasons alone. Rather, you should do things that make good economic sense. As I explained to them, even after taxes their mortgage was still costing them over 3½ percent. I then said that their money in the bank after taxes was paying well less than one percent. Therefore, by paying off their mortgage they were increasing the return on that money by over 300 percent. Of course, the real issue was whether they would feel comfortable reducing their cash in half. Both husband and wife felt extremely comfortable with taking the money and paying off their mortgage, which is exactly what they did.

Americans are keeping a substantial amount of money in banks. Whether they are afraid to invest with the stock market at record highs or they just feel comfortable in cash, I don’t know. However, one thing I do know is that you should never invest outside of your comfort zone but at the same time, you need to look for opportunities to be more productive with your money. Therefore, if you are sitting on a lot of cash and you don’t feel comfortable investing in stocks, you need to look for other opportunities and one of the best uses for that money is to pay down debt. Yes, if you pay off your house you may lose some tax deductions; however, you’ll end up having more money in your pocket and as far as I am concerned, it always looks better in your pocket than it does anywhere else.

Good luck!

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