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A Big Overlooked Risk in Paying Off Your Mortgage Early

Anyone who invested in the stock market during the late '90s or early 2000s lost money on their initial investments over the following 10 years. But even in cases where the stock market's average annual return lags your mortgage rate while you rapidly pay down your debt, you might still end up ahead in the long run if, instead, you invest while paying off your mortgage slowly. Because periods of poor returns are often followed by periods of better-than-average returns, those choosing to invest over paying down their mortgage see a greater benefit from those bigger returns by already having a significant amount invested in the market. A good sequence of returns in the accumulation phase could mean a lot more money in your portfolio by the time you're ready to retire. People retiring in January of 2000, for example, would have had a terrible time in retirement as the stock market crashed about 30% over the next 20 months or so. That's a poor sequence of returns, and it's why investors usually diversify away from stocks as they near retirement and in the first few years after retirement. If you invested the same amount every month in an S&P 500 index fund from January 2000 to January 2010, you earned an average annual return of 1.6%. If you kept investing the same amount per month through today, you'd earn an average annual return of 9.2%. How paying off your mortgage early increases your risk If you choose to pay down your mortgage debt instead of invest, you'll end up compressing the accumulation phase of your investment portfolio into a shorter period. The shorter your accumulation phase, the greater the risk of a poor sequence on your portfolio.