As fiduciaries we are obligated to act in our clients’ best interest. We often answer the call by providing recommendations that are conditional rather than absolute, because as economists we recognize that perfect solutions are rare – more often there are only trade-offs to be evaluated. These trade-offs, furthermore, vary among clients.
A lack of concrete answers does not mean analysis is useless. To the contrary, economic reasoning is extremely valuable. It eliminates extraneous considerations and allows one to determine an optimal course of action based on reason, given the uncertainties at hand.
It is the advisor’s duty to understand his client’s goals and objectives and help form a decision framework built only on relevant factors. We try to clarify the question at hand and identify and isolate all pertinent costs and benefits. In the process we separate emotional considerations – not to discard them, but to encourage clients to recognize them. These crucial “intangible” considerations are usually not measurable. But once acknowledged they can be considered against hard realities, many of which can be quantified with the advisor’s assistance.
This month we describe such a framework for homeowners wondering whether to pay off their mortgage ahead of schedule – a decision fraught with challenging trade-offs. We employ several tools of the economics trade. For example, more than once we use the phrase “all else equal” to assess how a single variable among many might affect this decision. Economics is social science – unlike natural scientists we cannot evaluate the impact of changing one variable while holding others constant – we have no Petri dish at our disposal. So instead we use this device (often invoking the Latin phrase “ceteris paribus”) to consider cause and effect.
While prudent investors will be satisfied with this methodology, those looking for a quick answer (e.g., “Pay Down Your Mortgage Now!”) will doubtless be frustrated. As a title, that phrase would certainly draw more attention. But we are content to serve a thoughtful, even if smaller, cohort of readers.
There are, unfortunately, predators in our industry who take the opposite tack, by proclaiming certainty in a world of risk and by playing upon the human tendencies of greed and fear. We hope the Investment Guide will help you to avoid such gambits.
Also In This Issue:
When Does it Make Sense to Pay off a Mortgage
Quarterly Review of Capital Markets
The High Yield Dow Investment Strategy
Recent Market Statistics
Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles
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