What I dont understand about the comment is that if someone couldnt be trusted to invest their money and behavioral factors would lead them astray, how come they will pay down student loans instead? It makes no sense whatsoever. If there is something peculiar or unique about paying debt vs. investing what is it?
I missed this quote earlier. The behavioral factors that lead them astray is this:
Short version: They invest just fine when the market is up for 10 years. Comes the crash, they sell everything and stay in cash, forever locking in their losses, never to return.
Long version: Sure, they are really good at putting money into the market every day while is slowly goes up. He does it like clockwork. Then one day it drops 3%. Scary, but they can handle it. Then it drops 10% next week. Now he's really worried. Then 10% the next week. Really worried, but he read about this. Meanwhile half his friends have sold everything. Now it goes down another 10%. Maybe he should sell some? His wife is screaming at him. Their kids have to go to college in a few years. Now it drops 20% more. He sells. He can't afford to lose anymore. Maybe it goes down another 20%. He's afraid to jump back in. Over the next few years he keeps his money in cash. The market goes up, but all the commentators on tv are all doom and gloom. It's now 10 years later, the market is 20% higher than it was before the crash, but the commentators still keep predicting recession, so our friend is still in cash.
Sadly, not only do I know people like this, I know doctors like this. Most of them in fact.
Were you invested in 2000? In 2007? If so, how much? And how far out of residency. Because if you had $10,000 in the market, that's a different experience than 5 million. If you're 25 years from early retirement, that's different from 65 wanting to retire next year.
I actually showed that with a rate 50% less than the loan the investing came out ahead. It appears you just ignored the whole thing.
I honestly don't follow your numbers or logic at all. Maybe you can't follow mine. But I think that once again you you didn't account for the fact that the money that you put towards the loan is money that has to come out of your other investments. I also think that you're assuming that after paying off the loan you stop investing that money. That's not the case. The whole point as I indicated in my example of paying off the lump sum, is that any money not need for the loan payments is instead invested.
The loan won't compound, because you paid off the monthly interest accrual. But the money you use to pay off the loan isn't in your accounts anymore, so your equivalent asset can't compound grow either.
If you pay off the loan principal, it decreases your assets, so they can't grow and give you interest. But by paying down the principal, the amount of interest you have to pay goes down as well. If those interest rates were the same, it's a wash. It's the same for any dollar amount.
IF you account for the lost opportunity costs of the loan, its a wash.
Let's say you have all your assets in Vanguard. Some are mutual funds, some are bond funds, some is your emergency fund. They are all earning interest. Maybe some are earning more interest, some less. All are compounding, unless you are spending the interest from that particular account.
In another bank you have your mortgage. You owe principle and interest every month. So in order to stop your loan from defaulting, or compounding (negatively amortizing) you have to come up with the interest payment. That money has to come from your investment account. Whichever account you pull it from will
stop that account from compounding. You lose the compounding of that money forever. So as long as you have the loan, your comparable investment will not be able to compound. That account will grow in the future, but it will always be behind.
You also have to make a principle payment that month. Whatever money you take out to pay the principal you owe on the loan will decrease your assets by the same amount.
You will lose the future growth of that asset money forever. However, your net worth won't change, because while you have decreased your assets by that fixed amount,
you have simultaneously decreased your debt by that same amount. So you net worth won't change when you pay off your monthly payment. By paying off , let's say $1,0000 of your loan, you lose $1,000 of money that would have been earning you interest forever. That's terrible! But meanwhile, you have also paid down $1,000 of you loan. Now you won't have to pay the interest on the $1,000, that you would have had to pay forever. That's wonderful! For any given amount of money, whether it's $1 or $1 million, you are simply transferring your asset from one column to another. Your net assets stay the same. Meanwhile, when you make a principle transfer, the money that was generating interest in your favor now goes over to the debt column and decreases the growth of your debt by that same amount.
Before, the asset was pouring money into your account, but the loan was draining it out the bottom. By moving the asset to the loan, the hole draining the money gets plugged. If the rate at which the money was pouring in and out is the same ( ie interest rate) then the amount by which you plug the hole will have no net effect on the total assets.
The loan doesn't compound, because you paid the interest off immediately.
However, you asset won't compound either, because you spent the interest that would have compounded to pay the loan.
This is quite clear. I showed it with numbers, and I showed it with words. You may not understand it, but I think most everyone else will.