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Loan: 150,000, interest rate: 1.62%, period: 30 years, so monthly payment is about 700. Investable amount per month: 7000. (Don't need to take the returns from the investments to pay the loan.)

I want to know under the settings, paying back the loan as much as possible earlier (more than 700 per month) or investing (in passive ones like S&P 500 or individual stocks) as much as possible is better. My objective is to earn as much as possible with reasonable risks. I feel the rate is relatively low (beating 1.62% with index fund might not difficult?) and don't need to repay earlier.

  • An important consideration is how disciplined you are about investing the money you would have spent on the loan. If you go with this scheme I'd strongly recommend having it auto-invested without you having to actively do anything. For example a 401k plan at work. – JohnFx Dec 24 '18 at 17:36
  • @JohnFx Agree. Sounds auto-investing is a good idea. – DougT Dec 25 '18 at 8:16
  • once we admit our default setting is laziness, we can exploit that to substitute for actual discipline. :) – JohnFx Dec 30 '18 at 17:26
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My objective is to earn as much as possible with reasonable risks.

What do you consider "reasonable" risks? S&P returns have fluctuated between -30% and +40% per year, but has averaged about 10-12% per year. So on average you'll come out ahead, but there are years where you'l lose much more in the equity market. And that's provided that you reinvest earnings (meaning you don't pull out dividends and earnings). If you need the returns from your investments to pay the mortgage, then it is definitely not worth the risk.

Or, consider the alternative. With 7,000 per month investible income, you could pay off the mortgage in 20 months, then you can invest with NO debt, have a paid-for house, and can afford to take bigger risks.

  • +1. Your only real option here are perfectly safe investments so that you won't have to pull out your money at a (possibly huge) loss to pay off the mortgage should something happen that stops your income. – xyious Dec 24 '18 at 16:43
  • Don't need to take the returns from the investments to pay the loan, so maybe the risk tolerance level is relatively high. – DougT Dec 25 '18 at 4:26
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beating 1.62% with index fund might not difficult?

The one year return on SPY is -12.4% right now. The chart is below. This has nothing to do with difficulty. Difficult implies you matter to the equation. Moving a desk might be difficult. Whether or not an investment beats an interest rate is about probability. Whether or not you'll need or want the this money or cash or something else is about probability, not difficulty.

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I'm about as allergic to debt as it comes but 1.6% probably isn't enough to really be concerned about.

With that in mind, an 'index fund' is not 'safe'. Index funds are just the en vogue equity advice of the moment. Index investing is statistically the best way for the average person to maximize long term passive returns. Investing in a fund that tracks an index like the S&P500 is safER than buying a couple companies for reasons like you think Nike shoes are nice for essentially two reasons:

  1. The average person doesn't have the funds to buy a sufficiently diversified portfolio regardless of the reasons for choosing the companies.

  2. Non index tracking funds tend to be a lot more expensive. The bigger index funds like VOO or SPY have borderline negligible expense ratios, maybe 0.05% while an active managed fund might charge 0.75%. Extrapolate that cost over 10, 20, or 30 years and you've given up a lot of money to the manager.

Index funds are, however, not safe from losses. No matter what you do, you should always always always have a foundation of SAFE investments; something like a ladder of treasuries. Build a foundation of non-sexy safe investments.

I would not over prioritize repaying a 1.6% loan with interest rates rising as they are right now. In my opinion, right now, when 90 day treasuries are paying 2.3% (nearly double your interest rate) you would be better served by simply hoarding cash to ensure that you certainly don't take a car loan or other loan for any reason. Once you have a SAFE foundation, start clicking up the risk.

If your focus really is to 'earn as much as possible with reasonable risks,' just pay the loan faster. Because the rest of your question indicates that you don't really appreciate the risks.

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