Question:
My wife and I are very upset by the recent market decline.  Some of our mutual funds are down more than 25 percent since last fall.  We are five years away from retirement and plan to pay off our mortgage by the time we retire.  My wife feels strongly that the money in our funds would be put to better use paying off the mortgage instead of losing money in the market.  Does it make sense to do this? If so, how do I determine which funds to sell and which to keep?
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Paul Merriman:
I have been involved in the investment industry since 1966, and I’ve seen over and over that every time we go through a bear market, many investors wish they had done something else with their money. Many other people are asking themselves the same thing you are.
 
Without knowing your personal situation, I cannot make a specific recommendation. But here are some general guidelines to help you think about this.

First, I agree that it’s smart to pay off your mortgage by the time you retire. One good way to do this is by making extra principal payments regularly after you have maxed out your 401(k) and IRA opportunities.
 
Second, this market decline is not severe enough that it should make any long-term investor “very upset.” This makes me wonder if you and your wife have the right balance of stock funds and fixed-income funds so that your portfolio stays within your risk tolerance. With five years until retirement, you should not be pushing the envelope to try to squeeze out extra long-term returns. I suggest you read an article on our web site called “Fine tuning your asset allocation,” which can help you with this. I believe that most of the investors who are upset today are ones who have not given enough attention to this topic.

Third, with only five years to go before retirement, you should know now how much you will need from your portfolio to meet your cost of living once you retire. There’s a chapter in my new book that tells how to get a good handle on this. The book, “Live it Up Without Outliving Your Money,” would be worth your while anyway. Here’s an article that tells you more about what’s in the book. You may already have plenty of money and be able to continue making the mortgage payments if you choose. This is something you should know now.

Fourth, if you are going to sell some funds, don’t just sell the ones that you think are “losers” because they have disappointed you. First determine what your overall asset allocation should be, then sell the combination of funds that will take you closer to that allocation.

Fifth, for another thoughtful perspective on this topic, here’s an article we wrote last fall on the topic of paying off the mortgage from a lump sum of money.  

Finally I think this would be an excellent time for you to have professional help with these matters. Many firms offer a free initial consultation with a seasoned financial advisor who has dealt with these issues before. Our company offers this service at no cost or obligation, and I hope you will consider taking advantage of it.

I hope you and your wife can use these resources to find peace of mind and meet your needs.

Paul Merriman is a financial educator and founder of Merriman