Student loans as part of my retirement portfolio

[lucas]

I have a majority (95%) of my portfolio (nontaxable and taxable) in stocks (including REITs) and have been interpreting my student loans (2.75%) as the “bond” portion of my portfolio.  This puts my stock/”bond” portfolio at about 67% stock and 33% “bond”.  With my goal of 70-75% stocks at this time of my career, my current portfolio still pushes me to increase my stock portfolio and continue to minimize my student loan payments.

Does this seem like a reasonable approach to anyone else or am I way off base here?  I realize the same portfolio approach could be made with a mortgage (which I still have btw), although I don’t think I would be that bold especially considering the tax deduction to be made with the already low rate mortgage.  I was very aggressive early on paying off the 3.5%-8% loans that my wife and I originally had, but now don’t feel quite the urgency; i’m more inclined to improve my retirement portfolio, and now that the stock market is falling i’m going to be pushed to put even more into stocks and let the loan linger.  Although with my “bonds” fixed at 2.75%, maybe this isn’t the most realistic approach to keeping a balanced portfolio?

Thoughts?

[The White Coat Investor]

While paying down loans is similar to investing in bonds, I certainly wouldn't count the value of a debt as the fixed income portion of your portfolio. It's a NEGATIVE bond if anything. For example, if your student loans were equal to your portfolio, I wouldn't say you had a 50/50 portfolio, I'd say you had a 200/0 portfolio.

[lucas]

yeah, soon after I posted this I started realizing this probably wasn't going to be very effective since paying off my student loan would only worsen that portion of my portfolio instead of bringing it to my desired %.  Maybe a better approach would be to purchase stocks and payoff the loan at the desired portfolio % i'm going after.  ie, take 70% to purchase stocks and the other 30% payoff the loan.  Although then i'm left with the dilemma of being around 95% stocks by the time i'm done paying the loans.  From there I guess i'll increase my bond purchasing over the course of a year or 2 until i'm at my desired portfolio.  Seems a little risky though and I do hate the thought of adding bonds instead of additional stocks to my portfolio in this bear market.

[The White Coat Investor]

lucas wrote:

yeah, soon after I posted this I started realizing this probably wasn’t going to be very effective since paying off my student loan would only worsen that portion of my portfolio instead of bringing it to my desired %.  Maybe a better approach would be to purchase stocks and payoff the loan at the desired portfolio % i’m going after.  ie, take 70% to purchase stocks and the other 30% payoff the loan.  Although then i’m left with the dilemma of being around 95% stocks by the time i’m done paying the loans.  From there I guess i’ll increase my bond purchasing over the course of a year or 2 until i’m at my desired portfolio.  Seems a little risky though and I do hate the thought of adding bonds instead of additional stocks to my portfolio in this bear market.

Click to expand...

95% stocks is less risky than 200% stocks, which is where you might be at now.
If you don't want that much risk, then start buying bonds as soon as the student loans are paid off. I agree there is little reason to buy bonds when you have 6% student loans you could be paying down instead, except that you want to be maxing out retirement accounts and it doesn't do you any good to carry a portfolio more risky than you can sleep at night with.

[Zaphod]

I would simply drop this analogy altogether as its very confusing and absolutely separate. Student loans are a liability on your net worth balance sheet, investments are an asset. There is no rational/sensible way to combine it, and doing so is more likely to confuse the situation and alter behavior to the negative.

[Matt]

You also need to consider the role that bonds play in your portfolio.  Sure, they provide a fixed rate of return (to an extent), which your strategy does as well.  However, they also give you some "powder in the keg", in other words, if there is a big stock correction and it throws your allocation out of whack, and you need to buy some stock, you can sell some bonds (which you are now overweight in) in order to do so.  You have no such option.  What you're really doing is investing on margin and slowly de-leveraging.

[wbenutley]

When you own an asset and you owe a liability, you are using leverage, regardless of whether or not the asset secures the debt. Leverage can be a problem when (a) the asset loses most or all of its value and (b) either the debtor has no other means to repay the liability or the liability is called due and payable on short notice.

To be certain, leverage brings more risk even as it offers the opportunity for greater reward but most people simply lack the tolerance required to sustainably and successfully bear this level of risk.

Physician Family financial Advisors Inc.