Investing is not gambling

Posted: Jul 11, 2006 12:00 AM

I am forced to write this column about this subject more often than I would like. However, the mere mention of extraordinary profits has ordinarily sensible individuals ready to jump off of high buildings, figuratively speaking, to reap the gold. Unless you are Superman (or Superwoman), I wouldn't jump down from a step stool for fear of twisting something that may not go back in place. I hope this paints a picture prior to my discussion!

A client wrote me at and told me about a plan a mortgage broker proposed to him. He has about $200,000 in equity in a rental and is being told to pull out $150,000 for investment. The message was "You can't let that equity sit there and not work for you." You actually can let it sit there and work for you if it is part of your retirement plan or another financial plan. But I digress.

The awful part of the message, as if the aforementioned was not bad enough, was the advice for the client to give up a 7 year arm with 3.5 years to go at 4.75% and take an option arm. If you are not familiar with an option arm, it is a loan that gives you four options each month: three of the four options have interest rates that are higher than you can get almost anywhere else and the fourth one creates negative amortization. This means that your balance goes up each month by the difference between what you pay and the interest only amount you should pay based on the interest rate. This also leads to paying interest on the interest you haven't paid. To sum up the interest rates for these types of loans are in the high 6% range to the low 8% range.

The broker also projected an anticipated cost (loss) of about $20,000 over 5 years.

This number is based on absolutely nothing that can be substantiated. Don't gamble; stick to your plan. If you really don't have a plan or you are confused about a wonderful scheme cooked up by someone who is trying to sell you something, write to me at and I will assist you in keeping your best foot forward on the Road to Financial Freedom.