From S. Fox: “I was brought up to distrust the stock market. But a good friend of mine at Merrill Lynch has been trying to get [me] to try it out for awhile. In the long run (I am only 26), would I be better off putting some in the market, or putting extra cash I have into my house?”

A.T.: In the very long run, stocks will way outperform houses, for the most part. Except that, wait — maybe not. A house might appreciate at 3% a year, but if you bought it with only 20% down, then your cash investment is appreciating at 15% a year. (Right? You paid $20,000 in cash to buy a $100,000 house. It appreciates $3,000 — 15% of your $20,000 investment.) Not bad compared to the historical 10%-or-so return from stocks (appreciation plus dividends).

But you’re not comparing buying stocks with buying a home — you’ve already bought one. You’re comparing buying stocks with paying down your mortgage, or else with making some home improvements (I’m not sure, from your message, which). Paying down the mortgage is like getting 8% risk-free, if it’s an 8% mortgage — not bad at all. Remodeling the kitchen or putting in a pool is less likely to provide a positive return when you sell, but may well increase your enjoyment of the home while you live there (once the inconvenience of living with the construction and the frustration of dealing with the contractor have lifted and your blood pressure returns to normal).

But there’s little question that it would be terrific for you to get into the habit/discipline of putting $100 or $500 every month — whatever you can comfortably afford, gradually increasing it as your income allows — into one or two low-expense, no-load mutual funds, or directly into stocks. A lifetime of steady investing is something you will almost surely be happy, years from now, that you embarked on.

But never borrow to invest. Pay off your credit card balances and car loans (but not your low-interest, tax-deductible home mortgage) first.

And keep your expenses and transaction costs low. Sorry to be the heavy with your friend at Merrill Lynch — I know he/she means well and has to eat, too — but feeding him is an unnecessary and unwise expense that over the years will drag down your investment performance. (For more on all this, go to the library — lest you feed me — and get my book, The Only Investment Guide You’ll Ever Need. I think it will answer a lot of your questions.)



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