By taking extra money and investing it in the stock market, one is forgoing a risk-free return on their money in favor of an investment that’s inherently risky.  This isn’t necessarily a bad thing, provided that the investor understands that the potential for greater returns comes at the expense of increased risk to their hard-earned capital.  Only by dialing up the risk do we up the potential for higher returns.  This is the reason comparing the long-term return of stocks to the risk-free return of prepaying a loan is unwise.  Instead, I suggest comparing the loan prepayment return to that of another risk-free investment such as a treasury bond or CD.  When you make an apples to apples comparison you’ll see that prepaying the loan isn’t such a bad choice.

Remember, most of the truly disastrous financial mishaps in history were caused as a direct result of ignoring risk.  If risk was accounted for properly on Wall Street and Washington we wouldn’t be in our current situation.  Always be sure that you understand the risks before making a financial decision.

***This post is referring to individuals who are already fulfilling their financial obligations (i.e.: they have no high-interest debt, have an emergency fund, and are already contributing to retirement accounts.)  Thus they are asking what to do with additional free cash from earnings or perhaps even a windfall such as an inheritance***