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Putting the "40" of the 60/40 portfolio allocation into your house?
Old 11-18-2010, 09:43 PM   #1
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Putting the "40" of the 60/40 portfolio allocation into your house?

Well, I'm trying it. Instead of buying a bunch of dumb 3% bonds, I've put my 40% "safe" portion of my portfolio into a big ole' house. I figured this is pretty bottom of the market (and got my house at about half of the appraisal) so it can't improve any worse than those bonds. Can it?!
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Old 11-18-2010, 09:47 PM   #2
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One question in my mind is if you can retrieve cash from your house when you want to. HELOCs are hard to come by nowadays.
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Old 11-18-2010, 09:47 PM   #3
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A house isn't a substitute for bonds, it's real estate. Not saying there is anything wrong with investing in RE, but you are comparing apples and oranges.
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Old 11-18-2010, 10:13 PM   #4
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With bond funds I feel like I have the same market risks as stocks. When they talk about not having all your egg in one basket- I think a stock/bonds portfolio is just that-they may be different investments but they are still eggs.

I feel your logic. If I believed it I would be living in Alexandria by now. The trouble with real estate is it costs more then the initial investment-you have to feed it in maintenance and taxes. But it is a roof over your head and if it's something you love-then you did the right thing.
I'd rebalance the remaining financial portfolio to stocks and cash.
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Old 11-18-2010, 10:40 PM   #5
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Bonds often behave very differently than stocks do. By having some of each, you can reduce the overall volatility of your portfolio by rebalancing. I'm not sure how you do that with a house, unless you sell a room when the price goes up. Your profile shows that you are retired, so I assume you are drawing down your portfolio to pay living expenses. Most folks have a few years worth of "cash" (MM funds, CDs, etc) that they can live off if stocks are down, so they don't have to sell their shares at a low share price. Likewise, having bonds gives you another different asset type to sell if the stock market is down.

Is this house you're buying your personal residence or an income property? If it's your residence, then it's only something you live in, not a part of your investment portfolio that can be readily tapped. If you've invested your "bond 40%" in your residence, then is your remaining portfolio 100% stocks? Does that seem like a prudent investment allocation for you?
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Old 11-19-2010, 04:12 AM   #6
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Assuming you are describing paying off your home that you live in...

IMO - Paying off debt is a fine goal... But a home is not an investment.... It is a consumer purchase and long-term expense. If you do not put money back into it... the value falls relative to the state of the home. As long as you are alive... you have to fund some sort of living space. At best, the home has a residual value after you are done using it and sell it or your heirs sell it.

On the other hand Stocks and Bonds are investments. If you do not understand MPT and asset allocation and the benefits... educate yourself.


If you want to pay off your home with investment, that is a personal decision... but conventional wisdom would guide you to then rebalance your portfolio to your asset allocation of Stock and Bonds for the long term. (assuming you are not planning on trying to time the market).
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Old 11-19-2010, 06:28 AM   #7
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If this is a second house, are you intending to rent it or keep it as a vacation house and wait to sell it at a higher price? How much does it cost to maintain a big old house?
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Old 11-19-2010, 07:24 AM   #8
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There are many discussion that have ensued here about investing vs. paying off a house. In our family we don't consider our house an investment as we live here and have nowhere else to go. If your plan is to sit it out then sell, you could wait a long time for this real estate market to go up. Our house was at it's purchase price for years before it started to appreciate, but we were very happy living here. I don't consider real estate any less risky than bonds from what I have seen.
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Old 11-19-2010, 07:32 AM   #9
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In our family we don't consider our house an investment as we live here and have nowhere else to go.
Same here.

A house is a place to live (assuming it is your primary home and is not an additional one that you are using as an investment opportunity).

Our retirement portfolio consists of equity/bond funds, along with substantial cash assets that are targeted/used for retirement income. That target AA is set at 50/50 (50% equity funds, 50% bonds & cash).

While our home is part of our "terminal estate net worth" (along with personal assets, which will be sold at auction for pennies on the dollar after we pass), it has nothing to do with income considerations while we are still on "this side of the grass" and in retirement.

Just our way of looking at it...
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Old 11-19-2010, 10:04 AM   #10
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Well, I'm trying it. Instead of buying a bunch of dumb 3% bonds, I've put my 40% "safe" portion of my portfolio into a big ole' house.
It's hard to justify owning 3% bonds if you're paying a 5% mortgage.

But I don't think the purchase of appreciating land or depreciating construction materials is the equivalent of the bond asset class. The biggest advantage of owning this large illiquid "asset" is that it keeps us from chasing other dumb assets.
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Old 11-19-2010, 12:43 PM   #11
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Can't rebalance your portfolio if the fixed income is all one house. For me, the fixed income side should be available to spend down completely in the event of a protracted market meltdown. I can see where a small investment property might work in some cases, though not for this real estate led recession. That might mean you're safe for the next one though.
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Old 11-19-2010, 08:15 PM   #12
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It's hard to justify owning 3% bonds if you're paying a 5% mortgage.

But I don't think the purchase of appreciating land or depreciating construction materials is the equivalent of the bond asset class. The biggest advantage of owning this large illiquid "asset" is that it keeps us from chasing other dumb assets.
No mortgage, I paid cash.

(And I'm in my early 40's so can handle higher risk/potential return, not too concerned about that I guess).

I suppose was mostly curious how others figured in their home equity as part of their total investment portfolio. Interesting that some don't even consider it. Those are informative posts above, thanks everyone!
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Old 11-20-2010, 08:05 AM   #13
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I suppose was mostly curious how others figured in their home equity as part of their total investment portfolio. Interesting that some don't even consider it. Those are informative posts above, thanks everyone!
I wouldn't consider home equity in my personal residence as part of my portfolio. Real estate in the form of rental properties, on the other hand... I would. If I owned any of it.
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Old 11-20-2010, 10:16 AM   #14
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No mortgage, I paid cash.

I suppose was mostly curious how others figured in their home equity as part of their total investment portfolio. Interesting that some don't even consider it. Those are informative posts above, thanks everyone!
Most don't consider equity in AA. Unlike stocks or bonds it is less liquid. I also think it is harder to quantify the equity. As another poster said, if you need to rebalance to get to your desired AA, you can't sell off part of the equity.


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Old 11-20-2010, 11:11 AM   #15
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No mortgage, I paid cash.

(And I'm in my early 40's so can handle higher risk/potential return, not too concerned about that I guess).

I suppose was mostly curious how others figured in their home equity as part of their total investment portfolio. Interesting that some don't even consider it. Those are informative posts above, thanks everyone!
I never considered our house in the AA for retirement investments even though we had no mortgage. However, we sold it end of 2003, became renters and the proceeds from the house are now part of the AA.
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Old 11-20-2010, 12:36 PM   #16
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A house isn't a substitute for bonds, it's real estate. Not saying there is anything wrong with investing in RE, but you are comparing apples and oranges.
+1 The idea of equating real estate and bonds is pretty perplexing.

Here in the South I suspect that not many would include their assumptions of home equity in their portfolio; a home (here) is a place to live. It's probably different in places like California, where a few years ago some folks spent everything they could scrape together or borrow to buy expensive homes in order to ride the market up.

When I was years from retirement, I didn't have anything in bonds either. Nothing wrong with that when you are dealing with a long time frame.

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I suppose was mostly curious how others figured in their home equity as part of their total investment portfolio.
I don't consider it at all. My house is fully paid off, and I intend to sell it and buy a less expensive house in Missouri eventually. Suppose I end up with a paid off house in Missouri and $50K, for example, and after furnishing the new house and doing any necessary renovations that $50K is reduced to $20K. I will then add that $20K to my portfolio as a windfall, and rebalance accordingly.
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Old 11-20-2010, 01:33 PM   #17
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A house has cash flow characteristics that I think are probably overlooked by many, and could be considered "bond like." I wouldn't consider them good substitutes for the reasons mentioned by others (illiquidity, indivisibility, etc).

Having said that, if you don't own a house you'll likely have to rent some place to live. The difference between the avoided rental expense, and the cost of home-ownership can be viewed as the "coupon" on your house. If the "coupon" / home price is greater than prevailing fixed income yields, it might make economic sense to swap some of your fixed income portfolio for home-ownership. Tons of other conditions and caveats apply but it makes sense to me.
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Old 11-21-2010, 08:53 PM   #18
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+1 The idea of equating real estate and bonds is pretty perplexing.
How is it perplexing? It's just modern portfolio theory -- setting your desired risk and return by proportionally mixing different risk/return investments. I could do 80/20 stocks and bonds and create roughly the equivalent risk and yield as 60/40 stocks and real estate. Except I can't live in my "bonds" so why not buy a nice house instead? Well, that's what I figure anyway. Plus it lets me cut my withdrawal rate by 40%.

Rebalancing if stocks fall medium-long term is the downside though, yes. I guess I'm gambling the economy and stock market will recover and the rebalancing will go the other way (having to sell my stocks to buy bonds, not sell my house to buy more stocks)... we'll see I guess!
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Old 11-21-2010, 11:03 PM   #19
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If you lived in a rented apartment would you have a 100% equity portfolio?
Why are things different if you live in a paid-off house? Sure, your annual expenses will be lower, but that just means selling fewer of whatever you have (stocks/bonds/collectible styrofoam lawn ornaments) to meet expenses.
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Old 11-22-2010, 02:03 AM   #20
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I haven't considered it either. My RE represents about 10-15% of my NW now.

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I suppose was mostly curious how others figured in their home equity as part of their total investment portfolio. Interesting that some don't even consider it. Those are informative posts above, thanks everyone!
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