net worth assets & asset allocation

[eryx]

I read a lot about asset allocation between stocks, bonds, cash, and etc.

However, now that I have a substantial amount in those types of market investments, I am wondering what information or thoughts are out there about OVERALL asset allocation, i.e. as a part of total net worth.

For instance, around 20% of my assets are involved in my home (mortgaged). Let's say another 10% is related to "stuff" (cars, furniture, etc). Therefore when we talk about asset allocation, it is really just how to split up the allocation of the remaining 70%-- but I'd like to know more about how the full 100% should be best allocated.

Thoughts? Perhaps 70% spread across the various financial markets (stocks, bonds, etc) is too high and I should be diversified into something else (i.e., more real estate, small business, hard assets, cash, etc).

 

[Alan]

When I owned a house I always had a rough idea of what it was worth so knew roughly what my net worth was. However, I never chose to consider the value of the house in overall AA for investing purposes. (It would be different if we owned rental houses.)

My view was that you have to have somewhere to live and the house was an expense rather than an investment. (We owned 5 houses over a period of 26 years as we moved with our jobs).

That is just my experience but I can see the other point of view where people buy houses, improve their value while they live in them, then sell them at a profit, buying a cheaper house to begin the improvement process over again.

 

[padlin00]

I agree with Alan, I don't count my home in my asset allocation, if I sell I'll use the $ to live somewhere else.

Suggest you read a book or 2 on Asset Allocation. 4 Pillars by Bill Bernstein or Rick Ferri's All About Asset Allocation, are well worth the price and will provide a well rounded education on the subject.

 

[xyz]

I think I get what you are talking about .. I think it depends on your aversion to risk or knowledge of other investments such as art, precious metals, classic cars etc.. I think it also depends on your interest in managing such assets such as rental properties etc. I view most of my "stuff" (except for my house) as worthless and have not purchased personal items as investments. In some respects it is similar to a hobby or a job. I like to play guitar but will not do it for pay as it will take away from the enjoyment I get from it. Same holds true for possessions, if I purchase a guitar I view it as valueless not something I am going to sell.

Bottom line is we all are different. Many people like managing rental properties for an income stream. Some people like buying and selling things. We are all different and have different preferences .. But isn't that great?

 

[obgyn65]

I do not include the value of my condo in my asset allocation either. My asset allocation is mainly based upon investable assets only.

 

[foxfirev5]

If I can't sell it for a known amount at 4PM on any given weekday I don't count it. Likewise I agree we're all different.

 

[target2019]

A case study to help:
Elderly couple has home asset, recently sold, so the gain is realized in 2013. The home estimate came from Zillow each year, and the percentage is home estimated value divided by total assets.

2006	2007	2008	2009	2010	2011	2012	2013
25%	24%	25%	20%	19%	15%	15%	12%

I tracked this number so that I would have a better estimate of their net worth. This information came into play when we considered their moving into an independent living arrangement, and needed to know where the substantial down payment would come from. Fortunately I found another arrangement which required no down payment, and has proved to be a wiser choice overall.

I suspect this information would be of no use in a typical asset allocation, unless you are getting to the time when the proceeds will be available for investing (as in the example above). If you do include the home in the AA, then might have to think carefully about what you will do when the home value rises and falls.

 

[pb4uski]

In my retirement nestegg, I only include financial assets (taxable investment accounts, tIRAs, Roth IRAs, HSAs, CSV of a life insurance policy I own, etc) as all of these assets can be easily converted to cash and use to fund my retirement living expenses.

My net worth would be my retirement nestegg plus the value of my house, cars, boats, etc. I don't count these in my retirement assets because I use them and don't intend to sell them to fund my retirement living expenses.

However, the house, cars, etc do contribute to my retirement because if I didn't own them then my living expenses would need to be higher for house rent, car lease payments, etc and I would need a bigger retirement nestegg. So in a backwards way, these assets contribute to my retirement by reducing my living expenses rather than providing income/appreciation.

My target AA only applies to my retirement nestegg and is 42% domestic stocks, 18% international stocks, 22% investment grade domestic bonds, 5% high yield domestic bonds, 7% international bonds and 6% cash.

 

[timwalsh300]

if I sell I'll use the $ to live somewhere else.

But one could move into a smaller place, or to a lower cost-of-living area, or start renting and suddenly have a lot more money available. I count the value of my car in my net worth for the same reason: I could trade down to something cheaper if necessary, or move to a city and live car-free.

I don't include other things like furniture or electronics in my net worth, however, because the market for those items seems to be much less liquid/transparent/efficient than the market for homes or used cars.

I agree that talking about asset allocation is different. It's not useful to talk about "cars" being 3% of my asset allocation since I can't easily rebalance that. But I am aware of how much I have tied up in my car, and in general I think it should be minimized since cars have a high carrying cost (same with a home).

Tim

 

[W2R]

To me, asset allocation implies investible assets within the investment portfolio.

What percent of your assets you maintain as investible assets is your own choice, and is probably influenced by factors such as what stage in life you happen to be in. Like Alan, I do not consider my house to be an investible asset. The same is true for my car, or other possessions.

When I owned a house I always had a rough idea of what it was worth so knew roughly what my net worth was. However, I never chose to consider the value of the house in overall AA for investing purposes. (It would be different if we owned rental houses.)

My view was that you have to have somewhere to live and the house was an expense rather than an investment. (We owned 5 houses over a period of 26 years as we moved with our jobs).

That is just my experience but I can see the other point of view where people buy houses, improve their value while they live in them, then sell them at a profit, buying a cheaper house to begin the improvement process over again.

 

[FIREd]

I track 2 AAs. One including only "financial assets" like stocks, bonds, cash, etc... And one including everything, especially real estate (though I never include things like cars and furniture). If you only own the home you live in, it may not be useful to include RE in your AA, but that is not the case for me.

 

[haha]

To me, asset allocation implies investible assets within the investment portfolio.

What percent of your assets you maintain as investible assets is your own choice, and is probably influenced by factors such as what stage in life you happen to be in. Like Alan, I do not consider my house to be an investible asset. The same is true for my car, or other possessions.

This is true, yet clearly a house, and often also a car for someone who is going to need it can be valuable assets that may but will not always lower annual outflow. When I paid cash for a condo in the same rental class as the apartment I vacated, my cash balances went down meaningfully. But even with reasonable accruals for occasional expenses here, I will need at least $9000 or so less annually for shelter. If interest rats were higher, it might be a push, but with our very low rates, and my desire to nail down at least the price of any dwelling I might buy now or later (instinct), it seemed like a sound move for solely financial reasons.

Same with a car- when my car was totaled about a year ago at first I was on autopilot to take my insurance check and get a new one, but I saw that even with giving little or no weight to the cost of a car, I realized that in my current environment a car would be more trouble than aid. If I didn't already have a girlfriend who doesn't mind me not having a car I likely would have bought one anyway. But my transportation outflows are much less without a car then they were with one, so for me the car was pure consumption, and not IMO properly part of assets. Had it not been crashed and totaled I would still be driving it; it never would have turned to cash.

Ha

 

[Katsmeow]

I track my net worth and do count my home and cars (but not other items).

As far as allocation, it isn't part of the asset allocation but there is a point to consider.

That is, someone who has $1 million in assets invested at Vanguard and who received $20,000 a year SS who wants to spend say $55,000 a year has a much easier than time than someone who has $500,000 in assets invested at Vanguard and a $500,000 paid for home, who also wants to spend $55,000 a year. Now, the first person probably is spending a good amount of the $55,000 on rent, but has minimal home maintenance costs and no property tax (except insofar as included within rent). The second person has no mortgage, but may have considerably property taxes and has to repair and maintain the home. The second person though has a hard time because you can't safely take $35,000 a year from an invested portfolio of $500,000.

 

[Animorph]

Hard assets and investible assets don't seem to intersect a whole lot for me. The house is a potential Plan B, but not a formal part of the retirement plan. Everything else I just consider sunk costs. That's on the budgeting/spending/WR side, so again there is some interaction, but not in terms of AA.

If my portfolio was bigger I might increase my withdrawals, but I wouldn't think I had to buy more or better furniture or cars or houses to balance it out. Though that might indeed be the result.

If you had what seems like a lot of "stuff" compared to your portfolio value, it might be that you are a savvy shopper of stuff that holds its value well, instead of a world traveler that has memories instead of financially valuable stuff. Not really a factor in how your AA should look.

 

[gcgang]

I read a lot about asset allocation between stocks, bonds, cash, and etc.

However, now that I have a substantial amount in those types of market investments, I am wondering what information or thoughts are out there about OVERALL asset allocation, i.e. as a part of total net worth.

For instance, around 20% of my assets are involved in my home (mortgaged). Let's say another 10% is related to "stuff" (cars, furniture, etc). Therefore when we talk about asset allocation, it is really just how to split up the allocation of the remaining 70%-- but I'd like to know more about how the full 100% should be best allocated.

Thoughts? Perhaps 70% spread across the various financial markets (stocks, bonds, etc) is too high and I should be diversified into something else (i.e., more real estate, small business, hard assets, cash, etc).

The Talmud said to divide your assets into thirds: real estate, business and reserves.

I guess you could interpret this to mean a third your home, other RE and maybe your personal use "stuff" (although stuff is not really an investment, it's a future estate sale); a third in stocks; and a third in safe assets like cash, perhaps including bonds.

Advice that stands up to the test of time pretty good, IMO.

 

[FIREd]

The Talmud said to divide your assets into thirds: real estate, business and reserves.

I guess you could interpret this to mean a third your home, other RE and maybe your personal use "stuff" (although stuff is not really an investment, it's a future estate sale); a third in stocks; and a third in safe assets like cash, perhaps including bonds.

Advice that stands up to the test of time pretty good, IMO.

Interesting. It is pretty much my current AA: 35% hard assets (mostly RE), 34% equities, and 31% fixed income (high quality bonds, CDs, and cash). Each third is diversified internationally.

 

[GoodWishes]

For our net worth, we include our primary home and investable portfolio. For our investable portfolio, we include our rental houses, stocks, bonds and cash. We don't include cars, furniture, etc.

We have a spreadsheet that tells us the percentages of everything within our net worth and within our investable portfolio.

 

[pb4uski]

The Talmud said to divide your assets into thirds: real estate, business and reserves.

I guess you could interpret this to mean a third your home, other RE and maybe your personal use "stuff" (although stuff is not really an investment, it's a future estate sale); a third in stocks; and a third in safe assets like cash, perhaps including bonds.

Advice that stands up to the test of time pretty good, IMO.

Not to me. If my stocks and bonds were only 2/3 of my NW I would not have been comfortable ER - not even close. I don't see this advice as being practical in today's world.

Also see http://www.early-retirement.org/forums/f28/house-value-as-percent-of-nw-during-retirement-67806.html and http://www.early-retirement.org/forums/f29/percentage-of-net-worth-tied-up-in-house-50700.html threads.

 

[daylatedollarshort]

Thomas Stanley has a breakdown on his blog of the top asset categories of those with $2M+ in wealth from IRS estate tax data:

"Let's look at the data from the IRS' estate returns computed during 2007-2009 for those decedants who were under 70, married at the time of their deaths and had a gross estate of $2M or more. The rank and the percentage of the aggregate wealth held in the top ten asset categories are as follows: 1. investment real estate (17.7); 2. closely held stocks (14.5); 3. publicly traded stock (12.6); 4. retirement assets (11.4); 5. personal residence (9.2); 6. insurance (7.2); 7. cash assets (6.9); 8. limited partnerships (4.1); 9. tax-exempt bonds (3.9), and 10. farms (3.1). "

The Top Ten Assets Owned by Millionaires

 

[Midpack]

While I track my total net worth in including home and "stuff", I do not include home or stuff towards funds available for retirement income or in setting our asset allocation. I would only include our home if we planned to radically downsize such that the sale would add funds to our portfolio, or had a second, third home we planned to sell, same with stuff - none applies in our case. Since presumably you plan to have a home on retirement, the funds aren't available for income, therefore excluded.

I only care about the ongoing expenses associated with our home and stuff, not the purchase price itself.

I've never seen a recommended asset allocation for retirement income purposes that included a primary home. It wouldn't have any meaning for us. YMMV

 

[Larro Darro]

When DW has to do her public disclosure, the house is part of NW. But for retirement planning, we don't count it. It is like my gun collection. You could pay the electric bill by selling one a month for seven or eight years, but it is something I don't want to start anytime soon. In fact, I don't see myself not adding to it every birthday for the next ten or fifteen years.

 

[eryx]

I track two AAs, one for total investments (this is the one useful for retirement) and then total net worth which includes the home & material goods. Cash flow in/out is also very important when it comes to thinking about retirement so I track that too.

Mostly I was just wondering if there are any "rules of thumb" ratios between the two different classes. You hear about % of mortgage compared to salary, or the UAW/PAW ratios from Stanley's Millionaire Mind...and I'm sure there are others. I guess another way of saying it would, how much "stuff" (including home), which generally goes down in value rather than up, vs how much "nvestments. On this board and the MMM people are of course all about maximizing growing assets over consumption. But I hadn't seen any kind of analysis of what is a typical ratio.

 

[bamsphd]

Mostly I was just wondering if there are any "rules of thumb" ratios between the two different classes. You hear about % of mortgage compared to salary, or the UAW/PAW ratios from Stanley's Millionaire Mind...and I'm sure there are others. I guess another way of saying it would, how much "stuff" (including home), which generally goes down in value rather than up, vs how much "nvestments. On this board and the MMM people are of course all about maximizing growing assets over consumption. But I hadn't seen any kind of analysis of what is a typical ratio.

The LBYM answer is spend as little on "stuff" including your home as you can comfortably stand. That means the answer is very personal indeed.

Before I was married, my salary went basically a third to various taxes, a third for the future, and a third for now. Your preferences may be different, but getting to FI status was a high priority for me. Thus my ratio of investment portfolio to stuff grew every year until the volatility of my portfolio exceeded a third of my salary.

I kind of like the classic advice rarely followed these days that your home should cost at most 2 to 3 years of salary. Approximating with the 4% rule, that would imply your home's value should be roughly 8% to 12% of your portfolio's value, assuming you are retired with no other income streams.

If you put your investments in buckets to satisfy different spending categories, allocating basically the same amount to your home costs bucket as your home would sell for is another very rough rule of thumb.

Though it can be broken, a classic rule is that a luxury once sampled becomes a necessity. You can think about all purchases as not just the up front single purchase cost, but as what would it cost to use/maintain/replace this new luxury for the rest of my life in dollars/year? For example that new iPhone needs a wireless plan, and the phone itself will need to be replaced periodically. Using a 4% withdrawal rate as a rough approximation, how much portfolio would I need to produce that many dollars/year?

Until retirement, then calculate that using my current salary, how much of my time is needed to save that much money? Is this new luxury worth that much of my life? If yes, buy it now. If no, then reject or defer the purchase for later reconsideration. Basically, is this luxury worth deferring my retirement?

Once retired, you look at your current withdrawal rate, decide if it is below your personal maximum safe withdrawal rate guess, if so you can buy the new luxury because you have the spare cash. Basically, you are on a "fixed" income buddy, you can buy it if you can afford it forever.

The other alternative before and after retirement is to convince yourself you can eliminate some existing luxury with the same or greater cost as the new luxury, allowing you to swap luxuries.

In the end your investment portfolio to "stuff" ratio is a lifestyle choice, heavily dependent on what kind of "stuff" you like, how optimistic you are, what if any other income streams you have, how LBYM you want to be, how close you are to FIRE, and how much you like to w@rk.

 

[haha]

I guess another way of saying it would, how much "stuff" (including home), which generally goes down in value rather than up, vs how much "nvestments.

Except for the RE crash years, a reasonably well located home plus lot would have had to suffer very bad luck to lose money.

It isn't very hard to figure out how your city is going to do, and it isn't very hard to pick the better districts of your city.

You don't want more home than your retirement assets can easily support, but more than one family or couple have been priced out of an area where they wanted to be. Since I would experience serious quality of life losses if I had to move somewhere cheaper, I elected to buy and my anxiety level dropped meaningfully. I did not want to move to the burbs or worse yet to another part of the country, if we got a hot real estate market. OTOH, I figured that at the cost level at which I was entering, losses would have little risk for me. My condo would rent at a good cash profit, so the only thing that might negatively impact me would be an important regional business recession.

Ha

 

[ERhoosier]

Except for the RE crash years, a reasonably well located home plus lot would have had to suffer very bad luck to lose money.

Ha

There have been many exceptions to that over past 10-15yrs particularly after including the ongoing costs of mortgage, taxes, insurance, upkeep, periodic renovations, etc. While most markets have stabilized recently, there are lots of nice properties in major markets which are still badly underwater vs 5-10yrs ago.
I've come to view a home as a stable place to live in the area of my choosing. Any investment gain would be a bonus.