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Asset Allocation and Alternatives
Old 12-03-2021, 11:22 AM   #1
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Asset Allocation and Alternatives

When you calculate asset allocation, do you include your home value as an alternative asset? I tried to search and could not find this discussed.



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Old 12-03-2021, 11:29 AM   #2
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When you calculate asset allocation, do you include your home value as an alternative asset? I tried to search and could not find this discussed.



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I don't.
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Old 12-03-2021, 11:39 AM   #3
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You can if you like. However, just be cognizant that if you base your withdrawal rate on a total which includes the house, you may be making a mistake...unless you are willing to sell the house if you begin to run out of other assets to sell to maintain the withdrawal rate and standard of living.
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Old 12-03-2021, 11:43 AM   #4
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Net worth = all assets - all liabilities

All assets includes real estate of all descriptions

All liabilities includes all obligations including mortgage

Allocation is commonly used in context with securities ie stocks and bonds.

Do be sure to include real estate and mortgage in the net worth calculation for your FIRE planning.
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Old 12-03-2021, 11:43 AM   #5
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When you calculate asset allocation, do you include your home value as an alternative asset? ...
No, I don't include my house as part of my retirement nestegg because my house doesn't pay me an income and I can't (conveniently) withdraw from it for spending.... it is a place where I live... the financial benefit is that because I own it I don't pay rent but I do pay property taxes and insurance so my spending is lower than if I didn't own the house.
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Old 12-03-2021, 11:44 AM   #6
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I don't. Nor do I count the assets in my HSA and emergency fund.

IMO, Asset Allocation is somewhat of a subjective concept. I guess do what works best for you.
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Old 12-03-2021, 12:29 PM   #7
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No. I may not live here forever, but I can't say for sure where I go next would be less expensive. If funds are running low I can certainly downsize (both price and size) but it's not part of my plan.

Indirectly it is part of the consideration. I don't have a mortgage, so I feel I can be a little more aggressive with my investments.
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Old 12-03-2021, 01:15 PM   #8
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Our houses are part of our net worth, just like our cars and some other expensive possessions but that stuff is not investable, hence not included in our investment planning calculations.

But hey, its your calculation. You can use whatever rules you like.
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Old 12-03-2021, 02:41 PM   #9
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For asset allocation, no we do not include the home value. A home is too illiquid and we are not planning on selling ours. Kind of tough to rebalance an AA that includes a home, though not impossible (perhaps using a HELOC). I think the ability to rebalance and otherwise cope with market ups and downs is the main reason for an asset allocation.

We do include our home's net value in net worth calculations, but that's just informational for us. And of course our home is included in our overall financial planning.
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Old 12-03-2021, 02:55 PM   #10
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When you calculate asset allocation, do you include your home value as an alternative asset? I tried to search and could not find this discussed.



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It’s just rebalance my retirement accounts that I withdraw from annually for income. So I only include my retirement accounts in my asset allocation calculation. Certainly not my house. It’s pretty hard to rebalance bits of your house, or withdraw 4% of it every year.
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what is an alternative?
Old 12-03-2021, 02:55 PM   #11
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what is an alternative?

njhowie- thank you that makes a lot of sense to me.


What is an alternative in your portfolio?
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Old 12-03-2021, 02:58 PM   #12
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IMO, Net Worth is a different measurement than Asset Allocation. AA is, again my opinion, allocation of investments that are somewhat flexible. one can move assets from one subgroup to another in order to keep one's risk stable over time. I don't anticipate selling my primary home in order to rebalance my AA. Therefore, it isn't in my AA calculations. Net worth is whatever you want it to be. For me it is all my financial balances plus my home value minus debt. It has nothing to do with sensitivity to market trends.
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Old 12-03-2021, 03:09 PM   #13
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When you calculate asset allocation, do you include your home value as an alternative asset? I tried to search and could not find this discussed.



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I don't. From a financial point of view, I only use it as part of my overall net worth only.

I do know some who have a plan to sell and downsize in the future. What they do is estimate the net proceeds from the future sale at an estimated future date minus the purchase price of the replacement house, with any remainder being considered part of their portfolio, discounted to the present day. Some also do something similar with a future inheritance, future incomes from SS and/or a pension, etc...
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Old 12-03-2021, 03:44 PM   #14
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We project $2 million in home equity at age 80, so I canít ignore it. Iím treating it as SHTF Insurance when Iím a senior citizen.
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Old 12-03-2021, 04:35 PM   #15
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We project $2 million in home equity at age 80, so I can’t ignore it. I’m treating it as SHTF Insurance when I’m a senior citizen.
Good point. While I don't count our primary residence or our second home it probably should be a factor. While not quite on your scale our lakehouse should be a plan C following the Roths for future calamities. If DW or I got that far we would certainly beat the odds.
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Old 12-03-2021, 06:23 PM   #16
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I don't.
while we include our residence in our total net worth we do not include it in our AA.
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Old 12-03-2021, 06:34 PM   #17
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We include our home and vacation homes in our Net Worth, but not asset allocation. The reason is in 2026 the Estate Tax reverts to pre-2017 levels adjusted for inflation. We are currently just below that level. We donít want our kids to have to pay Federal Estate taxes on top of the PA Inheritance tax that theyíll already be hit with. So weíre watching our Net Worth closely and taking measures to avoid it.
For asset allocation of investments, we donít include real estate.
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Old 12-03-2021, 06:34 PM   #18
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I look at our paid for house as a LTC policy replacement.
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Old 12-03-2021, 06:51 PM   #19
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I do not count our house in the asset allocation. AA is for our investments and our house is not an investment. AA is stocks, bonds, and cash. If we had other investments like rental property, precious metals, crypto, etc. then I would include those items since they'd be part of the investment portfolio.
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Old 12-03-2021, 07:22 PM   #20
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I don’t include the house or other land that we own in my asset pool to fund retirement, I do, however, include the sale of those assets in my long term plan. I know that sounds odd, but the retirement pool funds needs over the next X years. The real estate likely will fund a transition into some sort of assisted living down the road.
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