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?!
Putting the "40" of the 60/40 portfolio allocation into your house?
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GoodSense
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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.
REWahoo
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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.
lemming
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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.
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.
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?
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?
chinaco
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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).
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).
Moscyn
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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?
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.
rescueme
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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...
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.
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.
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!
ziggy29
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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.
Gotadimple
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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.
-- Rita
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.
W2R
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+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.
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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Gone4Good
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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.
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.
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!
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.
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.
obgyn65
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Gone4Good
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But what's the argument (other than simplicity) for ignoring it altogether? If you sell your house and rent, you don't ignore the proceeds from the sale. Nearly everyone would just roll them into the existing AA. So implicitly, we're assigning to our houses an AA identical to the one we've chosen for our liquid portfolio. Is that the right approach? I'm not sure.
One way to think about it is that if the "yield" on your house is greater than your WR, your WR goes up if you sell and rent. Certainly it would make sense to change AA in the face of a changed WR. Maybe the answer isn't that a house is the same as a bond (which it isn't), but that owning a house impacts your withdrawals in a certain way, and that impact should, or at least could, affect your AA.
Consider our case where we've moved out of our house and put it up for rent. Maybe it's a temporary situation, maybe we'll move back in, maybe we'll sell it and move somewhere else, maybe we'll rent it out indefinitely. Do we still ignore the property? It doesn't seem like we can. It also seems like there should be a single answer that accommodates whatever decision we make. But I don't know what that answer is.
I think it all boils down to whether one is working from "net worth/total holdings" mindset or from a "portfolio to generate monthly income" perspective. To me, "net worth" is largely an abstraction that might be of importance to my heirs decades in the future. What I care about is maintaining enough portfolio assets, allocated in the right way, to generate income for the coming decades. My house is where I live, and I buy rather than rent because it does lower my expenses long-term and due to non-economic factors (the landlord can't tell me to leave). Yes, we could sell the place someday, but that's not part of the economic "big picture" for us.
Gone4Good
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And I think that is the "answer" for most people. We've effectively locked a certain amount of our portfolio into real estate and, because we have no intention of changing that allocation, we ignore it and back into the rest of the allocation as if it doesn't exist. I don't see any problem with that. But it doesn't preclude an approach that recognizes a home as just another asset in the portfolio that deserves its own consideration.
I think there are a few challenges in the approach. Real estate is actually a riskier asset class than bonds. It's also very illiquid. So it doesnt seem like a good substitute. Even if it were liquid, as REITS are, 40% would be a lot of eggs in that basket.
I prefer to view primary residence as cost avoidance (ie no rent etc) and potential source of a chunk of future money upon downsizing.
I prefer to view primary residence as cost avoidance (ie no rent etc) and potential source of a chunk of future money upon downsizing.
Moscyn
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Totally with you. Also, I don't mind splashing a bit on my primary residence as it is part of my lifestyle too. I can downsize later when I grow older or when I need the money. I used to have 2 properties - one for residence and one for rental but found it a bit too much work to rent and maintain the second property. I know a lot of people do that and great for them if it works for them. But for me, I prefer some other form of investment.
