Asset Allocation and Alternatives

[OldShooter]

OP -I haven't counted it in my AA previously, but all of the templates for calculating AA have Alternatives listed. More than anything I don't have any and wondered what others counted as an alternative in your portfolio. ...

I would suggest the most common would be gold &/or precious metals. I'm actually glad you didn't phrase the original post this way as it has been a good thread. Of course, there are many other possibilities

For retail investor portfolios, REITs are probably the most common thing listed in the Alternative category. This has never made a lot of sense to me as I consider them to be just another sector fund, but nobody has asked me either. For institutions, land (timber, cropland, etc) is AFIK counted in the alternative category. See also: https://www.investopedia.com/terms/a/alternative_investment.asp

 

[youbet]

I don’t consider it in our asset allocation, since it’s not liquid and if the market tanks, that won’t be the time to sell. We are pretty heavy equities, so I do think about our SS as being a bond like ballast.

If the market tanks, it also won't be the time to sell equities. Do you count those in your AA?

As I mentioned in an earlier post, I think the appropriateness of considering your home in choosing and calculating your AA (in some way) depends on the value of your home vs. the value of your FIRE portfolio and what your home consists of. A condo on the upper floor of a luxury urban high-rise? A modest home sitting on thousands of acres of prime farmland? An eight-flat building where you live in one apartment and rent the rest? An expensive suburban home in a bedroom community you plan to sell and downsize when you FIRE?

If my modest suburban home was a bigger slice of my worth, say it was valued at 3X or 4X what it is, I'd likely hold a larger percentage of equities than I do now.

 

[ArmchairMillionaire23]

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.
TY,
M

As our home value is approximately $60K, it represents about 4% of our net worth so I do not consider it an asset to be allocated. If we sold it, we'd pay more than that for another place to live.

 

[KarenF]

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.



TY,
M

I do not count my house. I do count all my investments, including the part of my HSA that is invested. We will always need some sort of housing, so that is where I compartmentalize housing.

 

[Elite59]

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.

Or a reverse mortgage...

 

[Retired Expat]

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.

Exactly. There is net worth and there is Net Net worth. At some point when assisted living may be needed the value of the home can be accessed to pay for that. Also you may well be planning to sell and move or have 2 homes and be planning to let one go.

I count my primary house and my vacation homes in my net worth but not in my investments for regular withdrawal funds. But my vacation home pays for itself and some and I do factor in the income. Everyone’s case is a bit different so we must adjust our thinking accordingly

 

[travelover]

I look at our paid for house as a LTC policy replacement.

That's the way I see it, too. I just hope my wife doesn't mind living in a van by the river while I burn up the house proceeds in the nursing home.

 

[target2019]

That's the way I see it, too. I just hope my wife doesn't mind living in a van by the river while I burn up the house proceeds in the nursing home.

Why such extravagance? There are very good tents good down to sub-zero temps.

 

[aja8888]

That's the way I see it, too. I just hope my wife doesn't mind living in a van by the river while I burn up the house proceeds in the nursing home.

I've heard this stuff before, but what really happens is her new husband will be taking good care of her and spending what's left of your assets.

You couldn't ask for a better outcome!

 

[LivetheDream]

some thoughts...

I have a smaller second home where I plan to move to full time in the next few years and primary is paid off. In firecalc you can add planned portfolio increases in one of the tabs. So I add in a conservative amount for the home sale, but then two years out from that also do a decrease of a lesser amount since I may expand that home, or get a small snowbird place, etc. That is the only way I include it in asset allocation if you can call it that. Only other thing might be if you plan on a reverse mortgage. To be honest, I am not that well versed on reverse mortgages though. Don't have kids so guess it could be an asset that pays if you go that route.

 

[Elite59]

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.

I have noticed reverse mortgages are getting quite popular. That is not in my plans, but recently spoke to a single friend, with no children and she mentioned that she plans to use that option, for extra spending money.

 

[travelover]

I have noticed reverse mortgages are getting quite popular. .......

That is what William Shatner says, but he is kind of spaced out.

 

[Elite59]

That is what William Shatner says, but he is kind of spaced out.

I have seen Tom Selleck, Henry Winkler and Robert Wagner advertising them ... must have missed Shatner.

 

[Chuckanut]

I have noticed reverse mortgages are getting quite popular. That is not in my plans, but recently spoke to a single friend, with no children and she mentioned that she plans to use that option, for extra spending money.

You might ask her about the costs involved. How much equity does she give up for each spendable dollar? I bet she doesn't know. Nor do I, but it's not my house.

 

[CRLLS]

I do not know much about Reverse Mortgages. I did look at a house for sale about 16 years ago. The owner had died, and the estate had 6 months to cover the amount already paid out plus interest or lose the home to foreclosure. From recent experience, that is barely enough time to get an estate organized, the home cleared out, listed & sold. The realtor was about to lose her commission if it wasn't sold soon. The house did sell at a deep discount. I'm sure the beneficiaries were not happy campers, for sure.

For someone with no children, a reverse mortgage might make sense. Why not?

 

[RunningBum]

For someone with no children, a reverse mortgage might make sense. Why not?

If you're really set on staying in your house, I guess. Otherwise you might sell the house and rent. I don't know enough to say which would be financially better.

 

[HI Bill]

For someone with no children, a reverse mortgage might make sense. Why not?

If the owner fails to keep up with property tax payments or home insurance, the lender can take the house. Especially probable if the owner loses mental capacity or runs low on $. Also, this complicates a sale when the owner needs the $ for LTC, if there is any equity left.