Asset Allocation and Alternatives

[2018]

RE considerations for NW

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.

As many have stated; we do count our primary home in net worth, but not investible assets.

For investible assets we only include our rental properties in the mix and I count them as bonds type assets.

So, while our IRA's may show 90% stocks/ETF's, the overall portfolio of investments (including rental properties) are more like 60/40. Most modeling tools don't have a mechanism to recognize rental properties so we just show that as cash in the tool.

 

[Markola]

No and Yes



As others have mentioned, your home is part of your Net Worth...and is not a part of your investable assets that you would split into stocks/bonds/cash.



However, your home equity could be part of your thinking when you decide your asset allocation. If you have a sizable home equity, you may be able to select your asset allocation to include more risk (more stocks) because you can use your home equity via a HELC, even sell your home and downsize, or rent a place to live (including assisted living) if your financial situation really crumbles.

We bought our house for $360,000 seven years ago and it was appraised for $535,000 last year before we did some upgrades, so maybe $600,000 estimated today, conservatively, given the froth of late. Applying its 30-ish year past annual growth rate per Zillow of 4.25%, calculators project a $1M+ value in 15 years and $2M+ in 29 years when the new, low interest mortgage is paid off. YMMV but that’s too much dough to ignore, so I’m counting it as the investable asset that it is to me, even if it is a future liquidity event, similar to the sale of a rental property or business or some future income coming online in the plan, like SS or an annuity, etc. I don’t personally see the need to pretend it isn’t there, as some other overly-conservative investors (not you) seem to prefer.

 

[mrfeh]

We bought our house for $360,000 seven years ago and it was appraised for $535,000 last year before we did some upgrades, so maybe $600,000 estimated today, conservatively, given the froth of late. Applying its 30-ish year past annual growth rate per Zillow of 4.25%, calculators project a $1M+ value in 15 years and $2M+ in 29 years when the new, low interest mortgage is paid off. YMMV but that’s too much dough to ignore, so I’m counting it as the investable asset that it is to me, even if it is a future liquidity event, similar to the sale of a rental property or business or some future income coming online in the plan, like SS or an annuity, etc. I don’t personally see the need to pretend it isn’t there, as some other overly-conservative investors (not you) seem to prefer.

Nobody is suggesting it be ignored; it is a component of your net worth.

But, it isn't part of your portfolio.

 

[OldShooter]

... I don’t personally see the need to pretend it isn’t there, as some other overly-conservative investors (not you) seem to prefer.

Well, the nice thing about this question is that it is simply a matter of personal preference. Your preference appears to be in the minority. Re "overly-conservative" this is really just a gratuitous shot at those of us who disagree with you. As you like, I guess.

 

[Markola]

I didn’t mean it as a gratuitous shot but as a challenge to think a little differently. We’ve had other strings exploring how the tendency on this board is for members to spend 2.5% when they could spend 4%, make sure their portfolios have 100% survivability when 90% would let them live a little better, work one more year, then another, then another. This is an early retirement forum, so I like to comment on strategies to help people retire earlier. Including a bit of future home equity in one’s long term projections can make a meaningful mathematical difference, so my point is legit, IMHO.

 

[Markola]

Nobody is suggesting it be ignored; it is a component of your net worth.



But, it isn't part of your portfolio.

Umm, says who? The Personal Finance Board?

 

[chassis]

I didn’t mean it as a gratuitous shot but as a challenge to think a little differently. We’ve had other strings exploring how the tendency on this board is for members to spend 2.5% when they could spend 4%, make sure their portfolios have 100% survivability when 90% would let them live a little better, work one more year, then another, then another. This is an early retirement forum, so I like to comment on strategies to help people retire earlier. Including a bit of future home equity in one’s long term projections can make a meaningful mathematical difference, so my point is legit, IMHO.

+1 a lot of the “advice” on this site is comically conservative.

 

[RobbieB]

It's like "the rock" yeah, upkeep and taxes and insurance, but still cheaper than rent. And you don't get a 30 day notice because the owner is selling.

I don't consider it part of the portfolio, but it is a part of my stability. Which could be considered "fixed income" of a sort as I don't have fixed outgo "rent" or mortgage.

Another reason I have an 80-20 AA.

 

[pb4uski]

... I don’t personally see the need to pretend it isn’t there, as some other overly-conservative investors (not you) seem to prefer.

I don't see where anyone said pretend that it isn't there. I include it in net worth, but since it doesn't produce cash flows that can be used for spending and I can't use it for withdrawals I don't consider it part of my retirement nestegg.

Might we sell it someday? Perhaps.

Include it if you wish to, but in my experience most people on this forum don't.

 

[youbet]

It's like "the rock" yeah, upkeep and taxes and insurance, but still cheaper than rent. And you don't get a 30 day notice because the owner is selling.

I don't consider it part of the portfolio, but it is a part of my stability. Which could be considered "fixed income" of a sort as I don't have fixed outgo "rent" or mortgage.

Another reason I have an 80-20 AA.

I think along those lines too. If owning a home influences the AA of your stock/bond/cash portfolio, then your home is indirectly a part of your AA.

My modest home is a tiny part of my net worth, so it really isn't a significant part of my rationale in choosing a 60/40 AA. But if my home were worth millions, I'd definitely go heavier on equities in my brokerage account.

Perhaps we might say that our homes are not included in the calculation of the AA of our "investible" FIRE portfolio. But, the value of our home definitely influences our target AA.

 

[Markola]

It's like "the rock" yeah, upkeep and taxes and insurance, but still cheaper than rent. And you don't get a 30 day notice because the owner is selling.

I don't consider it part of the portfolio, but it is a part of my stability. Which could be considered "fixed income" of a sort as I don't have fixed outgo "rent" or mortgage.

Another reason I have an 80-20 AA.

Yeah, I agree with the stability and fixed income comments. To me, home equity is, firstly, part of my SHTF Insurance someday when we’re older. Second, it is indeed a sort of “fixed income”, such as when we have periodically refinanced our appreciated houses, gotten a lower interest rate, and pulled out cash to pay off DW’s higher interest student loans way back when, but otherwise fixed up the houses to enjoy more and increase value when we’ve sold later. We bought a home in Atlanta in 2011 for a steal at the absolutely trough and sold it in 2014 for 30% more. That, friends, is an investment in my book. Treating an appreciating home this way (I’m on #4) seems like a better asset in my investment portfolio than does a pile of inert cash losing money to inflation, which is not even an investment. We’re splitting hairs, but this is what makes the most sense to me based on my experience owning houses and I can’t help what others do. Cheers.

 

[youbet]

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

Is the value of your home a significant portion of your total assets? If not, don't worry about it. If yes, do the calculation both ways and see if the difference between the two seems to matter. If it does seem to matter, give some thought to what your home is. 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 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?

"Home value" isn't a homogeneous term. It depends on what you mean by "home" and what percentage of your total worth it represents.

Note that the responses you're getting here are all correct........ based on the poster's particular circumstances, which might not apply to you at all.

 

[FLSUnFIRE]

I do not count it in my net worth but am aware of the imputed rent "income" I get from not having to pay rent or have a mortgage payment. If I ever decide to move it would become an income producing property for me and at that point I would count it. It's an off-balance sheet asset that I treat the same as my HSA that I also do not count - essentially self-insurance reserves for SHTF.


It's all mental accounting, treat it the way that makes sense for you. If you are into comparing yourself to the Jonses most articles include home equity and often even other personal property.

 

[eytonxav]

I do not consider the home I live in as an investible asset, so no. If someone has rental properties, I would think it appropriate to include them in the asset mix. Nevertheless, I'd consider it as part of ones net worth.

 

[DrRoy]

Part of Net Worth, but not part of an investment portfolio.

+1

 

[Exchme]

Is the value of your home a significant portion of your total assets? If not, don't worry about it. If yes, do the calculation both ways and see if the difference between the two seems to matter. If it does seem to matter, give some thought to what your home is. 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 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?

"Home value" isn't a homogeneous term. It depends on what you mean by "home" and what percentage of your total worth it represents.

Note that the responses you're getting here are all correct........ based on the poster's particular circumstances, which might not apply to you at all.

Yes! It's certainly a part of net worth. Depending on circumstances, it may make sense to count it as part of invested assets. But if you do count it, you have to think about the special characteristics it has.

For instance, unlike bonds, it may not be much of a diversifier from stocks, in that home values often go up and down at the same time as the stock market. So when disaster strikes and you need to tap its value, that may be the worst possible time.

Like any non-diversified investment, it might be wrong-place, wrong-time, so "real estate" might be fine, but your property might fail to grow or even lose a lot of value.

You still need a place to live, so if you do sell or cash out equity, it's not all gravy, there are higher liabilities somewhere in your future.

Different folks will come up with different assessments for their own situation.

 

[NW-Bound]

My 2 homes together are 20% of my net worth. This is just an estimate, and I do not even include their values in Quicken, because there's not a lot I can do with the info. I spend more time thinking about the other more liquid assets.

 

[all4j]

While largely just echoing earlier posts, I'd throw in a bit of a different perspective. Whether it is including house, social security, pension, et al, this is often discussed & indeed "it depends". I'd start with a more basic question -- why do you calculate an allocation & how do you plan to use it? I'll elaborate.

I think there are some who use aa as a means of weighing 'risk'; that is, 50/50 is 'safer' than 60/40. Let's say you want to have essentially 50% stocks/ 50% bonds & your net worth is made up of 20% house & 80% investable assets. So if you include the house, you'd make your allocation 20/40/40. If not, then 50/50. Either way, you start at the same place. It might be wise to adjust how quickly you rebalance though.

To extend that, suppose you are a younger, up&comer who is steadily increasing their house size/equity. Plans are to use leverage while good paying job, then swap some of that equity into investable assets & downsize once nest empties to facilitate fire with a paid off house. Then you may want to be quite aware that you have exposure to a local real estate market with minimal diversification in that market...which risk won't be evident in just looking at your aa.

Examples could go on & on, but hopefully basic point is made

 

[GTFan]

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.

For AA? No, an AA is only for investments, not including the home you live in. For NW? Sure, but for me only as an add-on to the portfolio. It's not on my spreadsheet, just in my head.

 

[OldShooter]

For those who count their houses in AA, is that different for a principal residence vs a second/vacation home? How about other personal-use assets? We have maybe $40-50K in cars that go into a NW statement but are not investable assets. Same-o I recently sold about $10K worth of target guns and reloading equipment, all personal-use. Again, I counted those in NW but not AA. Art? Same question. Oriental rugs? We have some nice silk rugs. Once you start listing personal-use items in AA where do you stop?

Of course there is no answer to this beyond personal taste. Nor does there need to be.

 

[Markola]

Personal taste but, logically, an appreciating second home seems a better investment than declining cash. A second home is not very liquid, but no less so than a duplex. “But a duplex generates income.” A second home has income potential, too, even if the owner chooses not to rent it out. These lines are blurry and personal.

 

[ecowtent]

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. We own a few acres of land, but wouldn't think that really amounted to a significant part of our NW or AA. We are very heavy US stocks. However, my DH has a pension which I consider (after someone on here suggested) that the pension could be considered our bond holdings. Most of all I am trying to weigh out how to adjust our AA as I move closer to retiring in the next 18 months.



TY all for lots to consider.

 

[foxfirev5]

For those who count their houses in AA, is that different for a principal residence vs a second/vacation home? How about other personal-use assets? We have maybe $40-50K in cars that go into a NW statement but are not investable assets. Same-o I recently sold about $10K worth of target guns and reloading equipment, all personal-use. Again, I counted those in NW but not AA. Art? Same question. Oriental rugs? We have some nice silk rugs. Once you start listing personal-use items in AA where do you stop?

Of course there is no answer to this beyond personal taste. Nor does there need to be.

IMHO start counting them when they actually will be a factor. Cars and other personal items are no factor whatsoever. However our second home is certainly something that could come into play. Currently an appreciating investment, I can see how someone would want to include this item.
However I can't bring myself to include this with holdings that that can be sold on any given day for a specific value. I am not professing that this approach is right or wrong. It's simply a method to preserve long term assets for future unknowns.

 

[tb001]

Is your appreciated home value inflation adjusted dollars?

I do include home equity in our NW calculations but I only pay attention to NW for ‘fun’. Other than estate tax implications it’s meaningless to me.

When we were on the edge of ER being possible, I assumed we sold our home and downsized at some point, banking another $X at that time. We live on a large property with high carrying costs and have young kids, so this seemed like a reasonable assumption. Now I look at it as LTC insurance.

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.

 

[all4j]

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