Should your home be considered an investment diversification?


Why do we diversify? To reduce risk.

The best way for Fred to reduce risk is to own his own home. So of course, he should not sell his new home.

Likewise, Wilma should sell the REITs and buy a home.

The issue of diversification arises after a person has bought their home. That is always their first financial priority.
 
Brendan Burgess said:
Why do we diversify? To reduce risk.
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I think we could be in danger of entering "angels on pins" territory.
Clearly you think that both Fred and Wilma should take on such concentration risk and I agree with you. The reason it is justified is that your home is a complete no brainer as an investment in our system and this superiority overrides the risk. In other systems borrowing to the hilt to buy a home or even buying your home with your own money rather than investing in the stockmarket would be madness from an investment perspective rather than renting.
I think that means I agree with you but I'm not sure.
 
Buying a home is taking on a risk, but not buying it is also a risk.

I understand that in Germany, most people are renters and their savings are in the stockmarket. But I am not sure why that is.
 
Brendan Burgess said:
I understand that in Germany, most people are renters and their savings are in the stockmarket. But I am not sure why that is.
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On the savings side the tax regime on investments is much kinder in Germany.

This is common in countries with big domestic industries that need capital to invest.

Ireland - which has always relied on FDI - has a much tougher tax regime on the retail investor.
 
If there are tax incentives to invest and rent and no incentives to own your own home, then investing and renting would probably be better.
 
On the road that I grew up on, with seven four-bed detached houses in suburban Dublin, all but one couple have traded down to smaller properties in retirement.

Another phenomenon that I’ve noticed is couples trading down in order to free up capital to help adult kids get on the housing ladder.
 
In general, I agree with @Duke of Marmalade that one’s PPR should not be considered an asset; however it is relevant when considering another aspect of investing that has often been discussed on this forum: how much of a retiree’s ARF to invest in equities.
A mortgage-free PPR means that the retiree has to worry less about sequence of return risk, which is often put forward as a reason for not investing a significant portion of one’s ARF in equities. If the dreaded sequence of return risk materialises, there is the fall-back option of a life loan or trading down - certainly not a desirable outcome but a small price to pay for the expectation of a higher long-term income in retirement.
 
I agree that owning your own home relaxes your risk-reward calculus. But does it preclude investment in REITS, for example, on concentration risk grounds?
 
Duke of Marmalade said:
does it preclude investment in REITS, for example, on concentration risk grounds?
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That is a good question.

And maybe we should move from the theoretical to the practical. "The implications of home ownership for investment strategy"

If someone has a home worth €500k and €500k to invest, they should not buy a residential investment property. They should buy shares.

If they buy a portfolio of 20 shares, is it ok for one of them to be in a REIT?

Given that most REITs are commercial property, it's fine. And if they buy the REIT which invests in residential investment property, it's not a big deal.
 
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I am not too sure if this has been mentioned on this thread yet but surely the tax-free status of your PPR should be a factor in one's thinking about this? I certainly include my home when I consider my net worth and if I was in financial distress my home would certainly be one of the assets I would consider selling if needed (I would expect to end up living somewhere smaller in this scenario).
 
This topic keeps getting confused between whether your home is a good investment and whether it should be considered as part of a portfolio from the point of view of diversification.
I think we all agree that your home is the best investment you could buy in our system.
I agree with @Brendan Burgess that it should reduce risk appetite for any further exposure to residential property.
 
Surely owning a house is also a liability in terms of the cost of upkeep?

I think a lot of Irish people have a funny view of property.

Personally i (together with my spouse) own a house and this provides a lot of comfort but I don't have it on the asset side of my balance sheet it's very much on the liability side.

We spent a very decent chunk of money over the last few years upgrading insulation and trying to future proof but the general maintenance costs can start mounting pretty quickly and there's likely to be a material cost every few years, e.g. replacing boiler (or heat pump like we've done), gutters, fixing roof, windows etc etc.
 
Won’t be signing it over to you Brendan because I plan to live here for a long while yet but you can pay all the expected liability outgo related to it, such as:
Property tax
Insurance
Wear and tear(storm and snow damage!}
Replacement cost
General Dilapidation
Garden maintenance
Painting and decorating
Servicing heating system, water system (I’ve a well) etc
 
@Fortune

Yes, my father took out a life loan, many years ago. He has since passed way, so the loan has been repaid.

Can I suggest a seperate discussion thread, for this topic, though - it'll just get lost in translation, here?
 
Surely you should offset against all of those costs the amount of imputed rental costs that you avoid by owning the property?
 
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