Should your home be considered an investment diversification?

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Duke of Marmalade

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I question the idea that your home is an asset in an investment portfolio. Are your legs also an asset? Diversification means that if one asset falls maybe another will do well. Your home may rise in value but you still have to live in it. If you want to think of it as an asset then think of your need for a home as a matching liability. Of course owning your home is very relevant to your financial position but not as an investment diversification.
 
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@Duke of Marmalade

I certainly think of my home as an asset - it’s a valuable thing that I own in that it saves me having to pay rent to keep a roof over my head.

I also think of it as an investment in the sense that I expect it to appreciate in value over time.
 
Sarenco said:
I certainly think of my home as an asset - it’s a valuable thing that I own in that it saves me having to pay rent to keep a roof over my head.

I also think of it as an investment in the sense that I expect it to appreciate in value over time.
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You're missing my point. Of course it is an asset but it has a matching liability - your need for a home. It is an important part of your financial position and does affect your risk reward profile. But it should not be seen as a diversification play. If you see it as a portfolio diversification then very few people could justify investing in property.
 
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And any value appreciation is arguably _bad_ from the owner’s point of view; it leads to increased property tax, and if you want to buy a bigger house, well, your house isn’t the only one going up in value, and the price delta is bigger than it would have been if prices hadn’t gone up. It’s a benefit if you’re downsizing, of course, but not all that many people actually do that. Other than that, it’s mostly only of benefit to you (or your estate) when you die.
 
@Duke of Marmalade

If I didn’t own my home, to use your terminology, I would have a liability without a matching asset. Agreed?

So, in owning my home, I’m neither long nor short on residential property - I’m neutral.

I’m not making the case that property is particularly good at diversifying any other assets class.

But that’s doesn’t mean it’s not an asset. Or an investment.
 
I think we are all agreed that your home is an asset. The issue is whether it should be factored into the discussion of diversifying your investment portfolio.

Let's look at a few examples to see how including it or excluding it might affect the decision.

Johnny is 50, is married and has a few teenage kids, has a mortgage-free home worth €500k and has a pension pot of €500k invested in equities.
He has inherited €300k cash and wants to know how to invest it. He is leaning towards buying a residential investment property.

After he buys a property, he will have €800k in property and €500k in equities.

But he will have two specific properties so will have property-specific or location-specific risk.

That just seems wrong to me and he should invest the €300k in equities.
 
Ok Boss, so let’s say equities fall 10% and property prices rise 10%. She is down 80k on her investable assets. Does she really get much reprieve from the 50k increase in the value of her home?
 
Mary is the same as Johnny, except that she has a €300k mortgage.

Most of us would agree that she should pay off her mortgage with her inheritance.

If you ignore her home from a diversification point of view, you would probably argue that she should buy an RIP as it would diversify her portfolio. But diversifying your portfolio with borrowed money is increasing your risk, rather than reducing your risk.
 
Duke of Marmalade said:
Of course owning your home is very relevant to your financial position but not as an investment diversification.
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I've always thought of my home as a "notional" asset and doesn't feature in my investment portfolio as I will always need a place to live in
But what it does do, is give me comfort that if all else fails I still have a roof over my head and options
 
Sarenco said:
If I didn’t own my home, to use your terminology, I would have a liability without a matching asset. Agreed?
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Interesting Jesuitical point. If you don’t own your home then yes you are short in the investment sense - rising house prices are a real concern to you. This is not mirrored in the opposite situation.
 
Duke of Marmalade said:
Does she really get much reprieve from the 50k increase in the value of her home?
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If it were me, I would certainly feel that my wealth has fallen by €30k not €80k. I know a lot of people would not be able to see this, but if I die tomorrow, my estate gets €30k less and not €80k less. And if I live another 20 years, the returns on equities will probably outperform the return on property.
 
For sure your beneficiaries see no difference at all between your house and your shares. They do not have the matching liability which gets extinguished on death.
 
Brendan Burgess said:
you would probably argue that she should buy an RIP as it would diversify her portfolio
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It would massively concentrate her portfolio into a single asset class, a single asset, a single geographic location; the complete opposite of diversification
 
Duke of Marmalade said:
But I don’t see how you single out the RIP as being geared instead of the shares or indeed your home.
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Because the price of an individual share compared to an individual building means an equity investment can be as small as you want (fractional share from some brokers) whereas you can't easily buy part of a house to suit your investable cash.
 
Fortune said:
Because the price of an individual share compared to an individual building means an equity investment can be as small as you want (fractional share from some brokers) whereas you can't easily buy part of a house to suit your investable cash.
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The point that was being made is that gearing increases risk much more than diversification reduces it. Agree with that absolutely. But just because the RIP was the last purchase, it is not exclusively to blame. In fact the mortgage on the RPR is the main culprit but looked at as a portfolio all three, the RIP, the PPR and any shares are being geared.
 
Maybe a PPR should be considered an Investment only when there is a viable option of getting a return from it?

If you're never going to sell it then it may not contribute to your financial position. It might benefit your heirs but your portfolio will normally require accommodation of some sort. Even the Fair Deal long term care is relatively neutral on the value of a PPR in terms of a % cap.

If you would consider selling it then you could factor it in.
 
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