Should your home be considered an investment diversification?

[Brendan Burgess]

Agreed. But I don’t see how you single out the RIP as being geared instead of the shares or indeed your home.

But diversifying your portfolio with borrowed money is increasing your risk, rather than reducing your risk.

Maybe I am expressing it badly.

Mary has a €500k home with a €300k mortgage and a pension fund with €500k invested in equities.
She inherits €300k
She should pay down her mortgage with that.

However, a lot of people compartmentalise their home and mortgage - and look at their other investments completely separately.
If Mary does this, she has €500k in equities so she diversifies by buying an RIP for €300k.

She thinks she is reducing risk, but she is increasing her risk compared to simply paying off her mortgage.

 

[Brendan Burgess]

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

The security of owning your own home mortgage-free gives you much more freedom in the rest of your portfolio. It should not be ignored in your investment planning.

It has been argued here that you should have 70% of your funds in equities and 30% in bonds because of the risk that if equities fall in the years after retirement, your investment fund will bomb out and you will be destitute.

As you correctly point out, you will never be destitute as you own your own home and will have the OAP. And if you need more, you can take out a Life Loan.

So ownership of your home frees you invest 100% in equities.

 

[Silversurfer]

This is a great topic. Recently I had reason to look at the residue of an elderly womans assets. She was mid eighties when she died. It was very noticeable that a lot of the shares in her portfolio were illiquid. Her physical property while it might not have had the growth of some of the shares still had value.
In my lifetime this has also held true. Without discussing specific shares the words ‘sugar’ and agricultural bank’ come to mind.

 

[Flybytheseat]

It has been argued here that you should have 70% of your funds in equities and 30% in bonds because of the risk that if equities fall in the years after retirement, your investment fund will bomb out and you will be destitute.

With the current level of the Shiller Cape Ratio for the S&P 500, US equities are only projected to return 2-3% per annum in the next 10 years so an investment of 30% in bonds might be prudent. The problem with bonds is that inflation will likely be high in the next 10 years with the move away from globalisation to protectionism. In an environment of rising inflation bond prices fall. Personally I'm 70% in equities, 12% in bonds and the rest in alternatives, commodities and cash. If there is a short or medium term correction in equities by 30-40% then I agree it's time to go back 100% equities.

 

[Brendan Burgess]

I don't have the capacity to time the market once, never mind the capacity to time it twice - to identify the right time to sell at the top and the right time to buy again at the bottom.

This thread is not about the current valuation of the property market or the equity market. It's about the general principle.

Brendan

 

[Duke of Marmalade]

Mary has a €500k home with a €300k mortgage and a pension fund with €500k invested in equities.
She inherits €300k
She should pay down her mortgage with that.

For sure. But if she inherits €400k she should not rule out property when investing the spare €100k. If she were to regard herself as already steeped in exposure to property through her PPR she and the vast majority of home owners wouldn't touch property with a barge pole.

 

[Mammysboy]

I question the idea that your home is an asset in an investment portfolio.

I was taught in school that an asset is something that can generate money, so unless you decide you sell your home or leverage it for investment purposes then no, to me it's not an asset.

 

[Brendan Burgess]

I was taught in school that an asset is something that can generate money,

Then you were badly taught.

Your home saves you paying rent. So it's an asset.

 

[Cervelo]

Your home saves you paying rent. So it's an asset.

And it can provide a tax free income through the "rent a room" scheme

 

[Brendan Burgess]

If she were to regard herself as already steeped in exposure to property through her PPR she and the vast majority of home owners wouldn't touch property with a barge pole.

The vast majority of home owners should not be investing in another property.

They should be diversifying by investing in equities.

 

[KOW]

Never have never will consider my home as asset.
I do have a rental and all other investments are part of my wealth portfolio.

 

[Sarenco]

According to the Oxford dictionary, an “asset” is -

“Any item owned or right possessed by a firm or individual which has an economic, commercial or exchangeable value”.

Seems pretty clear to me that your home is an asset, within the normal meaning of that word.

 

[Premos]

At what point equities become too many equities though?

 

[Brendan Burgess]

At what point equities become too many equities though?

Never really. Unless you have some moral objection to being too rich.

 

[Fortune]

the vast majority of home owners wouldn't touch property with a barge pole.

The vast majority of homeowners don't approach the purchase decision entirely rationally. Is include myself in that, I just got sick of dealing with landlords.

The rational analysis would include a comparison of the purchase of a property versus the investment in an alternative asset with its returns compared to the expected rent savings from buying a home.

 

[Fortune]

an asset is something that can generate money

An asset is something that can generate future economic benefits. This can include cost savings, such as not having to pay rent.

 

[Fortune]

Never have never will consider my home as asset.
I do have a rental and all other investments are part of my wealth portfolio.

Businesses are the same. There's a distinction in accounting standards between Property Plant and Equipment, and Investment Property.

 

[Premos]

Never really. Unless you have some moral objection to being too rich.

What I meant is, is there a point when one needs to think about rebalancing investment to something else when owning your own home and having already a sizeable amount in equity? It's a genuine question. I am not too rich and I will never be close to be too rich. Is there a point when it's worth considering?

 

[Brendan Burgess]

Never have never will consider my home as asset.

If you're never going to sell it then it may not contribute to your financial position

I was taught in school that an asset is something that can generate money,

These are very odd ways of thinking.

If you have a house worth €500k and no investments and I have €500k cash but no house, we are in exactly the same position. Yet by your reasoning, you have no assets and I have €500k.

If you sell your house and rent, you now have €500k of assets.

If I buy a house I have no assets as my €500k is gone.

Presumably, you see the complete fallacy of these statements.

So you don't actually mean that your house is not an asset.

So I am not sure what you mean by these various statements that your house is not an asset or that it does not contribute to your financial position.

1) You can sell it and convert it to cash - so it meets even Mammyboys' teacher's definition of assets.

2) While you live in it, it saves you rent - so it meets Redzer's implied definition that it contributes to your financial position

 

[Dr Strangelove]

At what point equities become too many equities though?

I don’t think I’ve ever seen a post on AAM and thought “This person has too much equity exposure relative to residential Irish property.”