NoVa Lurker wrote:Since you can sell your home and rent, I do not see the point of completely excluding home equity from an AA calculation.
But practically speaking, how many people are going to do that? It is very inconvenient, to say the least. I prefer the model of living in my home and having an investment portfolio that will eventually pay my expenses - a portfolio I can conveniently rebalance to control my risk.
I definitely see your point, and I think the majority (maybe 65%? 70%?) of Bogleheads agree with your view. But when I saw this thread, yours was the only reply, so I just wanted to make OP aware that not everybody takes the same view, and that there is an argument for including home equity to some extent. I agree people are unlikely to sell their home and rent in order to rebalance, but if you have a paid-off home and needed cash, you could: (1) sell it and move to a smaller home, (2) get a mortgage, or (3) sell it and rent / eventually move to assisted living, etc. Those would all involve transaction costs and might not be ideal - but taking the opposite view and ignoring home equity just doesn't make sense to me. If I use cash to pay down principal on a mortgage, I'm not losing an asset, I'm just trading one asset for another.
Ultimately, I agree with Harold and ks289 that figuring out your rough risk tolerance is the important thing. We're all just ballparking (50/50 vs. 60/40? who knows?) anyway.