How Does Real Estate Affect Asset Allocation?

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victor2244
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How Does Real Estate Affect Asset Allocation?

Post by victor2244 » Thu Nov 23, 2017 10:03 am

I currently have about $3.5M in my stock and bond portfolio with a mix of about 70% stock funds and about 30% bonds/CD’s. I am 65 and Plan to work for at least another 5 Years. I also have about $3.5M in real estate equity ($1M of this is from our primary residence that has no mortgage, $1.5M is from a vacation property that will eventually go to my kids and $1M from an investment property). I have always ignored the real estate part of our investments when calculating AA, and have only factored in the stock and bond fund holdings. If I include real estate into my AA, the AA is stocks=35%, bonds/cd=15% and real estate=50%. Alternatively, a case can be made that my primary residence should not be included in investment assets because we need a place to live and the vacation property should not be included because this will go to our kids. If I remove the primary residence and second home from the calculation, the AA works out to stocks=54%, bonds=23% and real estate=23%. An AA of 70% stocks sounds high for someone 65 years old, but 35% or 54% does not sound too bad when real estate is factored in. What are folks’thoughts/recommendations on this?

victor2244
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Re: How Does Real Estate Affect Asset Allocation?

Post by victor2244 » Thu Nov 23, 2017 10:09 am

PS-my risk tolerance is pretty high and I have always stayed the course during market drops in 1987 and 2008.

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Re: How Does Real Estate Affect Asset Allocation?

Post by Sandtrap » Thu Nov 23, 2017 10:17 am

I have gone from 100% R/E income property to 50/50 R/E vs portfolio. I do not include R/E in my asset allocation (investment portfolio). That includes residence, rental properties, and other R/E holdings. To me, the keeps allocation simple.
Though I am not as heavily vested in income property as in the past, I consider it a business that "anchors" my portfolio. Others with smaller holdings may differ. I do not include my residence in anything because I have to live in it and I can't eat it or pay bills with it, nor does it earn anything, and it is mortgage free so not a liability.
Post retirement, I've been liquidating holdings. As I do so I am dollar cost averaging and adjusting my allocation a little but not much. My allocation is roughly 35/65 at present.
Income property is a business.
Portfolio funds are investments.
Residence is a . . . home.

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Re: How Does Real Estate Affect Asset Allocation?

Post by SGM » Thu Nov 23, 2017 11:01 am

We have some income producing real estate and non-income producing real estate. Any net income reduces our need to withdraw from our portfolio. However, our various income streams could allow us to be either more conservative or more aggressive in our AA. Although we are no longer 100% in stock, we have chosen to be a little more aggressive. I am thinking about the ravages of inflation, taxes and medical costs on family wealth. I don't really believe in the concept of having "won the game". Like Jazzman, I am thinking about kids and grandkids futures as well as our own.

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Re: How Does Real Estate Affect Asset Allocation?

Post by dbr » Thu Nov 23, 2017 11:26 am

It seems to me that including personally owned real estate (not talking about stocks such as REITs) as an asset along with stocks and bonds in a portfolio should make sense. The same would hold true of owning gold, shares of beneficent interest in a gas field, timber, and other "alternative" assets. In practice I am not sure how this is done. The trick is that the theoretical understanding of a portfolio requires understanding the return, the variability of return, and the correlation of returns of the various assets. That is an exercise that is straightforward for stocks and bonds because the returns of those things are measured in a commensurate way. How to get the data and combine it all for highly non-commensurate assets isn't something I know enough to know how to do.

What should be done is open to suggestions.

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Re: How Does Real Estate Affect Asset Allocation?

Post by jebmke » Thu Nov 23, 2017 11:42 am

Right or wrong I have always taken the position that RE is already reflected in my income and expense estimates so I have excluded them from the portfolio. In addition, since I can't re-balance and it is not liquid, I am more comfortable ignoring it for portfolio considerations. For estate valuation, it is on the books.
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Re: How Does Real Estate Affect Asset Allocation?

Post by dbr » Thu Nov 23, 2017 11:45 am

jebmke wrote:
Thu Nov 23, 2017 11:42 am
Right or wrong I have always taken the position that RE is already reflected in my income and expense estimates so I have excluded them from the portfolio. In addition, since I can't re-balance and it is not liquid, I am more comfortable ignoring it for portfolio considerations. For estate valuation, it is on the books.
Yes, income and expense is one approach to this. Though not very liquid, real estate can be sold in the long run.

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Artsdoctor
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Re: How Does Real Estate Affect Asset Allocation?

Post by Artsdoctor » Thu Nov 23, 2017 12:02 pm

But where do you draw the line? If you're going to include your real estate holdings, do you include your cars? Art? Furniture? If you feel compelled to list those things, you may as well be consistent. But how is that actually going to affect your asset allocation, which is the OP's question?

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Re: How Does Real Estate Affect Asset Allocation?

Post by itstoomuch » Thu Nov 23, 2017 12:08 pm

Depends.
Our home is not included, it's an expense as Robert Kiyosaki vividly points out.
Our bare land has worth but is only worth something to a small number of buyers/investors.
Our rental only as meaning as Income to us. It was acquired in inheritance and will be passed on to heirs in an inheritance.
Our 2nd rental will be used as our retirement home. It is wildly overpriced.

I use Funded Ratio and Income Streams/Buckets not Asset Allocations.
YMMV
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Re: How Does Real Estate Affect Asset Allocation?

Post by randomizer » Thu Nov 23, 2017 12:14 pm

Given that there are many ways of looking at things, each with different arguments in support of it, I actually calculate this a few different ways.

For example, in one I include my emergency fund as part of my fixed income %, in another I treat my mortgage as a negative bond, in another I count real estate equity, including my own house, and various combinations of the above. No one is definitively "right" but looking at them together I get a nuanced sense of my risks, opportunities and progress.

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Artsdoctor
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Re: How Does Real Estate Affect Asset Allocation?

Post by Artsdoctor » Thu Nov 23, 2017 12:22 pm

Just to clarify, the point isn't whether or not to include your real estate holdings on your net worth spreadsheet. The question that the OP presents is whether or not you use your real estate holdings to adjust your asset allocation when it comes to investments. In other words, do your real estate holdings directly influence your stock/bond allocation in your investment portfolio?

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Re: How Does Real Estate Affect Asset Allocation?

Post by bigred77 » Thu Nov 23, 2017 12:24 pm

I only have a couple of fuzzy “rules of thumb”.

My personal residence is an asset and part of my net worth but it does not affect the AA of my financial assets.

If I had investment real estate, I would prefer it’s value (net of financing) not make up more than 1/3 of my net investible assets.

If I had investment real estate I would remove REITs from my portfolio.

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Re: How Does Real Estate Affect Asset Allocation?

Post by ram » Thu Nov 23, 2017 1:05 pm

Under your circumstances I would be OK with a 70% stock allocation.

It would be more aggressive than what I like if there was no real estate. I plan with the assumption that stocks can go down 50% and bonds (TBM) 10%.

Lets say that you had no real estate and had a 50-50 AA for the 3.5 M investible assets. Most people on this board would consider it satisfactory. (1.75 M each of stocks and bonds).

Now consider you move 700 K from bond bucket to stock bucket. You now have the 70/30 allocation.
You have now the potential to lose 350K (50% of the 700K moved). Lets say that actually happens. All you got to do is sell your rental property and replenish it.

Of note if you are in a real bad position financially you can also sell the vacation property to fund the last few years of your retirement.

In summary the availability of the real estate allows you to have a more aggressive stock/ bond ratio.
Ram

victor2244
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Re: How Does Real Estate Affect Asset Allocation?

Post by victor2244 » Thu Nov 23, 2017 1:51 pm

Ram, this is exactly how I have been looking at things. If the market goes down dramatically, I might be looking at a 50% drop in the stock value or a drop af about $1.25M. Certainly a substantial amount and it would be uncomfortable, but still only a drop of 20% of overall assets, excluding my primary residence value. I was trying to get a “pulse” if others thought my stock AA was reasonable for my situation and it sounds like what I am doing is not too unreasonable.

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Re: How Does Real Estate Affect Asset Allocation?

Post by cinghiale » Thu Nov 23, 2017 1:52 pm

I can state what I have done (or, more precisely, not done). This doesn’t constitute advice.

Our primary residence has never been counted in our asset allocation or in determining our investment worth. A while back we received a property as an inheritance. It is currently being rented out. The value of that property perhaps should have had some impact on our overall asset allocation, but it hasn’t. I hold TIAA Real Estate in my 403 plan. Inheriting the property has not nudged me toward liquidating that holding. So, by default, I count TIAA Real Estate in my asset allocation, and do not factor in the rental home.

This thread piques my interest, though. I may hear something compelling and convincing enough to revisit how I view “investment assets.”
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Re: How Does Real Estate Affect Asset Allocation?

Post by dbr » Fri Nov 24, 2017 9:30 am

Artsdoctor wrote:
Thu Nov 23, 2017 12:22 pm
Just to clarify, the point isn't whether or not to include your real estate holdings on your net worth spreadsheet. The question that the OP presents is whether or not you use your real estate holdings to adjust your asset allocation when it comes to investments. In other words, do your real estate holdings directly influence your stock/bond allocation in your investment portfolio?
Correct. And it seems very strange to me that it would not. If nothing else that asset can be considered when determining need/ability/willingness to take risk in stocks and bonds. I previously posted that I am not sure how real estate might be incorporated as part of the actual portfolio as an investment asset.

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Re: How Does Real Estate Affect Asset Allocation?

Post by Artsdoctor » Fri Nov 24, 2017 10:03 am

^ I think this is on target with I would do. I don't own commercial real estate and if I did, I might view it as an income stream. It might not have the same safety as an annuity, but with a certain amount of money coming in every month, I might have a higher equity allocation than I would without the income-producing property.

My personal residence doesn't affect my asset allocation. Although it's "on the books" in terms of estate planning, it doesn't affect my ability or need to take on more (or less) risk.

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Re: How Does Real Estate Affect Asset Allocation?

Post by Sandtrap » Fri Nov 24, 2017 10:34 am

dbr wrote:
Fri Nov 24, 2017 9:30 am
Artsdoctor wrote:
Thu Nov 23, 2017 12:22 pm
Just to clarify, the point isn't whether or not to include your real estate holdings on your net worth spreadsheet. The question that the OP presents is whether or not you use your real estate holdings to adjust your asset allocation when it comes to investments. In other words, do your real estate holdings directly influence your stock/bond allocation in your investment portfolio?
Correct. And it seems very strange to me that it would not. If nothing else that asset can be considered when determining need/ability/willingness to take risk in stocks and bonds. I previously posted that I am not sure how real estate might be incorporated as part of the actual portfolio as an investment asset.
Good Points, "artsdoctor" & "dbr".
This is a topic that might influence my own portfolio as well.

Perhaps what should be considered is the volatility and nature of the R/E holding if it is to influence risk tolerance in a stock/bond allocation. IE: A commercial building may have more risk than a multi-unit residential housing building. Also, income producing vs non income producing property. Also property with appreicative value vs a depreciating property. Stable value vs non.

Let's say one had a 30 unit apartment building. No debts. Averaging a 6% net CAP. With no intention to sell. As "dbr" pointed out, that somewhat reliable income stream could be considered in the entire portfolio just as if someone had a substantial retirement pension vs someone that did not. And, therefore could afford to take a less than conservative stock/bond allocation. But, that might work in that example and not necessarily with all R/E. IE: A home does not create an income stream. Does not always appreciate in value. And, is an expense.

Is a particular R/E holding an "investment", a "business", or ? Perhaps that's why there's so many variations of input on this.
Thoughts?
j :D

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Sandtrap
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Re: How Does Real Estate Affect Asset Allocation?

Post by Sandtrap » Fri Nov 24, 2017 10:45 am

Artsdoctor wrote:
Thu Nov 23, 2017 12:22 pm
Just to clarify, the point isn't whether or not to include your real estate holdings on your net worth spreadsheet. The question that the OP presents is whether or not you use your real estate holdings to adjust your asset allocation when it comes to investments. In other words, do your real estate holdings directly influence your stock/bond allocation in your investment portfolio?
Outstanding clarification. Always interested in your input.
Answer? Perhaps, maybe. The nature of the R/E holdings may effect stock/bond allocation if they are taken into consideration at all. I would be interested in your thoughts on my response to "dbr" on this thread.
mahalo
j :D

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Re: How Does Real Estate Affect Asset Allocation?

Post by johnra » Fri Nov 24, 2017 3:03 pm

I look at my portfolio as liquid assets only, not my home or other which are hard to move around or re-allocate. But my home is probably the cherry in my total estate, so gives me comfort for my security and my legacy.

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Re: How Does Real Estate Affect Asset Allocation?

Post by KyleAAA » Fri Nov 24, 2017 3:10 pm

Include investment real estate in your portfolio for the purposes of asset allocation but not your primary residence. I’d personally include the vacation property as well unless you are 100% certain you will never sell it or extract equity in any way for other purposes. Why wouldn’t you include investment real estate just because it takes a few weeks to sell? That makes no sense. Real estate isn’t as liquid as equities but neither is it illiquid, and it’s precisely that illiquidity premium you hope to harvest with an investment property. Treating is just as an income stream also makes no sense because you are ignoring the fact that there’s a large amount of capital tied up that could be deployed differently.

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Re: How Does Real Estate Affect Asset Allocation?

Post by Artsdoctor » Fri Nov 24, 2017 6:25 pm

KyleAAA wrote:
Fri Nov 24, 2017 3:10 pm
Include investment real estate in your portfolio for the purposes of asset allocation but not your primary residence. I’d personally include the vacation property as well unless you are 100% certain you will never sell it or extract equity in any way for other purposes. Why wouldn’t you include investment real estate just because it takes a few weeks to sell? That makes no sense. Real estate isn’t as liquid as equities but neither is it illiquid, and it’s precisely that illiquidity premium you hope to harvest with an investment property. Treating is just as an income stream also makes no sense because you are ignoring the fact that there’s a large amount of capital tied up that could be deployed differently.
All good points. But it's not just about ignoring the capital of your real estate investments. You can do that. However, it seems like an arbitrary line: "I'll count my investment real estate but not my vacation home, unless I might sell it, but I'm not sure." And as far as your primary residence, you can easily turn that into a cash flow faucet without selling it by simply getting a reverse mortgage. Whether or not you'd do that is one thing, but it would be very easy to do if you wanted.

Trying to put a figure on your real estate holdings and having that affect your equity:bond asset allocation is problematic. However, if the concept is that you have "other assets" swirling around out there, this might allow you to take more risk with your portfolio than if you had nothing.

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Re: How Does Real Estate Affect Asset Allocation?

Post by CurlyDave » Sat Nov 25, 2017 3:16 am

We have both income property and a home.

I treat the income property as both an income stream and the business it really is. One of the beauties of income property is that the rents increase over time. This is substantial inflation protection.

The income property allows me to be more aggressive with my more liquid portfolio holdings. I try not to over-analyze--the business really is a part-time job where I am the boss. It keeps me active in retirement.

I consider our residence an "ace in the hole" for whoever is the survivor between us. The sale of our residence, the portfolio, SS and pensions would set the survivor up in a very, very nice retirement living community.

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Re: How Does Real Estate Affect Asset Allocation?

Post by victor2244 » Sat Nov 25, 2017 8:50 am

I agree that the RE should allow me to be more aggressive with my AA, but by how much? Over the years my stock AA has been as high as 100% and was mostly between 95-100% from 1985-2009. I know that most on the forum would frown on this, but I never panicked during drops and it worked out well for me. I sold some RE in 2008 and cashed out company stock from 2010-2015 and the stock came down to 70-75% based on my more recent purchases. The main reason I am wondering about the AA is that my wife is planning to do some real estate flips and I need to cash out some investments because we will be paying cash for the first property. Therefore, I can try to keep the AA close to the 70/30 or even go to 80/20. I want to be pragmatic about this, establish a goal AA, and stick to it, but am having difficulty deciding “how much more aggressive “ I can be with the AA due to RE and what AA should I use?

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Re: How Does Real Estate Affect Asset Allocation?

Post by afan » Sat Nov 25, 2017 9:49 am

I include everything we own in networth and in asset allocation. The intended use has nothing to do with this. I don't intend ever to sell my VTI, but it is still an asset. Its volatility still contributes to the volatility of the overall portfolio. It is still part of my estate and it is still potentially available to pay bills if it came to that.

Real estate is the same for all of the above.
The only differences are that it is illiquid and it's value can be hard to estimate.

I view it as part of the high volatility component of my portfolio. I assume that it has a relatively low correlation with stocks and with bonds. There are studies that give estimates of these correlations but the values vary. Real estate also has the annoying property of sometimes being highly correlated with stocks, as in the Crash. It is sometimes correlated with bonds as when both go down in response to spikes in interest rates.

Even if I never sell any of our real estate, it all will be sold. Whatever we don't spend in our lifetimes will go to our heirs, who will quickly unload the real estate.

So RE is an asset, just with some different properties.
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Re: How Does Real Estate Affect Asset Allocation?

Post by dbr » Sat Nov 25, 2017 10:14 am

afan wrote:
Sat Nov 25, 2017 9:49 am


So RE is an asset, just with some different properties.
I agree. Part of the question here is the same one that comes up with pensions and annuities. The problem is whether the question is 1) or 2):

1) Should I acknowledge the existence of x (additional resource) when I consider my allocation to stocks and bonds?

2) Having answered 1) as yes, how do I take account of x when I consider my allocation to stocks and bonds?

a) Somehow count x as a stock or as a bond.

b) Consider the effect of x on how much risk to take with stocks and bonds. The answer to this may be that I should take less risk with stocks and bonds or that I should take more risk than I would have if I didn't consider the effect of x. This implies that you have a method for stock/bond allocation that is capable of responding to the existence of x. Age in bonds is an example of something that does not have a method for responding to the existence of income streams or real estate.

c) Figure out how a portfolio can have assets in it that are neither stocks nor bonds and have a method to decide how to allocate across all three. This implies making some decisions about how much real estate to hold. This implies having a method for making the allocation.

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Re: How Does Real Estate Affect Asset Allocation?

Post by Artsdoctor » Sat Nov 25, 2017 10:32 am

^ Then this is reminiscent of Bogle's comments regarding using social security income as a bond holding. Presumably, the higher the social security income during retirement, the more you can "afford" to take equity risk. This is reasonable, but I'm just not sure how accurate you're to be in calculating your asset allocation. The concept would be to include all or most assets including all income streams, but the figure is going to be pretty inexact.

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Re: How Does Real Estate Affect Asset Allocation?

Post by Sandtrap » Sat Nov 25, 2017 10:49 am

Artsdoctor wrote:
Sat Nov 25, 2017 10:32 am
^ Then this is reminiscent of Bogle's comments regarding using social security income as a bond holding. Presumably, the higher the social security income during retirement, the more you can "afford" to take equity risk. This is reasonable, but I'm just not sure how accurate you're to be in calculating your asset allocation. The concept would be to include all or most assetsincluding all income streams, but the figure is going to be pretty inexact.
Good point.
Isn't this what happens with portfolio review?
Those with substantial alternate income streams, (IE: SS, income property, annuity, etc), can afford to have a more aggressive allocation than one without. And, also, those same folks can retire at 65 with less than 25x?
But, the more variables are thrown into the mix, the more inexact and unpredictable the outcome?
IE: A R/E rental income stream may be included into the mix. But, the value of the property may or may not appreciate in value, and in some years may crash by 30% with no predictable recovery. Including this asset does indeed make things more inexact. Also, there is sometimes a perception that a R/E holding or income property does not add volatility to one's portfolio when in fact it might.

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Re: How Does Real Estate Affect Asset Allocation?

Post by dbr » Sat Nov 25, 2017 10:54 am

Artsdoctor wrote:
Sat Nov 25, 2017 10:32 am
^ Then this is reminiscent of Bogle's comments regarding using social security income as a bond holding. Presumably, the higher the social security income during retirement, the more you can "afford" to take equity risk. This is reasonable, but I'm just not sure how accurate you're to be in calculating your asset allocation. The concept would be to include all or most assets including all income streams, but the figure is going to be pretty inexact.
It is not reasonable to take more risk because you can afford it if you don't need to take risk. The fact that Bogle's rule runs only one way when a thoughtful approach might produce the opposite answer is one objection to it.

In the case of real estate it could easily be that the risks involved suggest that other assets should be more conservatively invested than they would be if one were ignoring the existence of the real estate. It is also true that the more wealth and income provided by the asset the less need there is to take risk with stocks and bonds. That, of course, depends on whether or not one wants to reconsider one's objectives.

The better process is to proceed according to the following steps:

1. Recognize the existence of the totality of one's resources.

2. Decide what one's objectives are:

3. Have a method of determining asset allocation that takes 1. and 2. into consideration. (Need/ability/willingness offers a scheme for doing this.)

4. See what the outcome is. The result is going to be different for different circumstances and for different individuals each of whom must proceed according to their own judgement and preference.

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Re: How Does Real Estate Affect Asset Allocation?

Post by dbr » Sat Nov 25, 2017 11:01 am

Sandtrap wrote:
Sat Nov 25, 2017 10:49 am
Artsdoctor wrote:
Sat Nov 25, 2017 10:32 am
^ Then this is reminiscent of Bogle's comments regarding using social security income as a bond holding. Presumably, the higher the social security income during retirement, the more you can "afford" to take equity risk. This is reasonable, but I'm just not sure how accurate you're to be in calculating your asset allocation. The concept would be to include all or most assetsincluding all income streams, but the figure is going to be pretty inexact.
Good point.
Isn't this what happens with portfolio review?

Only if it does.

Those with substantial alternate income streams, (IE: SS, income property, annuity, etc), can afford to have a more aggressive allocation than one without. And, also, those same folks can retire at 65 with less than 25x?

25x is relative to the desired income after income streams are taken into account, ie subtracted from desired spending, so, no, not less. People with substantial income streams can have more, less, or the same need and more, less, or the same ability to take risk than someone without a substantial income stream depending on what they want. It might be a fair argument that such people have less need and more ability to take risk in which case lack of need trumps ability because the marginal value of additional wealth decreases with wealth and because risk is usually underestimated (unless you are part of the crowd that freaks out when a bond fund goes down by 2%).


But, the more variables are thrown into the mix, the more inexact and unpredictable the outcome?
IE: A R/E rental income stream may be included into the mix. But, the value of the property may or may not appreciate in value, and in some years may crash by 30% with no predictable recovery. Including this asset does indeed make things more inexact. Also, there is sometimes a perception that a R/E holding or income property does not add volatility to one's portfolio when in fact it might.

If real estate could be an asset in a portfolio, it would be a risky asset and a possible result is that taking it into account that way would cause a big shift from what would otherwise be stocks into bonds. If, however, the investor had been ignoring the value of the real estate, then now he realizes he is much wealthier than he thought. That might also incline him to take less risk because he does not need to take risk. It is necessary to be clear about exactly what one is comparing, what one is asking, and what one wants to do.

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Re: How Does Real Estate Affect Asset Allocation?

Post by Sandtrap » Sat Nov 25, 2017 11:03 am

dbr wrote:
Sat Nov 25, 2017 10:54 am
. . . . If real estate could be an asset in a portfolio, it would be a risky asset and a possible result is that taking it into account that way would cause a big shift from what would otherwise be stocks into bonds. If, however, the investor had been ignoring the value of the real estate, then now he realizes he is much wealthier than he thought. That might also incline him to take less risk because he does not need to take risk. It is necessary to be clear about exactly what one is comparing, what one is asking, and what one wants to do... . . . .
As is human nature, there have been posts on both sides. R/E assets causing some to include it as fixed and then take more risk. And, vs vs.
. . . In the case of real estate it could easily be that the risks involved suggest that other assets should be more conservatively invested than they would be if one were ignoring the existence of the real estate. It is also true that the more wealth and income provided by the asset the less need there is to take risk with stocks and bonds. That, of course, depends on whether or not one wants to reconsider one's objectives.
. . . . . . The result is going to be different for different circumstances and for different individuals each of whom must proceed according to their own judgement and preference.
Outstanding!
Thanks "dbr".
j :D

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Re: How Does Real Estate Affect Asset Allocation?

Post by Artsdoctor » Sat Nov 25, 2017 11:49 am

Excellent conversation here. On one hand, it's tempting to view real estate income (say, from your apartment building that you've owned) as stable. And yet on the other hand, the income or even principal may not be stable at all (my residence in earthquake territory is showing--although a lot of geography nowadays may be less stable than once believed). So yes, your real estate holding may allow you to increase your risky equity stake--or may prompt you to increase your safe fixed income stake, depending on how you're going to view it.

The difficulty remains in putting a dollar figure on this. The OP is struggling with how to include real estate in his asset allocation, and I sympathize. You may be aware of extra income elsewhere or even the existence of land as part of your retirement planning, but translating that into moving the needle in equity:bond allocation is difficult.

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TD2626
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Re: How Does Real Estate Affect Asset Allocation?

Post by TD2626 » Sat Nov 25, 2017 12:25 pm

It depends and is ultimately personal and people seem to have diferent opinions.

My opinion is that real estate held for personal use amd enjoyment shouldn't be in AA and reits are better for investment than individual pieces of real estate.

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Re: How Does Real Estate Affect Asset Allocation?

Post by Sandtrap » Sat Nov 25, 2017 12:54 pm

Artsdoctor wrote:
Sat Nov 25, 2017 11:49 am
Excellent conversation here. On one hand, it's tempting to view real estate income (say, from your apartment building(s) that you've owned) as stable. And yet on the other hand, the income or even principal may not be stable at all (my residence in earthquake territory is showing--although a lot of geography nowadays may be less stable than once believed). So yes, your real estate holding may allow you to increase your risky equity stake--or may prompt you to increase your safe fixed income stake, depending on how you're going to view it.

The difficulty remains in putting a dollar figure on this. The OP is struggling with how to include real estate in his asset allocation, and I sympathize. You may be aware of extra income elsewhere or even the existence of land as part of your retirement planning, but translating that into moving the needle in equity:bond allocation is difficult.
Thanks "Artsdoctor". Always appreciate your input.
This is why the topic has my fullest attention. "Livesoft" and others tend to view debt free R/E income property as fixed income, whereas "dbr" takes a "it depends" case by case approach which makes sense. R/E also has an intrinsic value but that's for another thread.
As the OP has a substantial allocation to R/E, though not all in income property (which I can identify with) , how much would it move his allocation needle?
j :D

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Re: How Does Real Estate Affect Asset Allocation?

Post by afan » Sat Nov 25, 2017 6:48 pm

If you believe that

RE is volatile
Has limited correlation with both stocks and bonds

Then you can substitute RE for some of the sticks in your portfolio. With it's limited correlation, one might think you could substitute RE for bonds. But RE is both illiquid and has lots of idiosyncratic risk if you own individual properties. If you own REITS then you reduce the idiosyncratic risk but you pick up a high correlation with other stocks.

For those who own individual properties statistics on the correlation of RE with other investments does not really matter. You are concerned with the risk of your property, not RE in general. If you want to control risk, do that with fixed income. Figure that your overall risk *probably* goes down when you substitute RE for some of your stocks.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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