Networth- in diversified assets vs mainly in investment portfolio

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Jimsad
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Networth- in diversified assets vs mainly in investment portfolio

Post by Jimsad » Sat Jan 11, 2020 5:44 am

Currently my networth is about 50% in real estate (home plus commercial building where I conduct my business plus 2 small rental properties ) and 50% in investment portfolio .
I am trying to decide whether it is better to contribute more in future towards my investment portfolio vs accquiring more real estate .
I see some folks only focus on having large investment portfolio and have only small amount of real estate ( in extreme cases , do not even own a house and rent )
Is one approach better than the other ?

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happyisland
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by happyisland » Sat Jan 11, 2020 6:46 am

You will get as many opinions on this as there are bogleheads. My personal one is that, through personal experience of owning non-tradeable assets, I have come to strongly value the liquidity in stocks and bonds.

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Jimsad
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by Jimsad » Sat Jan 11, 2020 7:32 am

happyisland wrote:
Sat Jan 11, 2020 6:46 am
You will get as many opinions on this as there are bogleheads. My personal one is that, through personal experience of owning non-tradeable assets, I have come to strongly value the liquidity in stocks and bonds.
My concern with investments is , it feels great when they are doing well but when there is a market crash , things can get ugly pretty quickly

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tennisplyr
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by tennisplyr » Sat Jan 11, 2020 7:42 am

IMHO my home ownership enabled us to retire comfortably. I know it's not very liquid but I had not purchased my home in my early 30s, I'd not be where I am today. To each his own.
Those who move forward with a happy spirit will find that things always work out.

SandysDad
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by SandysDad » Sat Jan 11, 2020 7:50 am

I view my net worth as a stool with legs. I want to be sure the stool can always be sat upon without falling down.

If your stool only has 2 legs such as stocks and bonds and one of those tanks you are screwed.

So for the OP case he has a real estate allocation of 50 percent and stocks and bonds / cash of 50 percent. I think have real estate as one of the legs of your stool is GOOD you just have a bit much.

Social security if you get it is another leg of your stool.

I would think about taking a portion of your 50% real estate and diversifying that a bit. I would keep atleast 25% of your networth in super safe CDs or government backed credit of short or intermediate duration.

Annuities spia specifically totally suck pricing wise right now but you should keep these in mind as a diversification tool when you retire.

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Jimsad
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by Jimsad » Sat Jan 11, 2020 7:54 am

SandysDad wrote:
Sat Jan 11, 2020 7:50 am
I view my net worth as a stool with legs. I want to be sure the stool can always be sat upon without falling down.

If your stool only has 2 legs such as stocks and bonds and one of those tanks you are screwed.

So for the OP case he has a real estate allocation of 50 percent and stocks and bonds / cash of 50 percent. I think have real estate as one of the legs of your stool is GOOD you just have a bit much.

Social security if you get it is another leg of your stool.

I would think about taking a portion of your 50% real estate and diversifying that a bit. I would keep atleast 25% of your networth in super safe CDs or government backed credit of short or intermediate duration.

Annuities spia specifically totally suck pricing wise right now but you should keep these in mind as a diversification tool when you retire.
Thank you . You are suggesting 25% of ‘networth ‘ in Safe assets and not 25% of investment portfolio , correct ?

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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by msk » Sat Jan 11, 2020 8:04 am

Jimsad wrote:
Sat Jan 11, 2020 7:32 am
happyisland wrote:
Sat Jan 11, 2020 6:46 am
You will get as many opinions on this as there are bogleheads. My personal one is that, through personal experience of owning non-tradeable assets, I have come to strongly value the liquidity in stocks and bonds.
My concern with investments is , it feels great when they are doing well but when there is a market crash , things can get ugly pretty quickly
My asset allocation went from 100% RE at age 30 to 100% stocks at age 60. Owned 30 units before I started selling off. You already know how good is your nose for RE. Sooner or later you get fed up with managing RE. For you it could be at age 80... For me it was when I retired from my day job at age 55. We always wish to offload RE when the RE market gets tough. LoL. If you are wondering about it now, start selling while the going is good. Looking back over 40 years I could have become MUCH richer if I had geared up my stock investments to the extent I geared up RE. We often think of gearing only on RE and see RE as a super attractive AA, but stocks would also have worked wonders over the last few decades. History is beautifully clear :moneybag

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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by SandysDad » Sat Jan 11, 2020 8:33 am

msk wrote:
Sat Jan 11, 2020 8:04 am
Jimsad wrote:
Sat Jan 11, 2020 7:32 am
happyisland wrote:
Sat Jan 11, 2020 6:46 am
You will get as many opinions on this as there are bogleheads. My personal one is that, through personal experience of owning non-tradeable assets, I have come to strongly value the liquidity in stocks and bonds.
My concern with investments is , it feels great when they are doing well but when there is a market crash , things can get ugly pretty quickly
My asset allocation went from 100% RE at age 30 to 100% stocks at age 60. Owned 30 units before I started selling off. You already know how good is your nose for RE. Sooner or later you get fed up with managing RE. For you it could be at age 80... For me it was when I retired from my day job at age 55. We always wish to offload RE when the RE market gets tough. LoL. If you are wondering about it now, start selling while the going is good. Looking back over 40 years I could have become MUCH richer if I had geared up my stock investments to the extent I geared up RE. We often think of gearing only on RE and see RE as a super attractive AA, but stocks would also have worked wonders over the last few decades. History is beautifully clear :moneybag
Funny you mention this. As I got close to retirement I too lowered my real estate. But where I differ on this is I still think one should keep some of their nw in real estate. You never know when we will have a decade where stocks go no where.

To the op. I would consider your equity in re as part of nw and determine asset allocation based on that.

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Jimsad
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by Jimsad » Sat Jan 11, 2020 8:55 am

SandysDad wrote:
Sat Jan 11, 2020 8:33 am
msk wrote:
Sat Jan 11, 2020 8:04 am
Jimsad wrote:
Sat Jan 11, 2020 7:32 am
happyisland wrote:
Sat Jan 11, 2020 6:46 am
You will get as many opinions on this as there are bogleheads. My personal one is that, through personal experience of owning non-tradeable assets, I have come to strongly value the liquidity in stocks and bonds.
My concern with investments is , it feels great when they are doing well but when there is a market crash , things can get ugly pretty quickly
My asset allocation went from 100% RE at age 30 to 100% stocks at age 60. Owned 30 units before I started selling off. You already know how good is your nose for RE. Sooner or later you get fed up with managing RE. For you it could be at age 80... For me it was when I retired from my day job at age 55. We always wish to offload RE when the RE market gets tough. LoL. If you are wondering about it now, start selling while the going is good. Looking back over 40 years I could have become MUCH richer if I had geared up my stock investments to the extent I geared up RE. We often think of gearing only on RE and see RE as a super attractive AA, but stocks would also have worked wonders over the last few decades. History is beautifully clear :moneybag
Funny you mention this. As I got close to retirement I too lowered my real estate. But where I differ on this is I still think one should keep some of their nw in real estate. You never know when we will have a decade where stocks go no where.

To the op. I would consider your equity in re as part of nw and determine asset allocation based on that.
So , should the real estate equity be considered bond equivalent ?

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Jimsad
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by Jimsad » Sat Jan 11, 2020 8:58 am

I have a piece of land and I need to decide whether to try to build something on it for leasing which will further increase my real estate and incur expenses for developing it or just sell it .

SandysDad
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by SandysDad » Sat Jan 11, 2020 9:15 am

Jimsad wrote:
Sat Jan 11, 2020 8:55 am

So , should the real estate equity be considered bond equivalent ?
NO WAY!

I struggled with this for a long time and came to the conclusion that you CANNOT consider your RE Equity like a bond equivalent.

For one, RE equity is NOT liquid and cannot be counted on like (high quality) bonds to be ballast when equities tank.

From a retirement income perspective if the assets are stable and you plan to hold them you can consider your cash flow to be a reduction against your annual expenses provided that your cash flow is reliable and you take from this a generous allocation for vacancy and maintenance / capital reserves.

Or (don't do both) include the real estate in your AA as I stated above and consider it one of the "stools" for your investment portfolio.

Here is an example:
Total NW = 100
Real estate = 25
Stocks = 25
Supersafe Bonds / CD's = 25
Social Security / Pensions / Annuities = 25

If viewed as the standard bogleheads way this is a 50/50 portfolio but it is also split 50/50 as "risk" and "safe". Yes the RE is part of your "risk" portfolio even if it generates reliable income. And you will note that the bond portion in my example is tilted toward lower risk.

If near retirement, calculate your total expenses annually (not including those associated with real estate). Subtract from that your annual income from social security / pensions / annuities, and subtract your RE income (after including a reserve allowance). This is your NET expenses your stocks and bonds / cash portfolio must support. What are these net expenses as a % of the stocks / bonds / cash portfolio? This is your withdraw rate and you will get lots of opinions on where this should be but depending on age and risk tolerance plan on 3-4.5%

Hope this helps.
Last edited by SandysDad on Sat Jan 11, 2020 9:18 am, edited 1 time in total.

SandysDad
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by SandysDad » Sat Jan 11, 2020 9:18 am

Jimsad wrote:
Sat Jan 11, 2020 8:58 am
I have a piece of land and I need to decide whether to try to build something on it for leasing which will further increase my real estate and incur expenses for developing it or just sell it .
If you are already at 50% real estate I would not go higher. Just my opinion.

This does not mean you can't develop the land but rather if you do, you should sell something else in your RE portfolio (ie pick the best RE stuff to hold).

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Jimsad
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by Jimsad » Sat Jan 11, 2020 10:23 am

SandysDad wrote:
Sat Jan 11, 2020 9:15 am
Jimsad wrote:
Sat Jan 11, 2020 8:55 am

So , should the real estate equity be considered bond equivalent ?
NO WAY!

I struggled with this for a long time and came to the conclusion that you CANNOT consider your RE Equity like a bond equivalent.

For one, RE equity is NOT liquid and cannot be counted on like (high quality) bonds to be ballast when equities tank.

From a retirement income perspective if the assets are stable and you plan to hold them you can consider your cash flow to be a reduction against your annual expenses provided that your cash flow is reliable and you take from this a generous allocation for vacancy and maintenance / capital reserves.

Or (don't do both) include the real estate in your AA as I stated above and consider it one of the "stools" for your investment portfolio.

Here is an example:
Total NW = 100
Real estate = 25
Stocks = 25
Supersafe Bonds / CD's = 25
Social Security / Pensions / Annuities = 25

If viewed as the standard bogleheads way this is a 50/50 portfolio but it is also split 50/50 as "risk" and "safe". Yes the RE is part of your "risk" portfolio even if it generates reliable income. And you will note that the bond portion in my example is tilted toward lower risk.

If near retirement, calculate your total expenses annually (not including those associated with real estate). Subtract from that your annual income from social security / pensions / annuities, and subtract your RE income (after including a reserve allowance). This is your NET expenses your stocks and bonds / cash portfolio must support. What are these net expenses as a % of the stocks / bonds / cash portfolio? This is your withdraw rate and you will get lots of opinions on where this should be but depending on age and risk tolerance plan on 3-4.5%

Hope this helps.
Thank you . Will need to chew on this a little bit to understand fully!

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Jimsad
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by Jimsad » Sat Jan 11, 2020 10:44 am

SandysDad wrote:
Sat Jan 11, 2020 9:15 am
Jimsad wrote:
Sat Jan 11, 2020 8:55 am

So , should the real estate equity be considered bond equivalent ?
NO WAY!

I struggled with this for a long time and came to the conclusion that you CANNOT consider your RE Equity like a bond equivalent.

For one, RE equity is NOT liquid and cannot be counted on like (high quality) bonds to be ballast when equities tank.

From a retirement income perspective if the assets are stable and you plan to hold them you can consider your cash flow to be a reduction against your annual expenses provided that your cash flow is reliable and you take from this a generous allocation for vacancy and maintenance / capital reserves.

Or (don't do both) include the real estate in your AA as I stated above and consider it one of the "stools" for your investment portfolio.

Here is an example:
Total NW = 100
Real estate = 25
Stocks = 25
Supersafe Bonds / CD's = 25
Social Security / Pensions / Annuities = 25

If viewed as the standard bogleheads way this is a 50/50 portfolio but it is also split 50/50 as "risk" and "safe". Yes the RE is part of your "risk" portfolio even if it generates reliable income. And you will note that the bond portion in my example is tilted toward lower risk.

If near retirement, calculate your total expenses annually (not including those associated with real estate). Subtract from that your annual income from social security / pensions / annuities, and subtract your RE income (after including a reserve allowance). This is your NET expenses your stocks and bonds / cash portfolio must support. What are these net expenses as a % of the stocks / bonds / cash portfolio? This is your withdraw rate and you will get lots of opinions on where this should be but depending on age and risk tolerance plan on 3-4.5%

Hope this helps.
I am not sure I would agree to consider real estate as stock equivalent .
My desired asset allocation is about 70:30 stocks and bonds and I was applying this to only my investment portfolio . As per what you said , if I consider the real estate as stock equivalent , then I would be allocating a much bigger chunk of my investment portfolio to bonds and not the present 30%.
This would be too conservative for my liking .

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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by goodenyou » Sat Jan 11, 2020 11:13 am

A home and commercial real estate, to me, are completely different investments. Commercial real estate should produce cash flow. In addition to stocks and bonds, it can fund your consumption. Unless you liquidate your home value and then rent or buy another home for less, its value is a place to live. Of course it is part of your net worth, but its value cannot be used in a withdrawal strategy unless its sold or you do a reverse mortgage of some type. If you age (and die) in place, it will be part of legacy. I am one to have a large portion of my net worth in stocks and bonds and a small portion in my home (less than 7% of net worth- and paid off). It gives me a lot of options. I just went through a liquidity cycle in my commercial real estate, and now having a very large liquid position is empowering. Now, I am being courted to get back in :oops:
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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Jimsad
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by Jimsad » Sat Jan 11, 2020 11:43 am

My real estate breakdown -
Home- 18% net worth
Commercial building where I have my business (I am the landlord as well as tenant )- 15% net worth
Piece of land - 8%
Residential rentals - 10%

Just thought I would clarify my holdings further

SandysDad
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by SandysDad » Sat Jan 11, 2020 11:52 am

Jimsad wrote:
Sat Jan 11, 2020 10:44 am
I am not sure I would agree to consider real estate as stock equivalent .
My desired asset allocation is about 70:30 stocks and bonds and I was applying this to only my investment portfolio . As per what you said , if I consider the real estate as stock equivalent , then I would be allocating a much bigger chunk of my investment portfolio to bonds and not the present 30%.
This would be too conservative for my liking .
I did not say it was a "stock equivalent". I said it was part of your "risk" portfolio. And I provided a sample AA using equal weights, no reason why you can't tilt it to be unequal weights. Just don't try to fool yourself into thinking that your real estate is not part of your AA, it is. And it is different than stock, as well as different than bonds. Its its own asset class and as such you are going to have to think for yourself about how to allocate to it versus stocks and bonds as they are all different beasts.

From your additional detail above, you are not as heavy in RE as you initially implied. Really only the 10% residential rentals is a pure cash flowing RE investment. The raw land is basically an illiquid speculative holding. And the commercial building is tied to your business, so somewhat different as well.

Good luck.

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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by unclescrooge » Sat Jan 11, 2020 12:30 pm

msk wrote:
Sat Jan 11, 2020 8:04 am
Jimsad wrote:
Sat Jan 11, 2020 7:32 am
happyisland wrote:
Sat Jan 11, 2020 6:46 am
You will get as many opinions on this as there are bogleheads. My personal one is that, through personal experience of owning non-tradeable assets, I have come to strongly value the liquidity in stocks and bonds.
My concern with investments is , it feels great when they are doing well but when there is a market crash , things can get ugly pretty quickly
My asset allocation went from 100% RE at age 30 to 100% stocks at age 60. Owned 30 units before I started selling off. You already know how good is your nose for RE. Sooner or later you get fed up with managing RE. For you it could be at age 80... For me it was when I retired from my day job at age 55. We always wish to offload RE when the RE market gets tough. LoL. If you are wondering about it now, start selling while the going is good. Looking back over 40 years I could have become MUCH richer if I had geared up my stock investments to the extent I geared up RE. We often think of gearing only on RE and see RE as a super attractive AA, but stocks would also have worked wonders over the last few decades. History is beautifully clear :moneybag
Great advice.
I feel like selling my 2 rentals that I'm never managed, let alone even seen because I'm tired of them. But I balk at the capital gains and depreciation recapture.

How did you deal with the taxes on your properties when you sold?

msk
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Re: Networth- in diversified assets vs mainly in investment portfolio

Post by msk » Sun Jan 12, 2020 3:00 am

unclescrooge wrote:
Sat Jan 11, 2020 12:30 pm
Great advice.
I feel like selling my 2 rentals that I'm never managed, let alone even seen because I'm tired of them. But I balk at the capital gains and depreciation recapture.

How did you deal with the taxes on your properties when you sold?
As a wise man once said, to be taxed means that you have made an income. Overall, that's good. Don't let the tax tail wag your investment decisions unduly. I never did claim any depreciation because of the impending recapture headaches. This is quite unusual, and adding depreciation would have had the undesirable effect (to me anyway) of having to take larger mortgages for interest to balance out net income. As they say, you have eaten the cake already by claiming depreciation, while in fact your property was probably appreciating :annoyed My 30 units were scattered over 3 countries, each with its own tax regimes and definitions. I managed to sell off 2 units (single family homes) because I or my DW used them as principal residences in different years, and most of the other 28 units (mostly apartments) were in a country with nil capital gains taxes. So, for me, capital gains tax never distorted the picture unduly, except for timing (in order to claim principal residence status) and in raising mortgages, for which the interest balanced out my net rental incomes per tax jurisdiction. Good luck. It's always better to enjoy the fruit of your investments than to wait for death to pass on with a step-up basis :greedy

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