I bought a house, what is my AA now?

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countmein
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I bought a house, what is my AA now?

Post by countmein » Thu Feb 06, 2020 12:45 pm

I don't think there's a right answer to this but I'm trying to sort out the following (assume capital gains are a non-issue):

Mid forties. My AA and plan has been 50/50 for life. Bonds on the shorter end, in aggregate.

Always a renter until very recently-- bought a house using bonds/cash, no mortgage. House is 1/3 of net worth. My AA/plan never accounted for this change.

Therefore 35% out of the 50% bond allocation is now tied up in the house.

So my new allocation is 35/50/15 RE/stock/bond. Or...is it that 1/3 of my money is gone (spent on a consumable) and my AA is now 77/23 stock/bond?

If the latter, does that mean, per my IPS, that I'm supposed to sell down stocks to get back to 50/50? I could see the answer being YES to rebalance after trading in a lot of safe bonds for moderately risky real estate. Or NO because I'd have to sell off a lot of stocks that I was planning on (and comfortable with) holding forever.

KlangFool
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Re: I bought a house, what is my AA now?

Post by KlangFool » Thu Feb 06, 2020 12:51 pm

OP,

1) How are you going to rebalance the house? You cannot. The house is not part of your AA.

2) Are you going to sell your house in order to buy the stock if your stock is down?

3) Pick your AA. It does not include your house.

KlangFool

rkhusky
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Re: I bought a house, what is my AA now?

Post by rkhusky » Thu Feb 06, 2020 12:53 pm

Will you sell part of your house to rebalance into stocks?

A working AA should only contain assets you will rebalance with.

Perhaps you want to change your AA since your income needs have changed, assuming your homeowners expenses are much less than rent.
Last edited by rkhusky on Thu Feb 06, 2020 12:57 pm, edited 1 time in total.

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Wiggums
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Re: I bought a house, what is my AA now?

Post by Wiggums » Thu Feb 06, 2020 12:54 pm

I don’t count my house as part of my asset allocation of stocks/bonds(fixed income)/cash.

You need to see some of your stocks and buy more bonds unless you are comfortable with 70+% in equities. You are no longer at your desired AA of 50/50.

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goingup
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Re: I bought a house, what is my AA now?

Post by goingup » Thu Feb 06, 2020 12:57 pm

countmein wrote:
Thu Feb 06, 2020 12:45 pm
... my AA is now 77/23 stock/bond?
Yes, that's your current AA. You could rebalance or you could direct all new contributions to bonds.

We had the same dilemma in 2007 when we used most all cash/bonds for a home downpayment. Then along came 2008/2009 and I really wished we had more "safe" assets on hand.

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Re: I bought a house, what is my AA now?

Post by bloom2708 » Thu Feb 06, 2020 1:01 pm

Allocation is for stocks/bonds/cash.

Exclude house, mortgage, cars etc from your mix of stocks/bonds/cash.

If you used all your bonds to buy the house, you need to buy bonds and sell stocks to get back to 50/50.
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Re: I bought a house, what is my AA now?

Post by middistancerunner » Thu Feb 06, 2020 1:01 pm

rkhusky wrote:
Thu Feb 06, 2020 12:53 pm
Perhaps you want to change your AA since your income needs have changed, assuming your homeowners expenses are much less than rent.
You could think of the house as generating a stream of imputed rent: https://en.wikipedia.org/wiki/Imputed_rent

If rents are very stable or slowly increasing in your area, then the imputed rent payment is somewhat bond-like.

That said, I agree with rkhusky that possibly the better solution here is to change your target AA to be a bit more aggressive, since your expenses have gone down.

Goal33
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Re: I bought a house, what is my AA now?

Post by Goal33 » Thu Feb 06, 2020 1:03 pm

now that you have the house, I think you need to find a new AA. I see no issue in working slowly towards it though. Maybe all new money will go to bonds. Good luck
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beehivehave
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Re: I bought a house, what is my AA now?

Post by beehivehave » Thu Feb 06, 2020 1:04 pm

Wouldn't count the house in AA. However, long term it is something of a safe asset as it should hold at least some value and can be borrowed against in a catastrophe. So you might reconsider your original target AA: You might be comfortable reducing bond %, increasing stock % and increasing cash/emergency fund (for house-related issues).

dbr
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Re: I bought a house, what is my AA now?

Post by dbr » Thu Feb 06, 2020 1:04 pm

countmein wrote:
Thu Feb 06, 2020 12:45 pm

So my new allocation is 35/50/15 RE/stock/bond. Or...is it that 1/3 of my money is gone (spent on a consumable) and my AA is now 77/23 stock/bond?
Your AA is 35/50/15 RE/stock/bond and it is 77/23 stock/bond depending on what you want to talk about. Most people here would apply the concept of asset allocation only to stocks and bonds. What asset allocation you want depends on thinking through how much risk you want to take and how much return you want now that your situation is changed.

KingRiggs
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Re: I bought a house, what is my AA now?

Post by KingRiggs » Thu Feb 06, 2020 1:09 pm

I always get a kick out of someone who thinks of their house as an investment.

Very few people actually do a good job of tracking property taxes, homeowners assn dues, insurance, upkeep costs, mortgage interest etc and including them in the cost of ownership. I'm guessing that few people who DO track those things actually come out ahead. Not to mention the opportunity costs of those things mentioned above.

A house is a place to live, period. We spend the money because it makes our lives more enjoyable. Any return on that "investment" is just a happy bonus... 8-)
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Watty
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Re: I bought a house, what is my AA now?

Post by Watty » Thu Feb 06, 2020 1:13 pm

You have at least two different types of asset allocation.

1) Your investment asset allocation, which stocks, bonds, and investment real estate.

2) Your net worth investment asset allocation. Which would also include things like home equity, cars, and your household stuff.

Since you are living in the house and basically consuming the "free rent" (also called imputed rent which you can Google) each month you would not want to include that in your investment asset allocation. This is sort of like how people often ask if they could include a pension or Social Security as a bond in their investment asset allocation. The answer is no for those too.

GoldenFinch
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Re: I bought a house, what is my AA now?

Post by GoldenFinch » Thu Feb 06, 2020 1:14 pm

Net worth is the value of everything you own (house, business, stocks, bonds, cash) minus your total debt.

Asset allocation refers to money invested in equities, bonds and cash.

wolf359
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Re: I bought a house, what is my AA now?

Post by wolf359 » Thu Feb 06, 2020 1:18 pm

KlangFool wrote:
Thu Feb 06, 2020 12:51 pm
OP,

1) How are you going to rebalance the house? You cannot. The house is not part of your AA.

2) Are you going to sell your house in order to buy the stock if your stock is down?

3) Pick your AA. It does not include your house.

KlangFool
I agree with this advice.

If it makes you feel better, use Personal Capital to watch your net worth, which can include your investments and your residence. That way you don't feel poorer, and track the value.

However, asset allocation is only for investible assets. Your investible assets have shrunk, because you sold some of them to buy the house.

What does your investor policy statement (IPS) say to do if your asset allocation is out of whack? Do you rebalance immediately, or annually?

This is also an opportunity to re-evaluate your IPS. Has your risk profile changed? Are you feeling more stable now that your housing costs are fixed? Do you feel like you can take more or less risks? If so, modify the IPS BEFORE you act, because each rebalance is expensive.
If the latter, does that mean, per my IPS, that I'm supposed to sell down stocks to get back to 50/50? I could see the answer being YES to rebalance after trading in a lot of safe bonds for moderately risky real estate. Or NO because I'd have to sell off a lot of stocks that I was planning on (and comfortable with) holding forever.
Don't think of buying the house you live in as an investment. While it technically is an asset that could go up or down in value, you put a lot of emotional (non-financial) factors into its price and selection. People don't day-trade houses. You didn't trade safe bonds for moderately risky real estate. You liquidated part of your portfolio and bought something with it. You are comfortable holding the current amount of stocks you do. If you want to keep holding them, then start buying bonds until your asset allocation is normal. You could also sell the stocks while they're in record high territory, take some of the gains off the table, and rebalance.

There's nothing wrong with having to pay taxes because you made money. It's better than the opposite.
Last edited by wolf359 on Thu Feb 06, 2020 1:29 pm, edited 1 time in total.

dbr
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Re: I bought a house, what is my AA now?

Post by dbr » Thu Feb 06, 2020 1:24 pm

There are people who consider three asset portfolio theory for stocks/bonds/real estate:

http://www.realmarkits.com/derivatives/7.0portfolio.php

https://pdfs.semanticscholar.org/d88c/e ... 5e8912.pdf

https://scholarship.sha.cornell.edu/cgi ... t=articles

I doubt these approaches are particularly helpful to the amateur individual investor who would be better off looking more intuitively at what to do with stocks and bonds in the context of owning real estate.

medic
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Re: I bought a house, what is my AA now?

Post by medic » Thu Feb 06, 2020 1:31 pm

Agree with others, but consider if it's worthwhile to revisit your IPS.
Now that you own a home (really own since no mortgage), you may not need to be as conservative in your AA.

When we paid off our home, our emergency fund went down and asset reduced bonds because a downturn was not as painful. Less need that I'd have to tap the investments and less fear. As long as we could cover the property taxes and basic maintenance, we'd have a roof over our head.

Of course, set your IPS based on your future needs/goals and risk tolerance. If that hasn't changed, then get back to 50/50. You could do this with new money instead of selling to equities. Will take a bit longer, but net effect is the same.

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countmein
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Re: I bought a house, what is my AA now?

Post by countmein » Thu Feb 06, 2020 1:38 pm

KingRiggs wrote:
Thu Feb 06, 2020 1:09 pm
I always get a kick out of someone who thinks of their house as an investment.

Very few people actually do a good job of tracking property taxes, homeowners assn dues, insurance, upkeep costs, mortgage interest etc and including them in the cost of ownership. I'm guessing that few people who DO track those things actually come out ahead. Not to mention the opportunity costs of those things mentioned above.

A house is a place to live, period. We spend the money because it makes our lives more enjoyable. Any return on that "investment" is just a happy bonus... 8-)
Appreciate your view but I can't get away from the straightforward logic of it being an investment. I could rent it out tomorrow and certainly a "rental property" is an investment. In fact, I am renting it out-- to myself (and likewise I still have a rent expense on the other side of the balance sheet). Are rental properties supposed to stay out of one's AA as well? That doesn't work because in reality it's allocated capital. Seems odd to invest in real estate and then not account for it as an allocated asset.

You're right that to see it this way one needs to track all the aforementioned costs of ownership. Imputed rent (yield) + appreciation - costs = return. Capital improvements are akin to new contributions.

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Re: I bought a house, what is my AA now?

Post by KlangFool » Thu Feb 06, 2020 1:47 pm

countmein wrote:
Thu Feb 06, 2020 1:38 pm
KingRiggs wrote:
Thu Feb 06, 2020 1:09 pm
I always get a kick out of someone who thinks of their house as an investment.

Very few people actually do a good job of tracking property taxes, homeowners assn dues, insurance, upkeep costs, mortgage interest etc and including them in the cost of ownership. I'm guessing that few people who DO track those things actually come out ahead. Not to mention the opportunity costs of those things mentioned above.

A house is a place to live, period. We spend the money because it makes our lives more enjoyable. Any return on that "investment" is just a happy bonus... 8-)
Appreciate your view but I can't get away from the straightforward logic of it being an investment. I could rent it out tomorrow and certainly a "rental property" is an investment. In fact, I am renting it out-- to myself (and likewise I still have a rent expense on the other side of the balance sheet). Are rental properties supposed to stay out of one's AA as well? That doesn't work because in reality it's allocated capital. Seems odd to invest in real estate and then not account for it as an allocated asset.

You're right that to see it this way one needs to track all the aforementioned costs of ownership. Imputed rent (yield) + appreciation - costs = return. Capital improvements are akin to new contributions.
countmein,

<<the straightforward logic of it being an investment. >>

There is nothing straightforward about this. The house reduces your expenses by imputed rents. But, it is not something that you can rebalance with. So, it cannot be part of your AA.

If you can explain to us how you can rebalance your AA with the house, then, it is straightforward. Are you going to sell your house and buy the stock if the stock is down? If not, in practical terms, it is not part of your AA.

<<Are rental properties supposed to stay out of one's AA as well? >>

Yes. You cannot rebalance with that too.

KlangFool

Goal33
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Re: I bought a house, what is my AA now?

Post by Goal33 » Thu Feb 06, 2020 1:48 pm

take out a mortgage and buy bonds with it :wink:
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countmein
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Re: I bought a house, what is my AA now?

Post by countmein » Thu Feb 06, 2020 2:12 pm

KlangFool wrote:
Thu Feb 06, 2020 1:47 pm

countmein,

<<the straightforward logic of it being an investment. >>

There is nothing straightforward about this. The house reduces your expenses by imputed rents. But, it is not something that you can rebalance with. So, it cannot be part of your AA.

If you can explain to us how you can rebalance your AA with the house, then, it is straightforward. Are you going to sell your house and buy the stock if the stock is down? If not, in practical terms, it is not part of your AA.

<<Are rental properties supposed to stay out of one's AA as well? >>

Yes. You cannot rebalance with that too.

KlangFool
Doesn't seem right that ability to rebalance / degree of liquidity determines whether or not an asset gets accounted for. Suppose I moved half my stocks to a portfolio of private equity investments with limited liquidity. Or I bought some interval funds that can't be traded as readily as ETFs. This is still "allocated" capital with risks that should be balanced and accounted for in one's AA.

Must also count the imputed rent (yield) as an expense if I'm going to be consuming it and not pocketing said yield. I think this point probably escapes some folks.

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Re: I bought a house, what is my AA now?

Post by MichCPA » Thu Feb 06, 2020 2:34 pm

Yikes!

I thought one of the major lessons from 07-09 was to NOT treat your house like an investable asset because it is very illiquid and that is never more true than when everyone tries to sell at once. I guess you just need to ask yourself. "Would I be willing to sell my house at a huge loss due to a temporary change in the stock market.

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countmein
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Re: I bought a house, what is my AA now?

Post by countmein » Thu Feb 06, 2020 2:40 pm

MichCPA wrote:
Thu Feb 06, 2020 2:34 pm
Yikes!

I thought one of the major lessons from 07-09 was to NOT treat your house like an investable asset because it is very illiquid and that is never more true than when everyone tries to sell at once. I guess you just need to ask yourself. "Would I be willing to sell my house at a huge loss due to a temporary change in the stock market.
Why would I need to sell my house due to a change in the stock market?

dbr
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Re: I bought a house, what is my AA now?

Post by dbr » Thu Feb 06, 2020 3:35 pm

countmein wrote:
Thu Feb 06, 2020 2:40 pm
MichCPA wrote:
Thu Feb 06, 2020 2:34 pm
Yikes!

I thought one of the major lessons from 07-09 was to NOT treat your house like an investable asset because it is very illiquid and that is never more true than when everyone tries to sell at once. I guess you just need to ask yourself. "Would I be willing to sell my house at a huge loss due to a temporary change in the stock market.
Why would I need to sell my house due to a change in the stock market?
In order to rebalance your asset allocation to target. You would sell the house and replace it with one of lower value. Of course, nobody says your rebalancing rule is that you have to do that and you can always do the calculation of what your house/stock/bond allocation is, whatever it might mean.

dbr
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Re: I bought a house, what is my AA now?

Post by dbr » Thu Feb 06, 2020 3:39 pm

countmein wrote:
Thu Feb 06, 2020 2:12 pm


Doesn't seem right that ability to rebalance / degree of liquidity determines whether or not an asset gets accounted for. Suppose I moved half my stocks to a portfolio of private equity investments with limited liquidity. Or I bought some interval funds that can't be traded as readily as ETFs. This is still "allocated" capital with risks that should be balanced and accounted for in one's AA.

Must also count the imputed rent (yield) as an expense if I'm going to be consuming it and not pocketing said yield. I think this point probably escapes some folks.
Of course. The issue is what kind of portfolio theory you apply to that to produce a portfolio risk and return from the properties of the components. Do we look at the risk and return of illiquid investments as being commensurate with those statistics for liquid investments? Also what method do we have for deciding how much should be place in each asset and why we can not care if the allocation changes without anything being done about it.

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countmein
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Re: I bought a house, what is my AA now?

Post by countmein » Thu Feb 06, 2020 4:34 pm

Thanks for the input.

I've decided to split the difference between holding on to all equities (ie 77/23 AA) vs rebalancing to keep the 50/50 AA by using a 60/40 AA going forward (or 35/40/25 if you include the RE).

This means selling down 20% of current equity holdings which feels like a fair risk offset for having moved 70% of bonds into RE.

quantAndHold
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Re: I bought a house, what is my AA now?

Post by quantAndHold » Thu Feb 06, 2020 4:41 pm

countmein wrote:
Thu Feb 06, 2020 4:34 pm
Thanks for the input.

I've decided to split the difference between holding on to all equities (ie 77/23 AA) vs rebalancing to keep the 50/50 AA by using a 60/40 AA going forward (or 35/40/25 if you include the RE).

This means selling down 20% of current equity holdings which feels like a fair risk offset for having moved 70% of bonds into RE.
Seems reasonable. My comment was going to be that, after the purchase, your AA is still 50/50. But...you now have a large, safe asset that isn't part of your AA anymore, so you might want to adjust your AA to compensate.

It looks like you came to that conclusion before I got here...carry on...

Greg in Idaho
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Re: I bought a house, what is my AA now?

Post by Greg in Idaho » Fri Feb 07, 2020 12:23 pm

So how does this scenario change if the real estate purchase was for a business (not a home)?

We are in a very similar boat to the OP, except we spent about 10% of our total portfolio, all from bond funds, to purchase a property that my new business will occupy. Now we are low on the fixed income side, but have just a little room to adjust without incurring taxable events, so I taking some time to think this through (with some help...)

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Re: I bought a house, what is my AA now?

Post by harvestbook » Fri Feb 07, 2020 3:32 pm

I've never understood thinking of a house as an asset. Sure, you can sell it, but then you have to pay to live somewhere else (which also makes it odd to think of it as "renting to yourself," because if you rented out your house to someone else, you'd STILL need a place to live, either by buying or renting.)

I consider a house a necessary liability because of its ongoing costs, with the goal of reducing housing costs to as low as possible. Therefore, I don't consider it part of the AA and not really even part of my net worth for practical purposes.
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Re: I bought a house, what is my AA now?

Post by Unladen_Swallow » Fri Feb 07, 2020 3:58 pm

House is where you live. It is an asset, but is not part of your AA (the way AA is typically looked at).
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Re: I bought a house, what is my AA now?

Post by nisiprius » Fri Feb 07, 2020 4:06 pm

If you don't live in it, and you bought in order to collect rent and make a profit when you sell, then it is part of your asset allocation.
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Re: I bought a house, what is my AA now?

Post by Oddball » Fri Feb 07, 2020 4:57 pm

nisiprius wrote:
Fri Feb 07, 2020 4:06 pm
If you don't live in it, and you bought in order to collect rent and make a profit when you sell, then it is part of your asset allocation.
What if you bought when you were single, lived there 10 years, and then got married and moved to a new location and turned it into a rental?

What if you bought it to live in and rented out some of the bedrooms? Then, after several years you moved out but kept the house as a rental?

We own a 2 unit building which we live in one unit rent the other, a rental single family house, and a rental condo. Our AA is 80/20 stocks/bonds and our rentals do not affect our AA selection / are not included in it. Our net worth is ~60% stocks/bonds and ~40% equity in the real estate we directly own. The 60%/40% is totally fluid and I really don't care what it is, I have no target for % as they are independant.

In the end it is up to each individual to decide what they want to do.

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Re: I bought a house, what is my AA now?

Post by Quaestner » Fri Feb 07, 2020 6:16 pm

countmein wrote:
Thu Feb 06, 2020 4:34 pm
Thanks for the input.

I've decided to split the difference between holding on to all equities (ie 77/23 AA) vs rebalancing to keep the 50/50 AA by using a 60/40 AA going forward (or 35/40/25 if you include the RE).

This means selling down 20% of current equity holdings which feels like a fair risk offset for having moved 70% of bonds into RE.
This random amateur investor agrees with your conclusion to move to 60/40. You have less fixed expenses now and can logically choose to take on more risk. I would resist thinking about the house as RE and part of your AA (unless you're living in an apartment or rental home). You always will need somewhere to live.

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countmein
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Re: I bought a house, what is my AA now?

Post by countmein » Fri Feb 07, 2020 7:07 pm

harvestbook wrote:
Fri Feb 07, 2020 3:32 pm
I've never understood thinking of a house as an asset. Sure, you can sell it, but then you have to pay to live somewhere else (which also makes it odd to think of it as "renting to yourself," because if you rented out your house to someone else, you'd STILL need a place to live, either by buying or renting.)

I consider a house a necessary liability because of its ongoing costs, with the goal of reducing housing costs to as low as possible. Therefore, I don't consider it part of the AA and not really even part of my net worth for practical purposes.
Real estate, like other productive assets, has a market value and a yield. The yield of real estate is shelter, and is consumable. Whomever occupies the property consumes the shelter/yield. Wherever I live, whether I own it or not, I consume shelter.

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countmein
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Re: I bought a house, what is my AA now?

Post by countmein » Fri Feb 07, 2020 7:15 pm

nisiprius wrote:
Fri Feb 07, 2020 4:06 pm
If you don't live in it, and you bought in order to collect rent and make a profit when you sell, then it is part of your asset allocation.
If I were to sell my stocks and buy a farm that grows corn, I would count that farm as an asset in my portfolio. My asset, like other productive assets, would have a price and a yield (corn). If I ate some (or all) of the corn, it would not cease to be an asset in my portfolio.

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Re: I bought a house, what is my AA now?

Post by EnjoyIt » Fri Feb 07, 2020 7:27 pm

This thread exists because too many people call a mortgage a negative bond.
🤦🏻‍♂️

A house is not a bond. A house you live in is a consumable expense that you live in.

OP,
I like your plan of splitting the difference. Your expenses went down and so has your risk by owning your own home. Increasing your equities exposure is a reasonable response.
Last edited by EnjoyIt on Fri Feb 07, 2020 8:08 pm, edited 1 time in total.

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countmein
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Re: I bought a house, what is my AA now?

Post by countmein » Fri Feb 07, 2020 7:34 pm

EnjoyIt wrote:
Fri Feb 07, 2020 7:27 pm
This thread exists because too many people call a mortgage a negative bond.
🤦🏻‍♂️

A house is not a bond. A house you live in is a consumable expense that you live in.

OP,
I like you plan of splitting the difference. Your expenses went down and so has your risk by owning your own home. Increase your equities exposure is a reasonable response.
According to my AA I "increased" exposure. According to TDAmeritrade, I'm a few hundred thousand lighter in equities than I was prior. That irony is, I guess, the point of the thread. It certainly "feels" like a decrease, fwiw.

EnjoyIt
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Re: I bought a house, what is my AA now?

Post by EnjoyIt » Fri Feb 07, 2020 8:08 pm

countmein wrote:
Fri Feb 07, 2020 7:34 pm
EnjoyIt wrote:
Fri Feb 07, 2020 7:27 pm
This thread exists because too many people call a mortgage a negative bond.
🤦🏻‍♂️

A house is not a bond. A house you live in is a consumable expense that you live in.

OP,
I like you plan of splitting the difference. Your expenses went down and so has your risk by owning your own home. Increase your equities exposure is a reasonable response.
According to my AA I "increased" exposure. According to TDAmeritrade, I'm a few hundred thousand lighter in equities than I was prior. That irony is, I guess, the point of the thread. It certainly "feels" like a decrease, fwiw.
Here is what you did. You took a certain amount of cash and converted it into a consumable item that lowers your living expenses because now you don't have to pay rent. You paid a price for those lower expenses and luxury of home ownership.

It is no different than putting solar on your roof. You pay $30k or whatever for a bunch of panels and lower or eliminate your electric bill.

One more example. For this example lets just agree that 4% withdrawal rate is the perfect withdrawal rate. And for this example we have a family spending $60k a year of which $20k of it is rent and $40k is everything else. This family has $1.5 million. They decide to buy a house for $300k and they paid cash. They now have $1.2 million allowing a 4% withdrawal of 4% or $50k a year. They pay property tax of $3k/yr and have home maintenance of $3k/yr therefore coming out ahead by $4k/yr. For this hypothetical family, although they have less investable assets, they are financially better off. I have no idea where you sit compared to this example, but owning a home and having less invested assets is not necessarily a bad thing.
Last edited by EnjoyIt on Sat Feb 08, 2020 10:37 am, edited 1 time in total.

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Re: I bought a house, what is my AA now?

Post by 1789 » Sat Feb 08, 2020 10:18 am

I wouldn't count house as part of AA unless you are getting some income from it.
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Re: I bought a house, what is my AA now?

Post by alex_686 » Sat Feb 08, 2020 11:25 am

countmein wrote:
Fri Feb 07, 2020 7:15 pm
If I were to sell my stocks and buy a farm that grows corn, I would count that farm as an asset in my portfolio. My asset, like other productive assets, would have a price and a yield (corn). If I ate some (or all) of the corn, it would not cease to be an asset in my portfolio.
This is correct. This is called imputed rent. Just because you consume rent doesn't make it not a asset. Every last investment textbook and white paper emphasizes that a house is a asset that should be included as part of your IPS.

That being said, these investment guides suggest that you evaluate the house for any surprises. Large adjustable mortgages. Investor is planning to sell to finance their retirement. Leaving the home to their grandchildren as a legacy. etc. After assuring that their are no surprises, toss the house out of the AA. From a rational viewpoint it is complex and from a emotional viewpoint it is a mess. The primary benefit of a owner occupied house is a hedge against inflation.

Just keep your mortgage in as a negative bond so you know how much interest rate risk and leverage you are taking on.

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Re: I bought a house, what is my AA now?

Post by grabiner » Sat Feb 08, 2020 5:02 pm

countmein wrote:
Thu Feb 06, 2020 12:45 pm
I don't think there's a right answer to this but I'm trying to sort out the following (assume capital gains are a non-issue):

Mid forties. My AA and plan has been 50/50 for life. Bonds on the shorter end, in aggregate.

Always a renter until very recently-- bought a house using bonds/cash, no mortgage. House is 1/3 of net worth. My AA/plan never accounted for this change.

Therefore 35% out of the 50% bond allocation is now tied up in the house.

So my new allocation is 35/50/15 RE/stock/bond. Or...is it that 1/3 of my money is gone (spent on a consumable) and my AA is now 77/23 stock/bond?

If the latter, does that mean, per my IPS, that I'm supposed to sell down stocks to get back to 50/50?
No, it means that you should adjust your IPS, just as you would for other financial changes such as starting a new job or having a child. Now that you own a house, your risk tolerance has changed, because this house will provide you with a place to live without drawing down much of your retirement portfolio.

I wouldn't count the house in the investment portfolio because it isn't really analogous to an investment; you cannot easily convert it to cash, nor buy and sell parts of it to change your allocation. For purposes of retirement, it works more like an annuity which pays one month's rent (less maintenance and taxes) every month.

I made the same adjustment when I bought my home, and another adjustment because I took out a mortgage which I count as a negative bond. When I bought it, I changed my asset allocation to 100% net stock; that is, the government owed me X dollars on my Treasury bonds, and I owed the bank X dollars in mortgage payments, which puts me in the same situation as if I did not own either. I could have paid cash, selling stock in my taxable account to avoid the mortgage, and selling all the bonds in my retirement account to get back to the same stock allocation; this was not worthwhile because I would have had a huge capital gain on the stock sales.
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Re: I bought a house, what is my AA now?

Post by cashboy » Sat Feb 08, 2020 8:28 pm

countmein wrote:
Fri Feb 07, 2020 7:07 pm
Real estate, like other productive assets, has a market value and a yield. The yield of real estate is shelter, and is consumable. Whomever occupies the property consumes the shelter/yield. Wherever I live, whether I own it or not, I consume shelter.
OP,

in trying to look at it another way i came up with this:

if i sell several investment assets (stocks) and buy a truck is that truck part of my AA portfolio?

say that buying that truck changed my bonds/equities %s from 50/50 to 52/48.

the truck will take me places, carries things, and has a $ value. it also has support costs like a house (taxes, insurance, fuel). though not exactly the same as a house, the truck is the same in that it is something i can touch and use (and could live in it if need be :happy ).

lets take your statement from the quote above and change 'real estate' to 'truck'.


a truck, like other productive assets, has a market value and a yield. The yield of truck is transportation, and is consumable. Whomever owns the truck consumes the transportation/yield. Whatever i drive, whether I own it or not, I consume transportation.


that truck is certainly part of my 'net worth', but it is part of my AA portfolio? i would say no, it is not, since my AA portfolio is comprised of investment assets that i can buy, sell, rebalance, etc.

but, if you say your house is part of your AA then (to you) it is. :happy
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Re: I bought a house, what is my AA now?

Post by JAZZISCOOL » Sat Feb 08, 2020 11:01 pm

dbr wrote:
Thu Feb 06, 2020 1:24 pm
There are people who consider three asset portfolio theory for stocks/bonds/real estate:

http://www.realmarkits.com/derivatives/7.0portfolio.php

https://pdfs.semanticscholar.org/d88c/e ... 5e8912.pdf

https://scholarship.sha.cornell.edu/cgi ... t=articles

I doubt these approaches are particularly helpful to the amateur individual investor who would be better off looking more intuitively at what to do with stocks and bonds in the context of owning real estate.
Thanks for posting these. Retail vs. institutional investors is a key point. Liquidity is important for many investors.

Direct real estate and other illiquid investments (e.g. private equity, venture capital and many HF's with longer lock ups) are all included in the policy asset allocation of many institutional portfolios (e.g. foundations, endowments (e.g. Yale, Harvard) and pension funds). It created some challenges during the 2008 financial crisis in terms of liquidity but many of them are still heavily invested in illiquid investments. Illiquid assets are still assets.

Then there is the high net worth category. I listen to the White Coat Investor podcast sometimes and they talk about interesting real estate strategies sometimes that probably require a long lock up but very high minimum investments which many of us may not meet.

Then there are ultra HNW people who invest in art and other collectibles on top of other things. At that level, they may not have to worry that much about rebalancing stocks/bonds, I suspect, since their net worth is so high. :happy

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Re: I bought a house, what is my AA now?

Post by welderwannabe » Sun Feb 09, 2020 9:02 am

I disagree that one's real-estate investments aren't part of their AA just because it is semi-iliquid and hard to use to rebalance.

Personally, I would not consider my primary residence part of my AA as I am using it to live in. However, any investment properties such as rental real-state I would absolutely include.

However, I probably would have sold my investments in proportion to my AA and not taken it all from Bonds/Cash.
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Re: I bought a house, what is my AA now?

Post by mmmodem » Sun Feb 09, 2020 9:38 am

OP, you can do whatever you want. Asset allocation is what you are comfortable with. I sold my primary home 2 years ago for a relocation. At 3.5% interest rate, I chose to apply only 20% of the gains on my previous home as downpayment on my next home. The remainder, I invested in my asset allocation.

So yes, I do consider my home an asset and an investment and I do rebalance my AA with the home I live in. The simple reason for me to consider it part of my AA is that once owned it will reduce my spending in retirement. Or look at another way, the opportunity cost of investing the equity instead reduces my safe withdrawal rate. Owning has a real cost and I need to consider It's impact as part of my AA.

Finally, whether I am right or wrong is inconsequential. If I want to consider my assets to match Boglehead conversation, then I will exclude my home. Simple.

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Re: I bought a house, what is my AA now?

Post by retiredjg » Sun Feb 09, 2020 9:54 am

countmein wrote:
Thu Feb 06, 2020 12:45 pm
Or...is it that 1/3 of my money is gone (spent on a consumable) and my AA is now 77/23 stock/bond?
This is how I see it although I would not call the home a "consumable".

If the latter, does that mean, per my IPS, that I'm supposed to sell down stocks to get back to 50/50?
Maybe. But since you won't be paying rent or paying a mortgage, maybe your risk tolerance has changed and you'd now be comfortable with a higher percentage of stocks?

You can do whatever you want. If your risk tolerance is still 50/50, I'd start moving toward that number. How fast you get there depends on how uncomfortable you are with what you have now and how much it might cost in taxes to get to your number.


I do not see you as 35/50/15 because your "real estate" is not an investment. It is a place to live which might turn out to produce a profit if/when you sell it.

I see your current AA as 77% stocks and 23% bonds.

Do not confuse "net worth" with the "AA of my portfolio". They are not the same thing at all.

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Re: I bought a house, what is my AA now?

Post by EnjoyIt » Sun Feb 09, 2020 4:08 pm

mmmodem wrote:
Sun Feb 09, 2020 9:38 am
OP, you can do whatever you want. Asset allocation is what you are comfortable with. I sold my primary home 2 years ago for a relocation. At 3.5% interest rate, I chose to apply only 20% of the gains on my previous home as downpayment on my next home. The remainder, I invested in my asset allocation.

So yes, I do consider my home an asset and an investment and I do rebalance my AA with the home I live in. The simple reason for me to consider it part of my AA is that once owned it will reduce my spending in retirement. Or look at another way, the opportunity cost of investing the equity instead reduces my safe withdrawal rate. Owning has a real cost and I need to consider It's impact as part of my AA.

Finally, whether I am right or wrong is inconsequential. If I want to consider my assets to match Boglehead conversation, then I will exclude my home. Simple.
May I ask? How would you view solar panels on your roof? Would that be part of your AA? After all it will decrease your spending on utilities.

What about a hydroponic greenhouse in your backyard? That would decrease your spending on groceries.

What about your car? It decrease your need to rent a taxi every time you want to leave the house.

I’m sure you see where I’m getting at. It can be a thin line between owning property and an AA.

I’m not saying you are right or wrong on what you do. It is your money and how you view it is your own business. I’m just offering a potential perspective.

For me, a house is a consumable item that requires upkeep. If I did not have this house then that money would be in another house. Or that money would be used to pay rent. To fit your view of the perspective, we may very well sell our house and buy something more expensive in a lower property tax state. The way I see it, if we spend an extra $250k on the house but our property tax drops by $10k, it will be a financially neutral move that would decrease our sequence of return risk in retirement. We would not adjust our asset allocation doing so.

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Re: I bought a house, what is my AA now?

Post by bitdocmd » Sun Feb 09, 2020 4:19 pm

countmein wrote:
Thu Feb 06, 2020 12:45 pm
I don't think there's a right answer to this but I'm trying to sort out the following (assume capital gains are a non-issue):

Mid forties. My AA and plan has been 50/50 for life. Bonds on the shorter end, in aggregate.

Always a renter until very recently-- bought a house using bonds/cash, no mortgage. House is 1/3 of net worth. My AA/plan never accounted for this change.

Therefore 35% out of the 50% bond allocation is now tied up in the house.

So my new allocation is 35/50/15 RE/stock/bond. Or...is it that 1/3 of my money is gone (spent on a consumable) and my AA is now 77/23 stock/bond?

If the latter, does that mean, per my IPS, that I'm supposed to sell down stocks to get back to 50/50? I could see the answer being YES to rebalance after trading in a lot of safe bonds for moderately risky real estate. Or NO because I'd have to sell off a lot of stocks that I was planning on (and comfortable with) holding forever.
Good question and something I struggle with as a renter.

Based on your post you seem like a smart person asking the right question.

What made you buy the house?

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Re: I bought a house, what is my AA now?

Post by alex_686 » Sun Feb 09, 2020 4:56 pm

retiredjg wrote:
Sun Feb 09, 2020 9:54 am
Or...is it that 1/3 of my money is gone (spent on a consumable) and my AA is now 77/23 stock/bond?
This is how I see it although I would not call the home a "consumable". ...

Do not confuse "net worth" with the "AA of my portfolio". They are not the same thing at all.
[/quote]

You can decompose the return into a rental return and a principal return. If you live in your house you are consuming your rental return. That is, imputed rent.

And what point are you trying to make with AA verse net worth?

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Re: I bought a house, what is my AA now?

Post by mmmodem » Sun Feb 09, 2020 5:25 pm

EnjoyIt wrote:
Sun Feb 09, 2020 4:08 pm
mmmodem wrote:
Sun Feb 09, 2020 9:38 am
OP, you can do whatever you want. Asset allocation is what you are comfortable with. I sold my primary home 2 years ago for a relocation. At 3.5% interest rate, I chose to apply only 20% of the gains on my previous home as downpayment on my next home. The remainder, I invested in my asset allocation.

So yes, I do consider my home an asset and an investment and I do rebalance my AA with the home I live in. The simple reason for me to consider it part of my AA is that once owned it will reduce my spending in retirement. Or look at another way, the opportunity cost of investing the equity instead reduces my safe withdrawal rate. Owning has a real cost and I need to consider It's impact as part of my AA.

Finally, whether I am right or wrong is inconsequential. If I want to consider my assets to match Boglehead conversation, then I will exclude my home. Simple.
May I ask? How would you view solar panels on your roof? Would that be part of your AA? After all it will decrease your spending on utilities.

What about a hydroponic greenhouse in your backyard? That would decrease your spending on groceries.

What about your car? It decrease your need to rent a taxi every time you want to leave the house.

I’m sure you see where I’m getting at. It can be a thin line between owning property and an AA.

I’m not saying you are right or wrong on what you do. It is your money and how you view it is your own business. I’m just offering a potential perspective.

For me, a house is a consumable item that requires upkeep. If I did not have this house then that money would be in another house. Or that money would be used to pay rent. To fit your view of the perspective, we may very well sell our house and buy something more expensive in a lower property tax state. The way I see it, if we spend an extra $250k on the house but our property tax drops by $10k, it will be a financially neutral move that would decrease our sequence of return risk in retirement. We would not adjust our asset allocation doing so.
No, I would not consider solar panels, a garden, or a car as part of my AA. These items are consumables. My home is not. I can see why one would say their home is consumable but I disagree with this viewpoint. If upkeep is the definition of a consumable then my 401k has monthly admin fees. I do see where you are going with the discussion and agree it's a thin line on how one wants to view it.

The point is why does it matter what I or OP view it as? How does it make my view any more dangerous than yours? It's like saying an AA of 60/40 is better than 80/20. There's no way to answer that question. One has more risk than the other. One is more volatile than the other. One has higher potential gain than the other. The only thing that matter is what allows you to sleep well at night.

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Re: I bought a house, what is my AA now?

Post by EnjoyIt » Sun Feb 09, 2020 5:48 pm

mmmodem wrote:
Sun Feb 09, 2020 5:25 pm
EnjoyIt wrote:
Sun Feb 09, 2020 4:08 pm
mmmodem wrote:
Sun Feb 09, 2020 9:38 am
OP, you can do whatever you want. Asset allocation is what you are comfortable with. I sold my primary home 2 years ago for a relocation. At 3.5% interest rate, I chose to apply only 20% of the gains on my previous home as downpayment on my next home. The remainder, I invested in my asset allocation.

So yes, I do consider my home an asset and an investment and I do rebalance my AA with the home I live in. The simple reason for me to consider it part of my AA is that once owned it will reduce my spending in retirement. Or look at another way, the opportunity cost of investing the equity instead reduces my safe withdrawal rate. Owning has a real cost and I need to consider It's impact as part of my AA.

Finally, whether I am right or wrong is inconsequential. If I want to consider my assets to match Boglehead conversation, then I will exclude my home. Simple.
May I ask? How would you view solar panels on your roof? Would that be part of your AA? After all it will decrease your spending on utilities.

What about a hydroponic greenhouse in your backyard? That would decrease your spending on groceries.

What about your car? It decrease your need to rent a taxi every time you want to leave the house.

I’m sure you see where I’m getting at. It can be a thin line between owning property and an AA.

I’m not saying you are right or wrong on what you do. It is your money and how you view it is your own business. I’m just offering a potential perspective.

For me, a house is a consumable item that requires upkeep. If I did not have this house then that money would be in another house. Or that money would be used to pay rent. To fit your view of the perspective, we may very well sell our house and buy something more expensive in a lower property tax state. The way I see it, if we spend an extra $250k on the house but our property tax drops by $10k, it will be a financially neutral move that would decrease our sequence of return risk in retirement. We would not adjust our asset allocation doing so.
No, I would not consider solar panels, a garden, or a car as part of my AA. These items are consumables. My home is not. I can see why one would say their home is consumable but I disagree with this viewpoint. If upkeep is the definition of a consumable then my 401k has monthly admin fees. I do see where you are going with the discussion and agree it's a thin line on how one wants to view it.

The point is why does it matter what I or OP view it as? How does it make my view any more dangerous than yours? It's like saying an AA of 60/40 is better than 80/20. There's no way to answer that question. One has more risk than the other. One is more volatile than the other. One has higher potential gain than the other. The only thing that matter is what allows you to sleep well at night.
I agree with you that one can view it any way they please as long as they understand what they are doing and why.

I can view that buying a home out right could alter one's risk tolerance because fixed expenses go down. One can view that as a desire to then decrease equities as they don't see the need to take additional risk or one can find it as a reason to increase equities as they see it as they are now capable to take on risk.

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