I agree that most people don't calculate that way; it is mathematically correct but doesn't fit the psychological description. If I had chosen to pay cash for the home (I didn't, because that would have required selling stock for a huge capital gain), I would have been 100% stock. I chose to keep the same amount of stock as if I had paid cash. Similarly, if I decide to pay off my mortgage, I will sell bonds to pay it off (by selling taxable stock and moving an equal amount from bonds to stock in my employer plan.)goblue100 wrote: ↑Wed May 08, 2019 7:27 amSo in your asset allocation, someone with $100,000 in equities and $100,000 in bonds would be 100% stocks if the interest from the bonds is earmarked for debt service? If that is how you want to calculate it, of course that is your business, but I don't think most people do it that way.grabiner wrote: ↑Sun Apr 15, 2018 9:26 pm
The home is also the reason for the net asset allocation. The home will provide me a place to live at a low cost; however, for the next 11 years, I will be paying a fixed amount of money to the bank. Bonds which provide me enough money to make that mortgage payment cannot also contribute to my retirement needs, so I don't count them. When I bought the home, my bond holding was exactly equal to my mortgage, so I was 100% net stock; now, I am 92% net stock (and the mortgage is smaller as well).
However, the net effect of what most people do should be similar. When I bought the home, my risk tolerance increased, giving me a reason to hold fewer bonds; when I took out the mortgage, I had a reason to hold more bonds. The combination of these two meant that my percentage allocation didn't change much.