I bought a house, what is my AA now?

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

Post by EnjoyIt » Wed Feb 12, 2020 6:01 pm

willthrill81 wrote:
Wed Feb 12, 2020 5:55 pm
EnjoyIt wrote:
Wed Feb 12, 2020 5:48 pm
willthrill81 wrote:
Wed Feb 12, 2020 5:17 pm
EnjoyIt wrote:
Wed Feb 12, 2020 5:02 pm
willthrill81 wrote:
Wed Feb 12, 2020 4:55 pm


Now I really don't know what you're talking about. You say that you "may adjust my asset allocation because I have a rental property" but immediately say "it does not belong in my asset allocation that helps me manage my risk." Would you expound upon that?
My life as a whole dictates how much risk I am willing, able, and need to take. As my life changes so does my AA.
By having a paid off house, my expenses decrease and therefor I do not need to take on as much risk with my portfolio and therefor I may want to adjust my AA.
Yes, and I agree with you on this point.
EnjoyIt wrote:
Wed Feb 12, 2020 5:02 pm
I am adjusting it because I have less expenses compared to my net worth and not because of some complex formula that adds my home into my AA. Does that make sense now?
Now it seems like you're doing some mental accounting when you go on to say the following below.
EnjoyIt wrote:
Wed Feb 12, 2020 5:02 pm
I use my AA to manage my risk and nothing more. My AA does not reflect my net worth, but my net worth may play a role in managing my risk.
I agree with you that the purpose of an AA is for the management of risk. But we both acknowledge that the ownership of a property changes an investor's risk profile. So why then would we specifically choose to exclude an asset that has a definite impact on our total risk profile in favor of other assets? Is it because real estate has differing properties from stocks and bonds?
To be fair, I do not adjust my AA as I pay down my mortgage and when my mortgage is actually paid off in 12-18 months I will still not see myself adjusting my asset allocation as it will not affect my risk tolerance though I can understand how it may change someone else's. I misspoke when attributing that action onto myself. On the other hand when I actually retire I will adjust my AA because I will have less ability to take on risk. If I win the lottery (I don't play) I would adjust my asset allocation as well because I not have much more ability to take on more risk.

I would not put large expensive assets into my AA because I don't need to in understanding my own risk profile. Adding in other assets is an unnecessary complexity for me. Therefore, my home is not part of my AA. Putting it in adds no value to me.

If my home value goes up by 50% or goes down 50% next year it will do nothing to my risk tolerance. If my comic book collection goes up 300% it does nothing to my risk tolerance. Therefor neither need to be in my AA.
Thanks for the clarification.

I appreciate your acknowledgement that this is a potentially complex issue without an objective 'right' answer and that everyone has to decide how to handle this for themselves.
That's the thing about personal finance. Dogma works for most, but not everyone. I have said it before and I'll say it again. Everyone should evaluate their own situation. Otherwise, might as well stick with a target date fund and just move on. This is something I recommend to anyone who is not interested in the details like some of us here on bogleheads.

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willthrill81
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Re: I bought a house, what is my AA now?

Post by willthrill81 » Wed Feb 12, 2020 6:05 pm

countmein wrote:
Wed Feb 12, 2020 5:47 pm
neurosphere wrote:
Wed Feb 12, 2020 5:09 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.
Thought experiment. What's the expense ratio on this investment? Be sure to include front-end and back-end "loads", etc. :D
In my case, front end load of about .3%, expense ratio is about 1.1%, back end load is the real killer, probably 4.5%? Yield is 5%. Expected return = Idk, but better than bonds.
In ours, the front-end load was about .13%, the expense ratio is 2% (i.e. maintenance, taxes, and insurance), and the back-end load would be very low, maybe .5% (we'd do a FSBO as we've done before). The value of imputed rent vis a vis nearly identical homes results in a gross yield of 6.9% and a net yield of 4.9%. Note that this does not take into account the 38% property appreciation we've experienced in the last five years.

Definitely better than bonds. :D
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by EnjoyIt » Wed Feb 12, 2020 6:12 pm

countmein wrote:
Wed Feb 12, 2020 6:00 pm
EnjoyIt wrote:
Wed Feb 12, 2020 4:51 pm

My opinion:
Again, we are confusing Assets (net worth) with Asset Allocation which is used to manage one's risk. So you have a racehorse, so what, what does having a race horse having anything to do with how much VTI I own and what I should do with my VTI if it goes up or goes down? What should I do with my race horse if my VTI goes down. Do I feed it less or do I turn the horse into glue?
Sell the horse/buy another horse. Sell a piece in the art collection/buy another piece. Sell your house/buy another, etc. All have markets just like the very popular owning-slices-of-businesses market. Different degrees of liquidity, sure. Are emerging market stocks not in the AA because treasuries are vastly more liquid?
I think you are throwing straw man examples at me for the sake or arguing. I and I want want clarify again I which is me personally invest in VTI. I do not care about emerging markets. I care about me and my VTI and my VXUS. Adding the value of a horse does not affect my risk tolerance in VTI or VXUS. I and I hope I do not need to clarify that I am still talking about me care about my risk tolerance in VTI and VXUS. I do not care about your horse, nor does it make a difference to my risk tolerance if my home value goes up or down. My AA is designed for me to manage my own risk it is not designed to manage all my income streams and assets.

If for example I invested in the diamond market I would have a completely different allocation on how much inventory I may hold. My wife has a couple of diamonds that I was "encouraged to purchase." They are not in my asset allocation nor are they in some sort of inventory allocation since I do not dabble in the jewelry markets. I do not care how much that jewelry is worth nor will the value of those diamonds affect how much VTI or VXUS I hold.

Personally I think adding the value of expensive things to your asset allocation adds unnecessary complexity. But if it helps you sleep better at night and manage your risk then more power to you. Enjoy.

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

Post by countmein » Wed Feb 12, 2020 6:13 pm

willthrill81 wrote:
Wed Feb 12, 2020 6:05 pm
In ours, the front-end load was about .13%, the expense ratio is 2% (i.e. maintenance, taxes, and insurance), and the back-end load would be very low, maybe .5% (we'd do a FSBO as we've done before). The value of imputed rent vis a vis nearly identical homes results in a gross yield of 6.9% and a net yield of 4.9%. Note that this does not take into account the 38% property appreciation we've experienced in the last five years.

Definitely better than bonds. :D
Curious, when you FSBO, how do you deal with buyer's agents? Tell them to get their fee from the buyer or pound sand?

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willthrill81
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Re: I bought a house, what is my AA now?

Post by willthrill81 » Wed Feb 12, 2020 6:22 pm

countmein wrote:
Wed Feb 12, 2020 6:13 pm
willthrill81 wrote:
Wed Feb 12, 2020 6:05 pm
In ours, the front-end load was about .13%, the expense ratio is 2% (i.e. maintenance, taxes, and insurance), and the back-end load would be very low, maybe .5% (we'd do a FSBO as we've done before). The value of imputed rent vis a vis nearly identical homes results in a gross yield of 6.9% and a net yield of 4.9%. Note that this does not take into account the 38% property appreciation we've experienced in the last five years.

Definitely better than bonds. :D
Curious, when you FSBO, how do you deal with buyer's agents? Tell them to get their fee from the buyer or pound sand?
The former. But when we did our last FSBO, the buyer had no agent. We worked with a title company to complete the sale. Smooth as silk.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by neurosphere » Wed Feb 12, 2020 8:36 pm

countmein wrote:
Wed Feb 12, 2020 5:47 pm
neurosphere wrote:
Wed Feb 12, 2020 5:09 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.
Thought experiment. What's the expense ratio on this investment? Be sure to include front-end and back-end "loads", etc. :D
In my case, front end load of about .3%, expense ratio is about 1.1%, back end load is the real killer, probably 4.5%? Yield is 5%. Expected return = Idk, but better than bonds.
:sharebeer

For the 10 years I owned a condo, my ongoing expense turned out to be much more than 1%, but I got lucky and sold in 2006 due to a job change. My neighbor sold an identical unit (all the units were the same) 2 years later for half what I sold for. I did better than bonds for sure, she certainly did not. :?
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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

Post by aristotelian » Wed Feb 12, 2020 8:49 pm

You can calculate your AA however makes sense for you. The important thing is to have a plan and stay the course.

I do think you should understand that the mortgage acts in some ways as a negative bond, in effect leveraging up your investment portfolio and also dragging against the yield from your bond portfolio.

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

Post by countmein » Wed Feb 12, 2020 9:20 pm

neurosphere wrote:
Wed Feb 12, 2020 8:36 pm
countmein wrote:
Wed Feb 12, 2020 5:47 pm
neurosphere wrote:
Wed Feb 12, 2020 5:09 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.
Thought experiment. What's the expense ratio on this investment? Be sure to include front-end and back-end "loads", etc. :D
In my case, front end load of about .3%, expense ratio is about 1.1%, back end load is the real killer, probably 4.5%? Yield is 5%. Expected return = Idk, but better than bonds.
:sharebeer

For the 10 years I owned a condo, my ongoing expense turned out to be much more than 1%, but I got lucky and sold in 2006 due to a job change. My neighbor sold an identical unit (all the units were the same) 2 years later for half what I sold for. I did better than bonds for sure, she certainly did not. :?
Good reminder that homes are risky investments. So if the purpose of an AA is to "manage risk"...

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

Post by rkhusky » Wed Feb 12, 2020 9:39 pm

willthrill81 wrote:
Wed Feb 12, 2020 3:54 pm
At any rate, my point was just that the criterion that an asset only belongs in your AA if it can be rebalanced is illogical, as I noted above.
It is completely logical. Your asset allocation is for assets for which you have a particular allocation, e.g. 70% stocks and 30% bonds. If you want your asset allocation to be 50% stocks, 20% house, 10% EE bonds, 20% other bonds, then so be it. (And I would put CD's in the same category as EE bonds - the withdrawal penalty would need to be factored into the plan and the risk/reward calculation).

I calculate and track my asset allocation to determine when my allocation to a particular asset type has strayed too far from its allocation. If it has, I adjust by buying and selling, i.e rebalancing. I see no point in having EE bonds in my asset allocation, if I do not intend to buy/sell them to maintain my allocation to them. So, if I wanted them in my AA, I would have a plan for buying/selling them. The same goes for a house. If I wanted it in my AA, then I would have a plan for buying/selling the value of the house to maintain its allocation. I am not going to stick it in my AA to act like an unmovable blob.

I see no point in computing an asset allocation, if you aren't going to do something with the information.

The other problem with putting something like a house in your AA is that you have no basis for choosing an allocation. With stocks, bonds, and cash, there are tools to see how particular allocations have fared in the past. While these aren't perfect, they do give you a feeling for the risk and reward of different allocations in the past. There is nothing similar available for putting your house in your AA. So, you are choosing your allocation through a complete guess.

Finally, an asset allocation is completely different from a list of assets.

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

Post by countmein » Wed Feb 12, 2020 10:29 pm

But it is a fact that your capital is allocated to your list of assets, in various amounts.

You can decide not to think about certain assets but if the purpose is risk/return management and these are risky, return-producing assets, it would be counterproductive to do so.

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

Post by EnjoyIt » Thu Feb 13, 2020 12:12 am

countmein wrote:
Wed Feb 12, 2020 10:29 pm
But it is a fact that your capital is allocated to your list of assets, in various amounts.

You can decide not to think about certain assets but if the purpose is risk/return management and these are risky, return-producing assets, it would be counterproductive to do so.
Maybe I don't understand your use or your plan of this strategy?

Let me ask you, your current AA is what 40/10/50 . . . stocks/bonds/house? What happens in the next downturn when stocks drop by 50%? What is your plan with this AA? A 50% drop in equities would put you at 25/12.5/62.5. What do you do with that information? Do you sell all of your bonds and buy back equites to 37.5%? Do you take on a mortgage to get you back to 40/10/50?

Try out some other scenarios as well. How about the housing market plummets 50% and now your asset allocation is 53.3/13.3/33.3? Is the plan then to sell more equities and bonds to buy a second home?

Many people use future contributions to help keep them at their desired AA. So if equities and bonds are doing well do you put future contributions into REITS to keep yourself at 40/10/50?

What value are you personally getting from putting your house as part of your AA? Please help me understand better your thinking and your plan.

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willthrill81
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Re: I bought a house, what is my AA now?

Post by willthrill81 » Thu Feb 13, 2020 12:32 am

EnjoyIt wrote:
Thu Feb 13, 2020 12:12 am
countmein wrote:
Wed Feb 12, 2020 10:29 pm
But it is a fact that your capital is allocated to your list of assets, in various amounts.

You can decide not to think about certain assets but if the purpose is risk/return management and these are risky, return-producing assets, it would be counterproductive to do so.
Maybe I don't understand your use or your plan of this strategy?

Let me ask you, your current AA is what 40/10/50 . . . stocks/bonds/house? What happens in the next downturn when stocks drop by 50%? What is your plan with this AA? A 50% drop in equities would put you at 25/12.5/62.5. What do you do with that information? Do you sell all of your bonds and buy back equites to 37.5%? Do you take on a mortgage to get you back to 40/10/50?

Try out some other scenarios as well. How about the housing market plummets 50% and now your asset allocation is 53.3/13.3/33.3? Is the plan then to sell more equities and bonds to buy a second home?

Many people use future contributions to help keep them at their desired AA. So if equities and bonds are doing well do you put future contributions into REITS to keep yourself at 40/10/50?

What value are you personally getting from putting your house as part of your AA? Please help me understand better your thinking and your plan.
Not to answer your questions directed at countmein, but I'm increasingly growing skeptical of how we, myself included, toss around various stock/bond allocations as though it's the most meaningful measure of financial risk that everyone faces. In some instances (e.g. those approach retirement), it very likely is. In other instances (e.g. those just starting to invest), it very likely is not.

I think that this is what you were getting at earlier, but I certainly believe that owning a home (whether one lives in it or rents it) outright changes an investor's overall risk profile. I won't get into the specifics as to how, but it certainly does.

You bring up some very good questions regarding how one incorporates a house into an AA. I would be very interested to know how landlords, of which there are many around here, address these issues. But I think that our quest to 'boil down' one's financial risks to an AA with only two components may implicitly ignore the realities of an investor's total risk profile as well as the presence of additional asset classes.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by EnjoyIt » Thu Feb 13, 2020 1:10 am

willthrill81 wrote:
Thu Feb 13, 2020 12:32 am
EnjoyIt wrote:
Thu Feb 13, 2020 12:12 am
countmein wrote:
Wed Feb 12, 2020 10:29 pm
But it is a fact that your capital is allocated to your list of assets, in various amounts.

You can decide not to think about certain assets but if the purpose is risk/return management and these are risky, return-producing assets, it would be counterproductive to do so.
Maybe I don't understand your use or your plan of this strategy?

Let me ask you, your current AA is what 40/10/50 . . . stocks/bonds/house? What happens in the next downturn when stocks drop by 50%? What is your plan with this AA? A 50% drop in equities would put you at 25/12.5/62.5. What do you do with that information? Do you sell all of your bonds and buy back equites to 37.5%? Do you take on a mortgage to get you back to 40/10/50?

Try out some other scenarios as well. How about the housing market plummets 50% and now your asset allocation is 53.3/13.3/33.3? Is the plan then to sell more equities and bonds to buy a second home?

Many people use future contributions to help keep them at their desired AA. So if equities and bonds are doing well do you put future contributions into REITS to keep yourself at 40/10/50?

What value are you personally getting from putting your house as part of your AA? Please help me understand better your thinking and your plan.
Not to answer your questions directed at countmein, but I'm increasingly growing skeptical of how we, myself included, toss around various stock/bond allocations as though it's the most meaningful measure of financial risk that everyone faces. In some instances (e.g. those approach retirement), it very likely is. In other instances (e.g. those just starting to invest), it very likely is not.

I think that this is what you were getting at earlier, but I certainly believe that owning a home (whether one lives in it or rents it) outright changes an investor's overall risk profile. I won't get into the specifics as to how, but it certainly does.

You bring up some very good questions regarding how one incorporates a house into an AA. I would be very interested to know how landlords, of which there are many around here, address these issues. But I think that our quest to 'boil down' one's financial risks to an AA with only two components may implicitly ignore the realities of an investor's total risk profile as well as the presence of additional asset classes.
Can I add to those queries? Does having risk in one asset class necessarily change how one should view the risk in another asset class? If I struck oil on my land, how does the fluctuations of oil price affect how much equities I should own to manage my risk better? Or If I dealt with diamonds, I should probably keep a supply that hopefully will allow me to meet demand but not overextend myself so much that I can't pay my bills. Should my diamond assets affect how much oil I pump through my new oil drills? I honestly would say no. Maybe some assets just need to be managed separately.

Equally if I had 10 single family homes and now bought an 11th does not necessarily mean I need to also rebalance all my bonds and equities. If I get promoted at work and make 10% more money do I change my AA as well?

I believe if I was a landlord and I wanted to decrease my risk, I would do it by managing the risk of the rentals. I would decrease risk through deleveraging which in turn would likely decrease expected return but would add safety to my real estate asset class. I would not decrease my risk by increasing my bond allocation. But that is just how I would do it and am equally curious what landlords actually do as well.

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

Post by mmmodem » Thu Feb 13, 2020 6:36 am

EnjoyIt wrote:
Thu Feb 13, 2020 12:12 am
countmein wrote:
Wed Feb 12, 2020 10:29 pm
But it is a fact that your capital is allocated to your list of assets, in various amounts.

You can decide not to think about certain assets but if the purpose is risk/return management and these are risky, return-producing assets, it would be counterproductive to do so.
Maybe I don't understand your use or your plan of this strategy?

Let me ask you, your current AA is what 40/10/50 . . . stocks/bonds/house? What happens in the next downturn when stocks drop by 50%? What is your plan with this AA? A 50% drop in equities would put you at 25/12.5/62.5. What do you do with that information? Do you sell all of your bonds and buy back equites to 37.5%? Do you take on a mortgage to get you back to 40/10/50?

Try out some other scenarios as well. How about the housing market plummets 50% and now your asset allocation is 53.3/13.3/33.3? Is the plan then to sell more equities and bonds to buy a second home?

Many people use future contributions to help keep them at their desired AA. So if equities and bonds are doing well do you put future contributions into REITS to keep yourself at 40/10/50?

What value are you personally getting from putting your house as part of your AA? Please help me understand better your thinking and your plan.
I'm not countmein but since you used my numbers... If stocks dropped 50% I would buy more equities. I've never had to sell to maintain my AA but I imagine I might if I'm outside my investment bands. Or in other words, I would do the same thing as any Boglehead with an 80/20 AA.

I would not take on an extra mortgage or sell my home. I would not buy REITs to maintain my AA. The value of putting my home in my AA is that it allows me to sleep with an AA of 40/10/50. I may not be able to sleep as well at 80/20.

An example of what might happen would be two years ago before I sold my home. I was 32/8/60. I chose to apply enough of the equity from the sale to avoid PMI on my next home. The rest was used to purchase stock to maintain my AA. If there was no real estate then my AA would be something else entirely as my risk profile is not the same.

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

Post by ukbogler » Thu Feb 13, 2020 7:59 am

How do you rebalance a house? Easy. Sell it and buy a smaller / bigger one. :-)

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

Post by rkhusky » Thu Feb 13, 2020 8:10 am

mmmodem wrote:
Thu Feb 13, 2020 6:36 am
The value of putting my home in my AA is that it allows me to sleep with an AA of 40/10/50. I may not be able to sleep as well at 80/20.
How do you know the risk of 40/10/50? Is it just that you see the 40 and think less risk? So, it's just a psychological trick?

Perhaps having multiple AA's is useful. You have a working AA with assets that you intend to manage through rebalancing. And you have another AA, with all your assets, that you can look at for your overall financial picture, and which may inform your working AA.

I have a separate AA for the kids' college funds. And having a separate AA for a short term expenditure, such as a new car or a house down payment, might also be appropriate.

I also track my retirement portfolio net worth separately from my overall net worth. I used the size of the retirement portfolio to decide when to retire, not the total net worth.
Last edited by rkhusky on Thu Feb 13, 2020 8:21 am, edited 4 times in total.

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

Post by rkhusky » Thu Feb 13, 2020 8:11 am

ukbogler wrote:
Thu Feb 13, 2020 7:59 am
How do you rebalance a house? Easy. Sell it and buy a smaller / bigger one. :-)
You must never have sold a house.

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

Post by FrugalInvestor » Thu Feb 13, 2020 8:18 am

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
This is the way I have always looked at it. I've always needed a place to live and I always will as long as I'm alive, so selling the house only results in buying another. The money is not available for producing income, in fact it's the opposite, owning a house produces ongoing expenses. There is a possibility of significant appreciation over time but that's a bonus in my mind and the opposite is possible as well.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

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

Post by mmmodem » Thu Feb 13, 2020 8:37 am

rkhusky wrote:
Thu Feb 13, 2020 8:10 am
mmmodem wrote:
Thu Feb 13, 2020 6:36 am
The value of putting my home in my AA is that it allows me to sleep with an AA of 40/10/50. I may not be able to sleep as well at 80/20.
How do you know the risk of 40/10/50? Is it just that you see the 40 and think less risk? So, it's just a psychological trick?

Perhaps having multiple AA's is useful. You have a working AA with assets that you intend to manage through rebalancing. And you have another AA, with all your assets, that you can look at for your overall financial picture, and which may inform your working AA.

I have a separate AA for the kids' college funds. And having a separate AA for a short term expenditure, such as a new car or a house down payment, might also be appropriate.
I don't know the risk. If the stock market tanked 50%, I would be pretty devastated at 80/20. There goes 40% of my investment. If I was 40/10/50, there goes 20% of my investments. If real estate tanked 50%, I don't care. I live in the home. I'll pay my mortgage like I normally do. So, yes, it's a psychological trick and I see 40 as less risky than 80. It works for me.

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

Post by rkhusky » Thu Feb 13, 2020 9:02 am

mmmodem wrote:
Thu Feb 13, 2020 8:37 am
I don't know the risk. If the stock market tanked 50%, I would be pretty devastated at 80/20. There goes 40% of my investment. If I was 40/10/50, there goes 20% of my investments. If real estate tanked 50%, I don't care. I live in the home. I'll pay my mortgage like I normally do. So, yes, it's a psychological trick and I see 40 as less risky than 80. It works for me.
So, perhaps you should also put expected future income from your job and future SS into the AA as well. Then it might look like 20/5/25/30/20 (stock/bond/house/job/SS). The 20 in stocks now looks really safe. So safe in fact that perhaps you should bump it back up to 40, i.e. double the amount of stocks you currently have. Or at least get rid of the bonds.

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

Post by JW-Retired » Thu Feb 13, 2020 9:22 am

countmein wrote:
Wed Feb 12, 2020 10:29 pm
But it is a fact that your capital is allocated to your list of assets, in various amounts.

You can decide not to think about certain assets but if the purpose is risk/return management and these are risky, return-producing assets, it would be counterproductive to do so.
IMO, use of the real stock/bond AA is mostly a convention here so we all can know what you are talking about. As soon as you throw additional different assets into that simple 2 part mix it just gets too complicated for most of us to be of any help. Please keep it simple for us.
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Re: I bought a house, what is my AA now?

Post by dknightd » Thu Feb 13, 2020 9:54 am

rkhusky wrote:
Thu Feb 13, 2020 9:02 am

So, perhaps you should also put expected future income from your job and future SS into the AA as well. Then it might look like 20/5/25/30/20 (stock/bond/house/job/SS). The 20 in stocks now looks really safe. So safe in fact that perhaps you should bump it back up to 40, i.e. double the amount of stocks you currently have. Or at least get rid of the bonds.
You could do that. Not unreasonable. I've never considered job/house/SS as part of my AA. Yes, they have potential value but I have always considered them potential income, and a place to live. Specific to the OP, buying a house is essentially prepaying rent, or perhaps leveraging to have a more or less stable rent payment. Or perhaps a life choice.
When I think of AA I think only of "investable" dollars. I do not consider my job (when I had one), or my house (where I live), or SS income (when I claim) as investable dollars. They are future income, or expenses.

But obviously there are many ways to think about this. I'm not sure there is a right way. So for simplicity I only consider my "investable" dollars in my AA.

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

Post by willthrill81 » Thu Feb 13, 2020 10:47 am

JW-Retired wrote:
Thu Feb 13, 2020 9:22 am
countmein wrote:
Wed Feb 12, 2020 10:29 pm
But it is a fact that your capital is allocated to your list of assets, in various amounts.

You can decide not to think about certain assets but if the purpose is risk/return management and these are risky, return-producing assets, it would be counterproductive to do so.
IMO, use of the real stock/bond AA is mostly a convention here so we all can know what you are talking about. As soon as you throw additional different assets into that simple 2 part mix it just gets too complicated for most of us to be of any help.
Precisely. An investor's AA is often a poor measure of their overall risk profile, but it's comparatively easy for us to evaluate, so that's why we use it.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by mmmodem » Thu Feb 13, 2020 10:50 am

rkhusky wrote:
Thu Feb 13, 2020 9:02 am
mmmodem wrote:
Thu Feb 13, 2020 8:37 am
I don't know the risk. If the stock market tanked 50%, I would be pretty devastated at 80/20. There goes 40% of my investment. If I was 40/10/50, there goes 20% of my investments. If real estate tanked 50%, I don't care. I live in the home. I'll pay my mortgage like I normally do. So, yes, it's a psychological trick and I see 40 as less risky than 80. It works for me.
So, perhaps you should also put expected future income from your job and future SS into the AA as well. Then it might look like 20/5/25/30/20 (stock/bond/house/job/SS). The 20 in stocks now looks really safe. So safe in fact that perhaps you should bump it back up to 40, i.e. double the amount of stocks you currently have. Or at least get rid of the bonds.
How do you quantify your human capitol into a number? You can't. Not with any degree of accuracy in my opinion. There's no point in adding precision when there is none. Ditto with SS. I don't know when I will retire, how many more years I will work, or when I will retire. There's no accuracy here either. Think significant digits. Doubling stocks and getting rid of bonds adds to risk. I think you know that and you are being facetious.

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

Post by rkhusky » Thu Feb 13, 2020 11:00 am

mmmodem wrote:
Thu Feb 13, 2020 10:50 am
How do you quantify your human capitol into a number? You can't. Not with any degree of accuracy in my opinion. There's no point in adding precision when there is none. Ditto with SS. I don't know when I will retire, how many more years I will work, or when I will retire. There's no accuracy here either. Think significant digits. Doubling stocks and getting rid of bonds adds to risk. I think you know that and you are being facetious.
But you do know how much SS that you have currently earned. And some people do put the net present value of their SS and/or pension into their AA.

Regarding bonds, if all you are looking at is the stock number to determine risk, then going from 40/10/50 (stock/bond/house) to 25/0/25/50 (stock/bond/house/SS) would look like a much safer allocation.
Last edited by rkhusky on Thu Feb 13, 2020 11:24 am, edited 1 time in total.

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

Post by EnjoyIt » Thu Feb 13, 2020 11:06 am

mmmodem wrote:
Thu Feb 13, 2020 10:50 am
rkhusky wrote:
Thu Feb 13, 2020 9:02 am
mmmodem wrote:
Thu Feb 13, 2020 8:37 am
I don't know the risk. If the stock market tanked 50%, I would be pretty devastated at 80/20. There goes 40% of my investment. If I was 40/10/50, there goes 20% of my investments. If real estate tanked 50%, I don't care. I live in the home. I'll pay my mortgage like I normally do. So, yes, it's a psychological trick and I see 40 as less risky than 80. It works for me.
So, perhaps you should also put expected future income from your job and future SS into the AA as well. Then it might look like 20/5/25/30/20 (stock/bond/house/job/SS). The 20 in stocks now looks really safe. So safe in fact that perhaps you should bump it back up to 40, i.e. double the amount of stocks you currently have. Or at least get rid of the bonds.
How do you quantify your human capitol into a number? You can't. Not with any degree of accuracy in my opinion. There's no point in adding precision when there is none. Ditto with SS. I don't know when I will retire, how many more years I will work, or when I will retire. There's no accuracy here either. Think significant digits. Doubling stocks and getting rid of bonds adds to risk. I think you know that and you are being facetious.
I think what he is doing is showing you that if you are willing to play mind games with yourself, why not take it a step further?

As I said before, if playing these tricks in yourself helps you stay the course and sleep well at night, then why not? Do what you want to do?

BTW, estimating your own SS is pretty easy. There are plenty of charts and calculators for that. SS payments vary very little if you hit the second bend point. You can also use your current SS at FRA or 70.5 and multiply it by 25 (or 33 if you plan on a 3% withdrawal rate) to get a value and place it in your AA. That should really add to tricking yourself.

Also BTW, we expect our SS to cover all of our basic needs and our portfolio will be used for our wants. This is why our IPS states to increase our equities allocation once we start collecting SS.

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

Post by rkhusky » Thu Feb 13, 2020 11:24 am

There is a range of liquidity measures. For example, investments in a taxable account may have less liquidity due to the capital gains that would be incurred from selling. There is the early withdrawal penalty (EWP) in many CD's. There is the early withdrawal penalties for EE bonds. There are purchase fees in some funds that reduce liquidity. There are the costs and effort involved in selling a house. Other hard assets have their own specific cost and effort.

So, one needs to decide what assets one is willing to sell for investment purposes and take whatever hit in terms of cost and effort that is needed to do so. For example, I would not be willing to sell my house for investment purposes. I would also not be willing to mortgage my house for investment purposes. I have incurred the purchase fee for Vanguard Int. Corp. bond fund, but there is some resistance to doing so. I prefer using the short term corp bond fund for rebalancing. If I had CD's, I would incur the EWP if the market dropped sufficiently. If I had EE bonds, the market would have to drop a lot before I would sell before 20 years, but I would do so if held for a few years and if I didn't have any other fixed income to sell that would be less costly. I avoid rebalancing in my taxable account, unless I can do so without incurring extra tax.

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

Post by KlangFool » Thu Feb 13, 2020 11:30 am

rkhusky wrote:
Thu Feb 13, 2020 11:00 am
mmmodem wrote:
Thu Feb 13, 2020 10:50 am
How do you quantify your human capitol into a number? You can't. Not with any degree of accuracy in my opinion. There's no point in adding precision when there is none. Ditto with SS. I don't know when I will retire, how many more years I will work, or when I will retire. There's no accuracy here either. Think significant digits. Doubling stocks and getting rid of bonds adds to risk. I think you know that and you are being facetious.
But you do know how much SS that you have currently earned. And some people do put the net present value of their SS and/or pension into their AA.
rkhusky,

Those people need to be lucky enough that they are not permanently unemployed or under-employed in their 40s and 50s. If that happened, being able to withdraw social security at 62 years old does not help them. Ditto on pension.

I was watching a documentary about a homeless person living under a bridge and hope to survive by panhandling until he is 62 years old. Then, he can survive by withdrawing social security.

Hoping to be lucky is not a good planning strategy.

KlangFool

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

Post by mmmodem » Thu Feb 13, 2020 12:20 pm

rkhusky wrote:
Thu Feb 13, 2020 11:00 am
But you do know how much SS that you have currently earned. And some people do put the net present value of their SS and/or pension into their AA.

Regarding bonds, if all you are looking at is the stock number to determine risk, then going from 40/10/50 (stock/bond/house) to 25/0/25/50 (stock/bond/house/SS) would look like a much safer allocation.
Knowing how much I have in SS currently doesn't tell me how much I will receive in an unknown future. There is no additional accuracy here and added complexity.

That AA looks extremely risky to me. I guess we will have to disagree.
EnjoyIt wrote:
Thu Feb 13, 2020 11:06 am
I think what he is doing is showing you that if you are willing to play mind games with yourself, why not take it a step further?

As I said before, if playing these tricks in yourself helps you stay the course and sleep well at night, then why not? Do what you want to do?

BTW, estimating your own SS is pretty easy. There are plenty of charts and calculators for that. SS payments vary very little if you hit the second bend point. You can also use your current SS at FRA or 70.5 and multiply it by 25 (or 33 if you plan on a 3% withdrawal rate) to get a value and place it in your AA. That should really add to tricking yourself.

Also BTW, we expect our SS to cover all of our basic needs and our portfolio will be used for our wants. This is why our IPS states to increase our equities allocation once we start collecting SS.
Why take it a step further and add complexity? Simplifying things is more important. Remember we both agree simplicity is preferred. I just think including my home is simpler than not including it. Willfully ignoring a significant portion of my asset in risk management is negligent for myself. But if this allows others to easily define AA for discussion and sleep well at night then I can adjust and call myself 80/20.

The ease of estimating SS is not at the issue. The accuracy is. You've already stated "if at second bend point." There is a huge difference in withdrawal at FRA or at 70. I expect significant changes to SS before I am at FRA but we're not allowed to speculate on this matter on this forum.

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

Post by willthrill81 » Thu Feb 13, 2020 12:30 pm

KlangFool wrote:
Thu Feb 13, 2020 11:30 am
I was watching a documentary about a homeless person living under a bridge and hope to survive by panhandling until he is 62 years old. Then, he can survive by withdrawing social security.
I don't believe that that would happen to 1 in a 1,000 people on this site. They're more likely to be killed in a vehicle accident, diagnosed with a terminal illness, etc.

However, I won't say more about this issue in order to avoid running afoul of the forum's rules.
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Re: I bought a house, what is my AA now?

Post by rkhusky » Thu Feb 13, 2020 12:47 pm

mmmodem wrote:
Thu Feb 13, 2020 12:20 pm
rkhusky wrote:
Thu Feb 13, 2020 11:00 am
But you do know how much SS that you have currently earned. And some people do put the net present value of their SS and/or pension into their AA.

Regarding bonds, if all you are looking at is the stock number to determine risk, then going from 40/10/50 (stock/bond/house) to 25/0/25/50 (stock/bond/house/SS) would look like a much safer allocation.
Knowing how much I have in SS currently doesn't tell me how much I will receive in an unknown future. There is no additional accuracy here and added complexity.
You don't know your stock balance or house value in the future either. You just use the value as of today. The same is with SS. Use what you have currently earned. As you work longer, you would adjust the SS balance higher.

In fact, you really don't know your house value either. And you won't until you sell it.

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

Post by mmmodem » Thu Feb 13, 2020 12:58 pm

rkhusky wrote:
Thu Feb 13, 2020 12:47 pm
mmmodem wrote:
Thu Feb 13, 2020 12:20 pm
rkhusky wrote:
Thu Feb 13, 2020 11:00 am
But you do know how much SS that you have currently earned. And some people do put the net present value of their SS and/or pension into their AA.

Regarding bonds, if all you are looking at is the stock number to determine risk, then going from 40/10/50 (stock/bond/house) to 25/0/25/50 (stock/bond/house/SS) would look like a much safer allocation.
Knowing how much I have in SS currently doesn't tell me how much I will receive in an unknown future. There is no additional accuracy here and added complexity.
You don't know your stock balance or house value in the future either. You just use the value as of today. The same is with SS. Use what you have currently earned. As you work longer, you would adjust the SS balance higher.

In fact, you really don't know your house value either. And you won't until you sell it.
I have zero access to my SS today and for decades In the future. Estimating its value today for a future value is not possible with any accuracy. The value today Is therefore zero.

The value in my home and my retirement accounts can be accessed much sooner. This is an important distinction versus SS. My home value can be estimated. If your argument is that I won't know the precise number until I sell. I also won't know the precise number when I sell my ETF fund either. I also don't know what my taxes are due. So if I can't estimate the value of my home, then I can't estimate the value of my 401k.

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

Post by grabiner » Thu Feb 13, 2020 8:36 pm

mmmodem wrote:
Thu Feb 13, 2020 12:58 pm
I have zero access to my SS today and for decades In the future. Estimating its value today for a future value is not possible with any accuracy. The value today Is therefore zero.
Valuing an unknown at zero doesn't make sense. You can actually get a good estimate. If you are 50 and plan to take SS at 70, you could buy 20-year TIPS now, and then buy an annuity at age 70 for the inflation-adjusted value of your current expected SS benefit. The price of these TIPS gives a good estimate of the present value of your SS.

Yes, laws may change by then, but that applies to everything you invest in; the value of your traditional IRA could be reduced by higher tax rates, or the value of your Roth IRA could be reduced by a value-added tax.

I still prefer not to count SS, or a pension, as an asset in asset allocation; instead, it increases your risk tolerance. My house works the same way; I increased the stock allocation of my investment assets once I bought a non-investment asset that is guaranteed to cover a significant part of my living expenses in retirement.
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Re: I bought a house, what is my AA now?

Post by cashboy » Thu Feb 13, 2020 8:40 pm

countmein wrote:
Tue Feb 11, 2020 7:50 pm
cashboy wrote:
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
good response, I like it. Answer is yes, technically you could count the truck in your AA but you wouldn't bother because its value is negligible amongst your other assets.

Let me turn that around. If you own an oil well whose value is 1/2 your net worth, and you consume 1/10 of the oil yield to heat your house, is it not a real asset that belongs in your asset allocation?
op,

my thought is that we ask ourselves what are the 'generally recognized' limits/boundaries/components of an 'AA'. (not net worth, but an AA).

is it stocks/bonds/cash? ex: 50/45/5
most would agree that is part of an AA. sure.

is it stocks/bonds/cash/gold? ex: 50/40/5/5
most would agree that is part of an AA. yep.

is it stocks/bonds/cash/gold/rental property? ex: 45/40/5/5/5
many would agree that is part of an AA.


but consider the following:

is it stocks/bonds/cash/gold/trucks? ex: 45/45/9.9/.1
is it stocks/bonds/cash/gold/house we live in? (not a rental)
is it stocks/bonds/cash/gold/shoes? https://www.abc.net.au/news/2016-10-02/ ... me/7877098

with these last three i think (my opinion; not fact) that we begin to stray from what is generally recognized as the limits/boundaries/components of an 'AA' and crossover into what is generally recognized as 'net worth'. but, just because something may be generally recognized as 'this' or 'that' (or i think it does or does not) does not mean anyone/everyone else has to accept that.


for the oil well, i think it might be considered an asset by some (like a rental property) as it produces an income stream and can be sold without impacting where one lives. that you consume 1/10 of the oil yield to heat your house is simply taking oil instead of cash as part of the overall oil well income stream



all,
it is threads like this (where we question what we think we know and put it to the test) that makes BH great.
Last edited by cashboy on Thu Feb 13, 2020 8:55 pm, edited 1 time in total.
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Re: I bought a house, what is my AA now?

Post by acegolfer » Thu Feb 13, 2020 8:55 pm

OP,

Unlike most other comments, I consider my primary home as an investments (granted I'm an economists and macroeconomics accounts housing as investments rather than consumption).

As for AA, I only decide the ratios among the "financial" asset classes. Of course, home ownership will affect AA decision. But I don't allocate certain % to my house value. It is part of my net worth yet I don't track the market home value.

AA depends on your objectives. Since you achieved one of the objectives (buying a house), you should revise your objectives and decide on the new AA. It could be different from 50/50 because your objectives are no longer the same.

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

Post by jmk » Thu Feb 13, 2020 9:09 pm

I agree with the majority that a house is not part of one's portfolio. However, I recently found myself falling into somewhat of that logic:
As an alternative to rebalancing by purchasing a CD at 2.4%, I instead paid down an equal amount of my 3% mortgage. Because I will end up with a "gain" at the end, and the cash I spent is equally illiquid as the CD, I counted this prepayment informally as part of my asset allocation. (I listed it in my spreadsheet just I like do my CDs: with its PV.) If I didn't do that kind of mental trick, I'd not be able to substitute one for the other. And, after all, that is why I did it in the first place. I admit I'm a little nervous seeing that mortgage payment on my spreadsheet under the Bond section. I guess another way of putting it is: I changed my AA to be more risky due to having more equity in my house.
Last edited by jmk on Thu Feb 13, 2020 9:14 pm, edited 4 times in total.

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

Post by willthrill81 » Thu Feb 13, 2020 9:10 pm

grabiner wrote:
Thu Feb 13, 2020 8:36 pm
I still prefer not to count SS, or a pension, as an asset in asset allocation; instead, it increases your risk tolerance.
Would it not have the same effect (i.e. increasing your risk tolerance in your other assets) if you included SS or a pension as part of your AA? It would likely make you underweight in stocks, so you would need to increase your stock allocation to get it back where you want it.
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Re: I bought a house, what is my AA now?

Post by willthrill81 » Thu Feb 13, 2020 9:12 pm

jmk wrote:
Thu Feb 13, 2020 9:09 pm
I agree with the majority that a house is not part of one's portfolio. However, I recently found myself falling into somewhat of that logic:
As an alternative to rebalancing by purchasing a CD at 2.4%, I instead paid down an equal amount of my 3% mortgage. Because I will end up with a "gain" at the end, and the cash I spent is equally illiquid, I counted this prepayment informally as part of my asset allocation. (I listed it in my spreadsheet just I like do my CDs: with its PV.) If I didn't do that kind of mental trick, I'd not be able to substitute one for the other. And, after all, that is why I did it in the first place. I admit I'm a little nervous seeing that mortgage payment on my spreadsheet under the Bond section.
It's less controversial, though not universally agreed upon, that a mortgage is a negative bond (i.e. it's the 'other side' of a traditional bond). As such, it functions as means of leveraging your portfolio. So if you had $100k of stocks, $100k of bonds, and a $100k mortgage, your overall AA would be 100/0 because the mortgage would exactly offset the bonds.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by dbr » Thu Feb 13, 2020 9:16 pm

One thing that does have to happen is that no matter what you call an asset or what you call your allocation, the number of dollars in the various things had better come out with the same answer or one, the others, or all your figuring is wrong.

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

Post by mmmodem » Fri Feb 14, 2020 5:57 am

grabiner wrote:
Thu Feb 13, 2020 8:36 pm
mmmodem wrote:
Thu Feb 13, 2020 12:58 pm
I have zero access to my SS today and for decades In the future. Estimating its value today for a future value is not possible with any accuracy. The value today Is therefore zero.
Valuing an unknown at zero doesn't make sense. You can actually get a good estimate. If you are 50 and plan to take SS at 70, you could buy 20-year TIPS now, and then buy an annuity at age 70 for the inflation-adjusted value of your current expected SS benefit. The price of these TIPS gives a good estimate of the present value of your SS.

Yes, laws may change by then, but that applies to everything you invest in; the value of your traditional IRA could be reduced by higher tax rates, or the value of your Roth IRA could be reduced by a value-added tax.

I still prefer not to count SS, or a pension, as an asset in asset allocation; instead, it increases your risk tolerance. My house works the same way; I increased the stock allocation of my investment assets once I bought a non-investment asset that is guaranteed to cover a significant part of my living expenses in retirement.
We disagree. Valuing SS for today is like valuing an inheritance. If I lose my job today, neither will provide for me for decades. Estimating a future value is not the problem. There are just huge error bars associated with it too render it useless as a planning tool for myself. Sure I keep tabs on it like I would an inheritance but adding it to my AA makes no sense. I will consider it part of my assets when I receive it.

Change in tax laws will affect everything we own. So are you arguing we can't calculate anything with accuracy? I think I will stop here. It's a slippery slope argument that a previous poster suggested since I include my home, I should include SS, sell all bonds, and buy more stock. I doubt they think it's a good idea and neither do you. (Yes, I included inheritance as another slippery slope argument.) :oops:

I also increased the stock and bond allocation of my portfolio when I sold my previous home precisely because my home is part of my AA and my risk tolerance has changed. I might be 50/50 or 100/0 depending on how I view real estate. My ability to stay the course in recessions or "all time highs" is also tempered by my home.

We are doing the exact same thing. I'm just looking at it differently because it makes more sense to me. And it's simpler this way.

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

Post by countmein » Fri Feb 14, 2020 8:56 am

cashboy wrote:
Thu Feb 13, 2020 8:40 pm

my thought is that we ask ourselves what are the 'generally recognized' limits/boundaries/components of an 'AA'. (not net worth, but an AA).

is it stocks/bonds/cash? ex: 50/45/5
most would agree that is part of an AA. sure.

is it stocks/bonds/cash/gold? ex: 50/40/5/5
most would agree that is part of an AA. yep.

is it stocks/bonds/cash/gold/rental property? ex: 45/40/5/5/5
many would agree that is part of an AA.


but consider the following:

is it stocks/bonds/cash/gold/trucks? ex: 45/45/9.9/.1
is it stocks/bonds/cash/gold/house we live in? (not a rental)
is it stocks/bonds/cash/gold/shoes? https://www.abc.net.au/news/2016-10-02/ ... me/7877098

with these last three i think (my opinion; not fact) that we begin to stray from what is generally recognized as the limits/boundaries/components of an 'AA' and crossover into what is generally recognized as 'net worth'. but, just because something may be generally recognized as 'this' or 'that' (or i think it does or does not) does not mean anyone/everyone else has to accept that.
Not sure why you're lumping in a house with shoes and a truck. A house is a significant asset, perhaps 1/2 your net worth. Shoes and truck (usually) are negligible. But on the off chance your shoe collection has a risk/return profile and is a large part of your net worth, then sure it would be a major asset to which you have allocated your capital.
cashboy wrote:
Thu Feb 13, 2020 8:40 pm
for the oil well, i think it might be considered an asset by some (like a rental property) as it produces an income stream and can be sold without impacting where one lives. that you consume 1/10 of the oil yield to heat your house is simply taking oil instead of cash as part of the overall oil well income stream
Your house also produces an income stream (rent) and can be sold without impacting where one lives (you can buy or rent somewhere else in town). That you consume 100% of the house yield to have a place to sleep is simply taking shelter instead of cash as part of the overall house income stream.

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

Post by acegolfer » Fri Feb 14, 2020 9:08 am

jmk wrote:
Thu Feb 13, 2020 9:09 pm
I agree with the majority that a house is not part of one's portfolio. However, I recently found myself falling into somewhat of that logic:
As an alternative to rebalancing by purchasing a CD at 2.4%, I instead paid down an equal amount of my 3% mortgage. Because I will end up with a "gain" at the end, and the cash I spent is equally illiquid as the CD, I counted this prepayment informally as part of my asset allocation. (I listed it in my spreadsheet just I like do my CDs: with its PV.) If I didn't do that kind of mental trick, I'd not be able to substitute one for the other. And, after all, that is why I did it in the first place. I admit I'm a little nervous seeing that mortgage payment on my spreadsheet under the Bond section. I guess another way of putting it is: I changed my AA to be more risky due to having more equity in my house.
Well done. This is the right approach. Home ownership is not part of AA. But it will affect AA decision.

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

Post by geniekid » Fri Feb 14, 2020 9:35 am

acegolfer wrote:
Fri Feb 14, 2020 9:08 am
jmk wrote:
Thu Feb 13, 2020 9:09 pm
I agree with the majority that a house is not part of one's portfolio. However, I recently found myself falling into somewhat of that logic:
As an alternative to rebalancing by purchasing a CD at 2.4%, I instead paid down an equal amount of my 3% mortgage. Because I will end up with a "gain" at the end, and the cash I spent is equally illiquid as the CD, I counted this prepayment informally as part of my asset allocation. (I listed it in my spreadsheet just I like do my CDs: with its PV.) If I didn't do that kind of mental trick, I'd not be able to substitute one for the other. And, after all, that is why I did it in the first place. I admit I'm a little nervous seeing that mortgage payment on my spreadsheet under the Bond section. I guess another way of putting it is: I changed my AA to be more risky due to having more equity in my house.
Well done. This is the right approach. Home ownership is not part of AA. But it will affect AA decision.

+1. Many things that constitute one's net worth should be considered when determining one's AA, while not being part of that AA.

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

Post by Oddball » Fri Feb 14, 2020 11:35 am

willthrill81 wrote:
Thu Feb 13, 2020 9:12 pm
jmk wrote:
Thu Feb 13, 2020 9:09 pm
I agree with the majority that a house is not part of one's portfolio. However, I recently found myself falling into somewhat of that logic:
As an alternative to rebalancing by purchasing a CD at 2.4%, I instead paid down an equal amount of my 3% mortgage. Because I will end up with a "gain" at the end, and the cash I spent is equally illiquid, I counted this prepayment informally as part of my asset allocation. (I listed it in my spreadsheet just I like do my CDs: with its PV.) If I didn't do that kind of mental trick, I'd not be able to substitute one for the other. And, after all, that is why I did it in the first place. I admit I'm a little nervous seeing that mortgage payment on my spreadsheet under the Bond section.
It's less controversial, though not universally agreed upon, that a mortgage is a negative bond (i.e. it's the 'other side' of a traditional bond). As such, it functions as means of leveraging your portfolio. So if you had $100k of stocks, $100k of bonds, and a $100k mortgage, your overall AA would be 100/0 because the mortgage would exactly offset the bonds.
If someone counts their mortgage as a negative bond, where do they count the equity in their home? Using the above numbers with $100k stock, $100k bond, and $100k mortgage on a house worth $200k, where does the $100k in home equity go?
geniekid wrote:
Fri Feb 14, 2020 9:35 am
acegolfer wrote:
Fri Feb 14, 2020 9:08 am
jmk wrote:
Thu Feb 13, 2020 9:09 pm
I agree with the majority that a house is not part of one's portfolio. However, I recently found myself falling into somewhat of that logic:
As an alternative to rebalancing by purchasing a CD at 2.4%, I instead paid down an equal amount of my 3% mortgage. Because I will end up with a "gain" at the end, and the cash I spent is equally illiquid as the CD, I counted this prepayment informally as part of my asset allocation. (I listed it in my spreadsheet just I like do my CDs: with its PV.) If I didn't do that kind of mental trick, I'd not be able to substitute one for the other. And, after all, that is why I did it in the first place. I admit I'm a little nervous seeing that mortgage payment on my spreadsheet under the Bond section. I guess another way of putting it is: I changed my AA to be more risky due to having more equity in my house.
Well done. This is the right approach. Home ownership is not part of AA. But it will affect AA decision.

+1. Many things that constitute one's net worth should be considered when determining one's AA, while not being part of that AA.
I agree with this. Even with owning 3 properties as I noted earlier in this discussion, the value of the real estate assets are not counted as part of my AA and I don't try to rebalance between real estate and stocks/bonds.

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

Post by cashboy » Fri Feb 14, 2020 11:38 am

countmein wrote:
Fri Feb 14, 2020 8:56 am
cashboy wrote:
Thu Feb 13, 2020 8:40 pm

my thought is that we ask ourselves what are the 'generally recognized' limits/boundaries/components of an 'AA'. (not net worth, but an AA).

is it stocks/bonds/cash? ex: 50/45/5
most would agree that is part of an AA. sure.

is it stocks/bonds/cash/gold? ex: 50/40/5/5
most would agree that is part of an AA. yep.

is it stocks/bonds/cash/gold/rental property? ex: 45/40/5/5/5
many would agree that is part of an AA.


but consider the following:

is it stocks/bonds/cash/gold/trucks? ex: 45/45/9.9/.1
is it stocks/bonds/cash/gold/house we live in? (not a rental)
is it stocks/bonds/cash/gold/shoes? https://www.abc.net.au/news/2016-10-02/ ... me/7877098

with these last three i think (my opinion; not fact) that we begin to stray from what is generally recognized as the limits/boundaries/components of an 'AA' and crossover into what is generally recognized as 'net worth'. but, just because something may be generally recognized as 'this' or 'that' (or i think it does or does not) does not mean anyone/everyone else has to accept that.
Not sure why you're lumping in a house with shoes and a truck. A house is a significant asset, perhaps 1/2 your net worth. Shoes and truck (usually) are negligible. But on the off chance your shoe collection has a risk/return profile and is a large part of your net worth, then sure it would be a major asset to which you have allocated your capital.
cashboy wrote:
Thu Feb 13, 2020 8:40 pm
for the oil well, i think it might be considered an asset by some (like a rental property) as it produces an income stream and can be sold without impacting where one lives. that you consume 1/10 of the oil yield to heat your house is simply taking oil instead of cash as part of the overall oil well income stream
Your house also produces an income stream (rent) and can be sold without impacting where one lives (you can buy or rent somewhere else in town). That you consume 100% of the house yield to have a place to sleep is simply taking shelter instead of cash as part of the overall house income stream.
the point of the shoes and truck is an (exaggerated) example to try and point out which assets are within the limits/boundaries/components of an AA (as generally understood) and which assets define net worth(as generally understood). stocks and bonds are in both AA and net worth; shoes and trucks are in net worth.

with that mindset, lets go back to the original post:
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.

to sum it up, you were looking for opinions so here is mine

countmein wrote:
Thu Feb 06, 2020 12:45 pm
So my new allocation is 35/50/15 RE/stock/bond.
no. you live in your house and (currently) do not rent it
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?
yes. and that is a high risk stock/bond AA.

countmein wrote:
Thu Feb 06, 2020 12:45 pm
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.
rebalance back to 50/50 if that is what your IPS says to do, or adjust your IPS to meet new stock/bonds AA goals that you might select as an interim approach (ex: 60/40).


good luck with whatever approach you take!

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Last edited by cashboy on Fri Feb 14, 2020 11:42 am, edited 2 times in total.
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Re: I bought a house, what is my AA now?

Post by willthrill81 » Fri Feb 14, 2020 11:39 am

Oddball wrote:
Fri Feb 14, 2020 11:35 am
willthrill81 wrote:
Thu Feb 13, 2020 9:12 pm
jmk wrote:
Thu Feb 13, 2020 9:09 pm
I agree with the majority that a house is not part of one's portfolio. However, I recently found myself falling into somewhat of that logic:
As an alternative to rebalancing by purchasing a CD at 2.4%, I instead paid down an equal amount of my 3% mortgage. Because I will end up with a "gain" at the end, and the cash I spent is equally illiquid, I counted this prepayment informally as part of my asset allocation. (I listed it in my spreadsheet just I like do my CDs: with its PV.) If I didn't do that kind of mental trick, I'd not be able to substitute one for the other. And, after all, that is why I did it in the first place. I admit I'm a little nervous seeing that mortgage payment on my spreadsheet under the Bond section.
It's less controversial, though not universally agreed upon, that a mortgage is a negative bond (i.e. it's the 'other side' of a traditional bond). As such, it functions as means of leveraging your portfolio. So if you had $100k of stocks, $100k of bonds, and a $100k mortgage, your overall AA would be 100/0 because the mortgage would exactly offset the bonds.
If someone counts their mortgage as a negative bond, where do they count the equity in their home? Using the above numbers with $100k stock, $100k bond, and $100k mortgage on a house worth $200k, where does the $100k in home equity go?
Good question. I'm not entirely sure, as I've noted in this thread. But the answer does not change the fact that a mortgage is debt and, as such, is a form of leverage for one's portfolio.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by willthrill81 » Fri Feb 14, 2020 11:42 am

cashboy wrote:
Fri Feb 14, 2020 11:38 am
countmein wrote:
Thu Feb 06, 2020 12:45 pm
So my new allocation is 35/50/15 RE/stock/bond.
no. you live in your house and (currently) do not rent it
So if he rented out his current home and rented another place for himself, he should then include the current home (i.e. now a rental property), in his AA?

There isn't an objectively right or best way to address this issue. It depends entirely on the individual investor's perspective, desires, situation, etc.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by cashboy » Fri Feb 14, 2020 11:56 am

willthrill81 wrote:
Fri Feb 14, 2020 11:42 am
cashboy wrote:
Fri Feb 14, 2020 11:38 am
countmein wrote:
Thu Feb 06, 2020 12:45 pm
So my new allocation is 35/50/15 RE/stock/bond.
no. you live in your house and (currently) do not rent it
So if he rented out his current home and rented another place for himself, he should then include the current home (i.e. now a rental property), in his AA?

There isn't an objectively right or best way to address this issue. It depends entirely on the individual investor's perspective, desires, situation, etc.

willthrill81 wrote:
Fri Feb 14, 2020 11:42 am

So if he rented out his current home and rented another place for himself, he should then include the current home (i.e. now a rental property), in his AA?
if he wanted to.

the majority of opinions on the 'house scenario' (including in this thread) are that most side with
'rental property = real estate part of an AA' (and is also part of net worth)
and
'non-rental property is not part of the real estate part of an AA' (but is part of net worth).

i share this 'opinion'.

willthrill81 wrote:
Fri Feb 14, 2020 11:42 am
There isn't an objectively right or best way to address this issue. It depends entirely on the individual investor's perspective, desires, situation, etc.
i agree.
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willthrill81
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Re: I bought a house, what is my AA now?

Post by willthrill81 » Fri Feb 14, 2020 1:28 pm

cashboy wrote:
Fri Feb 14, 2020 11:56 am
the majority of opinions on the 'house scenario' (including in this thread) are that most side with
'rental property = real estate part of an AA' (and is also part of net worth)
and
'non-rental property is not part of the real estate part of an AA' (but is part of net worth).
And that is a fallacious view in my opinion. Renting out the current property and then renting out another place for yourself should not logically change your AA.

The viewpoint you describe assigns value to 'traditional' rent but zero value to 'imputed' rent.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by EnjoyIt » Fri Feb 14, 2020 1:34 pm

We have discussed this ad nauseam. A house mortgage functions like a negative bond but does not have all the same properties as an inverse of a bond which is why it does not fit nice into one’s asset allocation when evaluating one’s risk.

This whole discussion continues to confuse two very important topics: net worth vs risk strategizing for oneself. Until we can get past the fact that these two items are distinctly different we will continue to talk in circles.

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