In my IPS my Asset allocation is 45% stocks, 10% cash and 45% fixed income. My home has no mortgage/fully owned - any thoughts on if I should include that in my % allocation?
Quote from: rtysmith on September 27, 2018, 12:44:24 PM
In my IPS my Asset allocation is 45% stocks, 10% cash and 45% fixed income. My home has no mortgage/fully owned - any thoughts on if I should include that in my % allocation?
Because I include the Zillow* value of our real estate (less any associated mortgages) in our net worth calculations, I track the % allocation in our "total portfolio" (just for curiosity's sake), but I do not include it in our "liquid portfolio" which includes cash, fixed income (i.e., bonds), and equities. I am mostly concerned with keeping the equity allocation of our "liquid portfolio" at a level which allows my significant other to sleep at night.
Also, since the real estate allocation in our "total portfolio" is of decent size, we have no desire to invest in REITs which would increase our real estate exposure. If your home is a "large" percentage of your net worth, maybe you would consider avoiding REITs. On the other hand, if your home is a "small" percentage of your net worth, maybe you would consider including REITs in your portfolio. It would of course depend upon what percentage of net worth you consider "large" and "small".
If included in a "liquid portfolio", I'm assuming the value of your home would be part of your equity allocation?
* I use Zillow rather than Redfin because I think the Zillow values are post sales commission values; relators always tell me Zillow is too low and steer me to Redfin for asking price values.
I classify real estate more like a Bond+. It tends to flatline or go down when rates rise and go up when rates fall.
But you're not really long real estate if you only own your primary residence. You're neutral real estate and inflation, which is great, and the least of what everybody should do IMO.
I like Sam's post on Financial Samurai, started in 2013 but with recent comments, "Should I Include My Primary Residence When Calculating Net Worth? The Case For Yes" for those interested in a good discussion.
I'm definitely pro including a primary residence in one's net worth. My home's value has doubled in 15 years and my mortgage has varied from $600,000 to $1,100,000 due to various refi's I've done over the years. It makes no sense to omit hundreds of thousands of dollars from my net worth.
At several points in time, I've done a cash out refi to invest in other assets. If I omitted my primary residence in my net worth calculation, it would appear that my net worth magically increased by a few hundred thousand dollars at the close of the refi.
As far as asset class, I have different categories for stock, cash, bonds and real estate.