Treat home value as bonds?

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Trying2learn
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Treat home value as bonds?

Post by Trying2learn »

My home value makes up about 50% of my NW. No mortgage. The other half of my NW is invested in a Boglehead manner (~20% bonds). I have sufficient cash (emergency fund) to last my household 1-2 years in the unlikely scenario that we lost both incomes. I'm in my mid-30s, if that matters. In this scenario, what do you think of treating the home value as an investment in bonds and being much more aggressive in my investment portfolio? What would be your reason not to? Or your reason for treating only part of the value (75%, 50%, etc.) as bonds?
Last edited by Trying2learn on Fri Dec 02, 2022 12:23 pm, edited 2 times in total.
bh1
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Re: Treat home value as a bond?

Post by bh1 »

If you consider (home - rent) as an investment, it has several aspects that are not very bond-like. The principle roughly keeps up with inflation, while a bond does not. It has costs like property tax and repairs that bonds do not. Homes are callable by fire and earthquake, rather than changes in inflation. The building has depreciation. So, you could, if you like, consider (home - rent) as an investment, but it isn't a bond.
NiceUnparticularMan
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Re: Treat home value as a bond?

Post by NiceUnparticularMan »

Properly speaking, a home you own is basically a type of depreciating durable consumer good. Holding aside things like being able to use your home to secure favorable loans, the basic advantage to buying a home is over sufficiently long periods of time, that can be a significantly less expensive way to pay for your housing than renting, although you have to make sure you account properly for things like closing costs, costs of capital, taxes, insurance, and the costs of offsetting depreciation, including maintenance and modernization. If that sounds like a lot to overcome, keep in mind your landlord has all the same sorts of costs to deal with, and needs to cover them out of your rent.

Unfortunately, a lot of people also seem to have gotten into the mindset that your home is an investment IN ADDITION to being a way of competitively paying for their housing. This is prima facie an odd thought--why would you get paid a return just for living somewhere?

And generally speaking, for the most part over the long term and across markets, homes have not been an investment like that. MAYBE a little bit the land itself, due to dynamics involving what one might see as either a natural or indeed artificial scarcity of land in certain locations. And even that is very market dependent and often risky. But the structures themselves have predictably not averaged out as good investments, they have averaged out as costs--because they are just depreciating durable consumer goods.

So why do some people think that way? Here are a few non-exhaustive possibilities.

First, if you DON'T do the accounting properly, you might buy into the idea that homes are a type of "forced savings". I personally think that is basically just an accounting illusion, specifically that you are not properly accounting for cost of capital. But I guess if you assume you would just use that same capital to fritter away on drunken parties and such (or whatever would not be as good of an "investment" as putting that capital into a depreciating durable consumer good), you can think of it as "forced savings".

Second, of course in specific times and places, housing has appreciated faster than average. Indeed, this has happened on a fairly broad basis in the United States in recent decades. However, I ALSO think this is largely an accounting illusion, and indeed the same kind of accounting illusion, namely you are not properly accounting for cost of capital. Like, virtually ALL assets in the United States have experienced faster than average appreciation in recent decades, and in that sense those great returns you got on your capital in the form of appreciation of your home equity were at the cost of not having as much stock and such to appreciate.

Third, even controlling for cost of capital, obviously some people are still going to get better than average returns. And there might be periods were a lot of people get better than average returns. If you happen to live in any area where land has gotten more scarce for some fundamental and sustainable reason, OK, maybe that is durable to that extent. But I am personally very wary about the idea these periods can be broadly sustained outside of such cases, to the point I personally think it is safer to assume some sort of regression toward long-term average appreciation than extraordinary appreciation forever.

But even if you don't buy that regression prediction, at a minimum I think people should assume at any point, going forward their home will probably only get average appreciation, give or take. And adjusted properly for cost of capital, usually that means your home really isn't an "investment" at all, beyond being a durable consumer good.

OK, so what was the question? Oh, right, no, in my view your home is not a bond.

However, to the extent because you own a home you can budget just for things like taxes, insurance, and offsetting depreciation, and not rent, and to the extent that helps you on the expected expense side of your financial planning--you can and should do that.

And if those savings on the expected expense side make you think you can take more risk on the investment side . . . OK. This is plausible given a number of models.

But not because your home is a bond. Rather, because buying your home was a way of paying (some) of your housing costs such that you don't have to also pay those costs out of your financial portfolio.
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nisiprius
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Re: Treat home value as bonds?

Post by nisiprius »

What makes a bond a bond? It isn't "delivers an income stream." (That's a distortion that people sometimes engage in, to sell things that aren't bonds to naïve investors who say they want bonds).

The essence of a bond... which is related to the word "binding..." is that a bond is a binding legal agreement, often to pay specific numbers of dollars on specific days. There is a issuer that you can sue in court if they make that exact payment on the appointed day. And, furthermore, for the kinds of bonds ordinary investors invest in, there are ratings agencies--the NRSRO's, nationally recognized statistical ratings agencies--that examine the books of the bond issuer and give "investment grade" ratings to bonds that are almost certain to honor their contracts.

Nothing about the value of a home resembles any of those characteristics.

Your own home is not a bond, nor like one. Neither are income real estate properties, non-traded REITS, dividend-paying stocks, preferred stocks, or a "secure" job.
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bloom2708
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Re: Treat home value as bonds?

Post by bloom2708 »

Your home is an asset. You have no corresponding liability (mortgage). I like this. I do the same.

20% bonds (fixed income type) is probably just fine if you are between 30 and 50.

Try this. All new money/investments go to stock index funds. Always buying stocks. 401k, Roths, Taxable with regular purchases.

Only rebalance into bonds/fixed income. Maybe 2 times per year in your 401k. Keep Roths as 100% stocks.

If your automatic purchases are stocks, you will feel like you are buying more stocks while keeping your ~20% bonds/fixed.
Mr. Buzzkill
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Re: Treat home value as bonds?

Post by Mr. Buzzkill »

I consider it part of net worth like a non-liquid zero coupon bond albeit bought at a discount relative to a future value that is not certain.

For for my overall asset allocation planning, I include it under my fixed income allocation at a big discount to current market value in anticipation of the risk of crash in real estate values.

I’m open to others pointing out flaws in my logic.
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Re: Treat home value as bonds?

Post by humblecoder »

Trying2learn wrote: Fri Dec 02, 2022 11:16 am My home value makes up about 50% of my NW. No mortgage. The other half of my NW is invested in a Boglehead manner (~20% bonds). I have sufficient cash (emergency fund) to last my household 1-2 years in the unlikely scenario that we lost both incomes. I'm in my mid-30s, if that matters. In this scenario, what do you think of treating the home value as an investment in bonds and being much more aggressive in my investment portfolio? What would be your reason not to? Or your reason for treating only part of the value (75%, 50%, etc.) as bonds?
Real estate is its own asset class: "real estate". Bonds and real estate are two different types of "investments", each with their own unique characteristics. Not sure how you can lump them together in a common asset class. Makes no sense to me.

Bond:
- Gets its value from the present value of future promised payments
- Generates cash flow through interest payments
- Subject to interest rate risk and default risk
- Liquid investment with low transaction cost and no carrying costs

Real estate:
- Gets its value from location, location, and location
- No cash flow (assuming we are talking about your personal home of course)
- Illiquid investment with a transaction cost (commissions, transfer fees, etc)
- Non-trivial carrying cost (property taxes, insurance, maintenance, etc)

The only similarity that I see is that both are subject to interest rate risk similarly (as interest rates rise, bond values and house values tend to fall).
the_wiki
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Re: Treat home value as bonds?

Post by the_wiki »

If your house is paid off and you stop having to pay rent or a mortgage, that is as good as an extra income stream. So I wouldn't consider it to be a bond, but you would need less bond income to cover expenses if you pay off your home loan.

but in general terms, I barely even register the value of my house. I need to live in it. I cannot extract the value of my house unless I want to start sleeping in my car or taking on additional debt payments.
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Re: Treat home value as bonds?

Post by nisiprius »

the_wiki wrote: Fri Dec 02, 2022 5:20 pm If your house is paid off and you stop having to pay rent or a mortgage, that is as good as an extra income stream. So I wouldn't consider it to be a bond, but you would need less bond income to cover expenses if you pay off your home loan.

but in general terms, I barely even register the value of my house. I need to live in it. I cannot extract the value of my house unless I want to start sleeping in my car or taking on additional debt payments.
Well said.
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KlangFool
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Re: Treat home value as bonds?

Post by KlangFool »

OP,

If your goal for this assumption is to change your AA from 20% bond to 0% bond, why? It won't matter if everything goes well. If it goes badly, you need your 20% bond to save you.

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Trying2learn
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Re: Treat home value as bonds?

Post by Trying2learn »

Yes, the reason I would like to think of the house as a bond investment is so that I can be more aggressive with my investment portfolio. I have a lump sum I am DCA’ing over the next several months into my taxable account and thought, in this down market, I’d like to put it all in stocks. I know not to time the market but if someone were to be in my position before I had purchased the house (in cash) they might’ve chosen to carry a mortgage and invest more towards their Bogleheads style portfolio. In that case, wouldn’t getting rid of that mortgage (a guaranteed 5%, let’s say) be similar to investing in bonds (low yield, balancing riskier stock fluctuations)?
secondopinion
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Re: Treat home value as bonds?

Post by secondopinion »

Trying2learn wrote: Sat Dec 03, 2022 4:15 pm Yes, the reason I would like to think of the house as a bond investment is so that I can be more aggressive with my investment portfolio. I have a lump sum I am DCA’ing over the next several months into my taxable account and thought, in this down market, I’d like to put it all in stocks. I know not to time the market but if someone were to be in my position before I had purchased the house (in cash) they might’ve chosen to carry a mortgage and invest more towards their Bogleheads style portfolio. In that case, wouldn’t getting rid of that mortgage (a guaranteed 5%, let’s say) be similar to investing in bonds (low yield, balancing riskier stock fluctuations)?
Getting rid of a mortgage is like buying a bond. But having a mortgage is a short of a bond as it were. If I am understanding it right, you have no mortgage; hence, you do not have a short position in bonds as it were. The home is not a bond position; the mortgage was.

You can afford more risk, that is true, than the person without the mortgage. But the home is not a bond. Just accept you are thinking of taking risk. There is no shame in it if you can afford it.
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Re: Treat home value as bonds?

Post by KlangFool »

Trying2learn wrote: Sat Dec 03, 2022 4:15 pm
Yes, the reason I would like to think of the house as a bond investment is so that I can be more aggressive with my investment portfolio.
Trying2learn,

https://investor.vanguard.com/investor- ... allocation

The average annual return for 80/20 is 11.1%
The average annual return for 100/0 is 12.3%

The difference is only 1.2% per year. If it goes well, it would not matter to you. If it goes badly, you could be in deep trouble. So, why are you doing this?

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JoeRetire
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Re: Treat home value as bonds?

Post by JoeRetire »

Trying2learn wrote: Fri Dec 02, 2022 11:16 amIn this scenario, what do you think of treating the home value as an investment in bonds and being much more aggressive in my investment portfolio?
It makes no sense to me.

Your home isn't part of your investment portfolio. Thus, it isn't a bond.

If you want to be more aggressive with your investments, just do it. Don't expect your home to help diversify your asset allocation.
Last edited by JoeRetire on Sun Dec 04, 2022 6:45 am, edited 1 time in total.
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Re: Treat home value as bonds?

Post by dcabler »

nisiprius wrote: Fri Dec 02, 2022 12:49 pm What makes a bond a bond? It isn't "delivers an income stream." (That's a distortion that people sometimes engage in, to sell things that aren't bonds to naïve investors who say they want bonds).

The essence of a bond... which is related to the word "binding..." is that a bond is a binding legal agreement, often to pay specific numbers of dollars on specific days. There is a issuer that you can sue in court if they make that exact payment on the appointed day. And, furthermore, for the kinds of bonds ordinary investors invest in, there are ratings agencies--the NRSRO's, nationally recognized statistical ratings agencies--that examine the books of the bond issuer and give "investment grade" ratings to bonds that are almost certain to honor their contracts.

Nothing about the value of a home resembles any of those characteristics.

Your own home is not a bond, nor like one. Neither are income real estate properties, non-traded REITS, dividend-paying stocks, preferred stocks, or a "secure" job.
Always a head scratcher for me as well. Only a bond is a bond. And everything else "is what it is" as well...

cheers.
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Re: Treat home value as a bond?

Post by funxional »

NiceUnparticularMan wrote: Fri Dec 02, 2022 12:43 pm First, if you DON'T do the accounting properly, you might buy into the idea that homes are a type of "forced savings". I personally think that is basically just an accounting illusion, specifically that you are not properly accounting for cost of capital. But I guess if you assume you would just use that same capital to fritter away on drunken parties and such (or whatever would not be as good of an "investment" as putting that capital into a depreciating durable consumer good), you can think of it as "forced savings".
I don't understand what type of accounting you are thinking about. Any time that I hear or think about 'forced savings' in reference to mortgages it is exactly for the reason that I highlighted in bold. Many people will struggle to reliably save money and a mortgage payment is a way to make it much harder to not set aside that money each month.
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Re: Treat home value as bonds?

Post by Triple digit golfer »

No. It isn't a bond. Treat your home equity as home equity, then decide if it is a meaningful thing to include in whatever it is you're calculating.

Asset allocation, sure, your home is an asset, but not for rebalancing purposes, in my opinion. I only rebalance things that I could easily buy or sell.

Net worth, absolutely.
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Re: Treat home value as bonds?

Post by traveling_salesman »

nisiprius wrote: Fri Dec 02, 2022 12:49 pm What makes a bond a bond? It isn't "delivers an income stream." (That's a distortion that people sometimes engage in, to sell things that aren't bonds to naïve investors who say they want bonds).

The essence of a bond... which is related to the word "binding..." is that a bond is a binding legal agreement, often to pay specific numbers of dollars on specific days. There is a issuer that you can sue in court if they make that exact payment on the appointed day. And, furthermore, for the kinds of bonds ordinary investors invest in, there are ratings agencies--the NRSRO's, nationally recognized statistical ratings agencies--that examine the books of the bond issuer and give "investment grade" ratings to bonds that are almost certain to honor their contracts.

Nothing about the value of a home resembles any of those characteristics.

Your own home is not a bond, nor like one. Neither are income real estate properties, non-traded REITS, dividend-paying stocks, preferred stocks, or a "secure" job.
I mostly agree with this, but if you really want to think of homes as bonds, you can think of the (imputed rent - costs) as a coupon payment. Like others said, homes are not callable, they cannot be shorted, futured or optioned easily and are generally not an instrument. But maybe this characterization helps with some cash flow accounting.
newparentNYC
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Re: Treat home value as bonds?

Post by newparentNYC »

Frankly, I don’t hate the suggestion of the OP.

Consider this thought experiment. If you buy a 1m house with 20% down with remainder financed at 6.5% 30yr mortgage, how would you allocate your remaining (let’s call it $1m) portfolio? In this scenario 80/20 or any bond allocation makes no sense. If you had $200k in bonds - and let’s assume sufficient savings or possibility of HELOC if you need liquidity in a crunch shouldn’t you at least sell the bonds and pay down the mortgage by 200k? Now you have 600k mortgage balance, 400k equity in house, and 800k investment portfolio 100% allocated to stocks. At that point one could debate how much of the portfolio to use to pay down mortgage further, or not, depending on risk tolerance.

So is the idea then that once the mortgage balance eventually drops below 200k that one should begin to allocate new investments back to bonds to maintain an 80/20 balance? Or just stay 100% in equities?

Separately, to those that say there’s no point in being “foolish” and going 100% equities… what disaster scenario do you envision where equities go to zero and your bond allocation “saves” you? Isn’t the experience of the last few years that the bonds are not really much safer in a crisis?
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Re: Treat home value as bonds?

Post by coachd50 »

Trying2learn wrote: Sat Dec 03, 2022 4:15 pm Yes, the reason I would like to think of the house as a bond investment is so that I can be more aggressive with my investment portfolio. I have a lump sum I am DCA’ing over the next several months into my taxable account and thought, in this down market, I’d like to put it all in stocks. I know not to time the market but if someone were to be in my position before I had purchased the house (in cash) they might’ve chosen to carry a mortgage and invest more towards their Bogleheads style portfolio. In that case, wouldn’t getting rid of that mortgage (a guaranteed 5%, let’s say) be similar to investing in bonds (low yield, balancing riskier stock fluctuations)?
I think you are asking the wrong question. It isn't "treat my home value as a bond" because as others have succinctly put it, your home is not a bond. What I believe you should be asking is "based on other's experience here, is my financial position more risk tolerant (not emotional position, only you can answer that) since I do not have a mortgage and own my home outright. What are the pros, and cons of investing more in equities because of that?
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Re: Treat home value as bonds?

Post by traveling_salesman »

JoeRetire wrote: Sun Dec 04, 2022 6:43 am
Trying2learn wrote: Fri Dec 02, 2022 11:16 amIn this scenario, what do you think of treating the home value as an investment in bonds and being much more aggressive in my investment portfolio?
It makes no sense to me.

Your home isn't part of your investment portfolio. Thus, it isn't a bond.

If you want to be more aggressive with your investments, just do it. Don't expect your home to help diversify your asset allocation.
I am not sure about what this is supposed to mean. An investment generates a cash flow. A house generates imputed rent cash flow. It is an investment.

My suggestion to the OP is simple: include everything that affects cash flow in planning how you allocate assets. That includes income, rents, taxes and etc. A house won’t diversify your asset allocation, sure, but it’s an investment that does provide an uncorrelated cash flow.
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Re: Treat home value as bonds?

Post by michaeljc70 »

Or you could just be 100% stocks because you are young and it makes sense.....

I was 100% stocks until my 40s. I retired in my 40s.
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Re: Treat home value as bonds?

Post by coachd50 »

traveling_salesman wrote: Sun Dec 04, 2022 8:20 am
JoeRetire wrote: Sun Dec 04, 2022 6:43 am
Trying2learn wrote: Fri Dec 02, 2022 11:16 amIn this scenario, what do you think of treating the home value as an investment in bonds and being much more aggressive in my investment portfolio?
It makes no sense to me.

Your home isn't part of your investment portfolio. Thus, it isn't a bond.

If you want to be more aggressive with your investments, just do it. Don't expect your home to help diversify your asset allocation.
I am not sure about what this is supposed to mean. An investment generates a cash flow. A house generates imputed rent cash flow. It is an investment.

My suggestion to the OP is simple: include everything that affects cash flow in planning how you allocate assets. That includes income, rents, taxes and etc. A house won’t diversify your asset allocation, sure, but it’s an investment that does provide an uncorrelated cash flow.
Does it provide cashflows though? If I own a house outright, but have no job, no savings, no investments no dividends etc, can I go buy groceries? Pay electric bills? Property tax bill?

I understand the concept of imputed rent- but I still wouldn't say that it is a "cashflow"
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Re: Treat home value as bonds?

Post by HMSVictory »

No the home value is not a bond substitute and yes you can be more aggressive in your AA.

Having your home paid for reduces your overall risk by eliminating a monthly payment (the largest payment most people have). It does not stabilize your portfolio risk (well not this year - ha) like bonds will. What it will do is dramatically reduce your monthly expenses now and forever going forward. This will enable you to invest a lot more into your portfolio each month because you are not sending that payment to a bank.

I am in the same boat and yes I have a much more aggressive AA. 90/10. I'm 44 years old.
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Re: Treat home value as bonds?

Post by lakpr »

coachd50 wrote: Sun Dec 04, 2022 8:41 am Does it provide cashflows though? If I own a house outright, but have no job, no savings, no investments no dividends etc, can I go buy groceries? Pay electric bills? Property tax bill?

I understand the concept of imputed rent- but I still wouldn't say that it is a "cashflow"
A person with no job, no savings, no investments but having a home owned outright is better off than another person with no job, no savings, no investments AND no home or mortgaged home. The first person at least has the option of selling the home, renting another place and survive for a few more months or years; the second person is totally bankrupt. Actually the first person also can claim bankruptcy but retain his home under homestead exemption. The second person will lose his home to the bank who carries the mortgage under bankruptcy

In that sense, yes there is an imputed cash flow by the home, the first person continues to benefit by owning the home outright.
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JoMoney
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Re: Treat home value as bonds?

Post by JoMoney »

As others have said, your home is not a "bond". If you have a mortgage, that is a bond - but it's a negative bond where you're paying the interest out.
It seems ridiculous to me to try and treat a home, or a mortgage, as parts of some arbitrary "asset allocation" you rebalance with... but the idea of an arbitrary asset allocation/rebalancing has always rubbed me the wrong way, and I like looking at it more like a "bucket" strategy where I have buckets associated with different needs/liabilities and my willingness to accept risk(s) in those areas. Once I have that mental accounting sorted out, my asset allocation is whatever that amounts to and doesn't matter if it's kept separate or commingled into one account, but at least I have a framework for myself to know why my risk exposures is what it is. You can have whatever allocation you want.
Owning a home means one of your largest regular expenses (rent) has been fixed with limited risk of inflation (other than taxes, repairs, insurance.)
Owning a home also means you could be subject to large sudden expenses for major repairs.
I could make the argument that without rent payments one might need less secured fixed income, I could also argue that the potential liabilities of fixing a home might call for a larger "emergency fund."
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Re: Treat home value as bonds?

Post by stan1 »

JoeRetire wrote: Sun Dec 04, 2022 6:43 am
Trying2learn wrote: Fri Dec 02, 2022 11:16 amIn this scenario, what do you think of treating the home value as an investment in bonds and being much more aggressive in my investment portfolio?
It makes no sense to me.

Your home isn't part of your investment portfolio. Thus, it isn't a bond.

If you want to be more aggressive with your investments, just do it. Don't expect your home to help diversify your asset allocation.
Exactly, I was going to post the same. Don't plug and chug on a formula or spreadsheet to try to rationalize a decision you otherwise aren't comfortable with. If you want 100% equities (or close to it) just do it. If you aren't comfortable with that decision of an aggressive asset allocation without considering your home value you probably should rethink the investing decision not build more spreadsheets.
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Re: Treat home value as bonds?

Post by KlangFool »

newparentNYC wrote: Sun Dec 04, 2022 8:16 am
Isn’t the experience of the last few years that the bonds are not really much safer in a crisis?
newparentNYC,

In March 2020, the stock drops 30+% and the bond drops 7%. So, the bond was safer. For a young person with a small portfolio, that could be the difference of surviving until recovery or not.

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Re: Treat home value as bonds?

Post by newparentNYC »

KlangFool wrote: Sun Dec 04, 2022 9:03 am
newparentNYC wrote: Sun Dec 04, 2022 8:16 am
Isn’t the experience of the last few years that the bonds are not really much safer in a crisis?
newparentNYC,

In March 2020, the stock drops 30+% and the bond drops 7%. So, the bond was safer. For a young person with a small portfolio, that could be the difference of surviving until recovery or not.

KlangFool
A young person with a small portfolio doesn’t need any bonds and could have waited the 6 months for recovery with no issue.
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Re: Treat home value as bonds?

Post by exodusNH »

KlangFool wrote: Sat Dec 03, 2022 4:41 pm
Trying2learn wrote: Sat Dec 03, 2022 4:15 pm
Yes, the reason I would like to think of the house as a bond investment is so that I can be more aggressive with my investment portfolio.
Trying2learn,

https://investor.vanguard.com/investor- ... allocation

The average annual return for 80/20 is 11.1%
The average annual return for 100/0 is 12.3%

The difference is only 1.2% per year. If it goes well, it would not matter to you. If it goes badly, you could be in deep trouble. So, why are you doing this?

KlangFool
That 1.2% difference is huge. Over 30 years, it's the difference between 23.5x growth and 32.5x. That could make a substantial difference in the success of your retirement or being able to leave a legacy.

Note I'm not recommending 100%, but dismissing 1.2% per year is a mistake.
dbr
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Re: Treat home value as bonds?

Post by dbr »

A theoretical answer is that one should classify the assets that make up an investment portfolio according to the characteristics of risk, return, and correlation of return with the other assets in the portfolio. This is so that one can compute a risk and return for the whole portfolio. Oftentimes one also presumes a portfolio design that holds a target allocation across the assets and rebalances from time to time.

There are some problems doing with with home value. One is that the risk and return if you can estimate them are not like those of either bonds or stocks. Very possibly the volatility of returns is more stock like than bond like. The presence of diversifiable risk in a single property is problematic because portfolio theory likes to assume that diversifiable risks have been diversified. If one is talking about dozens of properties not concetrated by location that would work, maybe. There are some papers here and there about portfolios of stock/bond/real estate assets.

As a practical matter one's home is neither stock nor bond like and is also relatively illiquid. That does not fit an asset allocation picture.

What can be done as a planning item is to contemplate scenarios where the home is sold, the proceeds are added to assets, the expenses are deleted from planned spending, but the expenses for alternative source of shelter are added to spending. This is actually a fairly likely scenario for lots of people, the uncertainty being mainly when it might happen. Planning tools like FireCalc provide for additions to the portfolio at a date and also for changes in spending at a date. It is possible to contemplate some scenarios. Of course there is still a problem estimating future property values and expenses.

In practice it is practical to tabulate investment portfolio data that does not include the home and also net worth data including the home value. A person does not have to debate whether net worth or portfolio value is what counts as one has both with a single key stroke in a spreadsheet.
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Re: Treat home value as bonds?

Post by KlangFool »

newparentNYC wrote: Sun Dec 04, 2022 9:20 am
KlangFool wrote: Sun Dec 04, 2022 9:03 am
newparentNYC wrote: Sun Dec 04, 2022 8:16 am
Isn’t the experience of the last few years that the bonds are not really much safer in a crisis?
newparentNYC,

In March 2020, the stock drops 30+% and the bond drops 7%. So, the bond was safer. For a young person with a small portfolio, that could be the difference of surviving until recovery or not.

KlangFool
A young person with a small portfolio doesn’t need any bonds and could have waited the 6 months for recovery with no issue.
newparentNYC,

1) How do you know this?

2) How do you know that 6 months is enough?

3) How many recessions have you went through?

KlangFool
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Re: Treat home value as bonds?

Post by KlangFool »

exodusNH wrote: Sun Dec 04, 2022 9:31 am
KlangFool wrote: Sat Dec 03, 2022 4:41 pm
Trying2learn wrote: Sat Dec 03, 2022 4:15 pm
Yes, the reason I would like to think of the house as a bond investment is so that I can be more aggressive with my investment portfolio.
Trying2learn,

https://investor.vanguard.com/investor- ... allocation

The average annual return for 80/20 is 11.1%
The average annual return for 100/0 is 12.3%

The difference is only 1.2% per year. If it goes well, it would not matter to you. If it goes badly, you could be in deep trouble. So, why are you doing this?

KlangFool
That 1.2% difference is huge. Over 30 years, it's the difference between 23.5x growth and 32.5x. That could make a substantial difference in the success of your retirement or being able to leave a legacy.

Note I'm not recommending 100%, but dismissing 1.2% per year is a mistake.
exodusNH ,

1.2% over 30 years.

If someone does not need to touch their portfolio for 30 years, that is a very lucky person. Counting on being lucky is not a good strategy.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
newparentNYC
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Re: Treat home value as bonds?

Post by newparentNYC »

KlangFool wrote: Sun Dec 04, 2022 9:43 am
newparentNYC wrote: Sun Dec 04, 2022 9:20 am
KlangFool wrote: Sun Dec 04, 2022 9:03 am
newparentNYC wrote: Sun Dec 04, 2022 8:16 am
Isn’t the experience of the last few years that the bonds are not really much safer in a crisis?
newparentNYC,

In March 2020, the stock drops 30+% and the bond drops 7%. So, the bond was safer. For a young person with a small portfolio, that could be the difference of surviving until recovery or not.

KlangFool
A young person with a small portfolio doesn’t need any bonds and could have waited the 6 months for recovery with no issue.
newparentNYC,

1) How do you know this?

2) How do you know that 6 months is enough?

3) How many recessions have you went through?

KlangFool
You used the anecdote of march 2020 and by that anecdote was not 6 months sufficient? And how did 80/20 vs a more aggressive allocation do since then? I don’t have the numbers in front of me but I’m pretty sure stocks have done far far better even with the recent downturn.
dbr
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Re: Treat home value as bonds?

Post by dbr »

exodusNH wrote: Sun Dec 04, 2022 9:31 am
KlangFool wrote: Sat Dec 03, 2022 4:41 pm
Trying2learn wrote: Sat Dec 03, 2022 4:15 pm
Yes, the reason I would like to think of the house as a bond investment is so that I can be more aggressive with my investment portfolio.
Trying2learn,

https://investor.vanguard.com/investor- ... allocation

The average annual return for 80/20 is 11.1%
The average annual return for 100/0 is 12.3%

The difference is only 1.2% per year. If it goes well, it would not matter to you. If it goes badly, you could be in deep trouble. So, why are you doing this?

KlangFool
That 1.2% difference is huge. Over 30 years, it's the difference between 23.5x growth and 32.5x. That could make a substantial difference in the success of your retirement or being able to leave a legacy.

Note I'm not recommending 100%, but dismissing 1.2% per year is a mistake.
A better estimate of that effect, which is real, would be to contemplate actual historical results by running this tool with the two different asset allocations, with or without contributions and withdrawals: https://engaging-data.com/visualizing-4-rule/

The question is, contemplating those charts, would you definitely choose one allocation over the other or do you think it doesn't matter.

A different question is does displaying the statistical nature of return rather than 23.5x vs 32.5x alter your perception of how to make the choice.
KlangFool
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Re: Treat home value as bonds?

Post by KlangFool »

newparentNYC wrote: Sun Dec 04, 2022 9:49 am
KlangFool wrote: Sun Dec 04, 2022 9:43 am
newparentNYC wrote: Sun Dec 04, 2022 9:20 am
KlangFool wrote: Sun Dec 04, 2022 9:03 am
newparentNYC wrote: Sun Dec 04, 2022 8:16 am
Isn’t the experience of the last few years that the bonds are not really much safer in a crisis?
newparentNYC,

In March 2020, the stock drops 30+% and the bond drops 7%. So, the bond was safer. For a young person with a small portfolio, that could be the difference of surviving until recovery or not.

KlangFool
A young person with a small portfolio doesn’t need any bonds and could have waited the 6 months for recovery with no issue.
newparentNYC,

1) How do you know this?

2) How do you know that 6 months is enough?

3) How many recessions have you went through?

KlangFool
You used the anecdote of march 2020 and by that anecdote was not 6 months sufficient? And how did 80/20 vs a more aggressive allocation do since then? I don’t have the numbers in front of me but I’m pretty sure stocks have done far far better even with the recent downturn.
newparentNYC,

A) How do you know that a young person would not be wiped out after 3 months?

B) Average American saves less than 5% of their gross income.

"And how did 80/20 vs a more aggressive allocation do since then?"

C) The person would have survive longer.

"I’m pretty sure stocks have done far far better even with the recent downturn."

D) It is obvious to me that you do not consider the possibility of unemployment and market downturn at the same time.

E) I was unemployed for more than 1 year during 2020/2021.

KlangFool
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newparentNYC
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Re: Treat home value as bonds?

Post by newparentNYC »

KlangFool wrote: Sun Dec 04, 2022 10:12 am
newparentNYC wrote: Sun Dec 04, 2022 9:49 am
KlangFool wrote: Sun Dec 04, 2022 9:43 am
newparentNYC wrote: Sun Dec 04, 2022 9:20 am
KlangFool wrote: Sun Dec 04, 2022 9:03 am

newparentNYC,

In March 2020, the stock drops 30+% and the bond drops 7%. So, the bond was safer. For a young person with a small portfolio, that could be the difference of surviving until recovery or not.

KlangFool
A young person with a small portfolio doesn’t need any bonds and could have waited the 6 months for recovery with no issue.
newparentNYC,

1) How do you know this?

2) How do you know that 6 months is enough?

3) How many recessions have you went through?

KlangFool
You used the anecdote of march 2020 and by that anecdote was not 6 months sufficient? And how did 80/20 vs a more aggressive allocation do since then? I don’t have the numbers in front of me but I’m pretty sure stocks have done far far better even with the recent downturn.
newparentNYC,

A) How do you know that a young person would not be wiped out after 3 months?

B) Average American saves less than 5% of their gross income.

"And how did 80/20 vs a more aggressive allocation do since then?"

C) The person would have survive longer.

"I’m pretty sure stocks have done far far better even with the recent downturn."

D) It is obvious to me that you do not consider the possibility of unemployment and market downturn at the same time.

E) I was unemployed for more than 1 year during 2020/2021.

KlangFool
OP states he has sufficient cash to last 1-2 years. I’m sorry you were unemployed during the pandemic; many people were able to replace the majority (or more) of their pre pandemic income from the various govt programs (rightfully or wrongly not for me to say).

In any case, we will have to respectfully agree to disagree on this topic and it has already strayed far from the original topic so this will be the last response from me on this one.

Have a great rest of the weekend!
exodusNH
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Re: Treat home value as bonds?

Post by exodusNH »

KlangFool wrote: Sun Dec 04, 2022 9:46 am
exodusNH wrote: Sun Dec 04, 2022 9:31 am
KlangFool wrote: Sat Dec 03, 2022 4:41 pm
Trying2learn wrote: Sat Dec 03, 2022 4:15 pm
Yes, the reason I would like to think of the house as a bond investment is so that I can be more aggressive with my investment portfolio.
Trying2learn,

https://investor.vanguard.com/investor- ... allocation

The average annual return for 80/20 is 11.1%
The average annual return for 100/0 is 12.3%

The difference is only 1.2% per year. If it goes well, it would not matter to you. If it goes badly, you could be in deep trouble. So, why are you doing this?

KlangFool
That 1.2% difference is huge. Over 30 years, it's the difference between 23.5x growth and 32.5x. That could make a substantial difference in the success of your retirement or being able to leave a legacy.

Note I'm not recommending 100%, but dismissing 1.2% per year is a mistake.
exodusNH ,

1.2% over 30 years.

If someone does not need to touch their portfolio for 30 years, that is a very lucky person. Counting on being lucky is not a good strategy.

KlangFool
No doubt that would be good luck.

However, dismissing a 1.2% annual return difference as "only" is not accurate. It adds up to a big multiplier difference.

I'm not arguing for 100%. If you ignore the effective leverage from having a mortgage, I've always been right around 80/20.
exodusNH
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Re: Treat home value as bonds?

Post by exodusNH »

dbr wrote: Sun Dec 04, 2022 9:52 am
exodusNH wrote: Sun Dec 04, 2022 9:31 am
KlangFool wrote: Sat Dec 03, 2022 4:41 pm
Trying2learn wrote: Sat Dec 03, 2022 4:15 pm
Yes, the reason I would like to think of the house as a bond investment is so that I can be more aggressive with my investment portfolio.
Trying2learn,

https://investor.vanguard.com/investor- ... allocation

The average annual return for 80/20 is 11.1%
The average annual return for 100/0 is 12.3%

The difference is only 1.2% per year. If it goes well, it would not matter to you. If it goes badly, you could be in deep trouble. So, why are you doing this?

KlangFool
That 1.2% difference is huge. Over 30 years, it's the difference between 23.5x growth and 32.5x. That could make a substantial difference in the success of your retirement or being able to leave a legacy.

Note I'm not recommending 100%, but dismissing 1.2% per year is a mistake.
A better estimate of that effect, which is real, would be to contemplate actual historical results by running this tool with the two different asset allocations, with or without contributions and withdrawals: https://engaging-data.com/visualizing-4-rule/

The question is, contemplating those charts, would you definitely choose one allocation over the other or do you think it doesn't matter.

A different question is does displaying the statistical nature of return rather than 23.5x vs 32.5x alter your perception of how to make the choice.
To reiterate my comment from above, I was only explaining that an annual 1.2% difference in return adds up to a substantially larger portfolio over 30 years and should not be dismissed as "only 1.2%."
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grabiner
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Re: Treat home value as bonds?

Post by grabiner »

the_wiki wrote: Fri Dec 02, 2022 5:20 pm If your house is paid off and you stop having to pay rent or a mortgage, that is as good as an extra income stream. So I wouldn't consider it to be a bond, but you would need less bond income to cover expenses if you pay off your home loan.
Therefore, it makes more sense to view a paid-off home as similar to an annuity. An annuity pays you a fixed dollar amount every month; the paid-off home instead "pays" you one month's rent every month.

While this is not a bond, it reduces the amount you need in bonds for risk reduction. If you are living entirely from your portfolio, and the portfolio loses 20% of its value, your standard of living in retirement will decline by 20%. If half your retirement income comes from pensions, annuities, or your home, and your portfolio loses 40% of its value, your standard of living in retirement will decline by only 20%.
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Re: Treat home value as bonds?

Post by Triple digit golfer »

I don't agree with the notion that a paid off home is a monthly income stream. It's a reduction of an expense or reduction in monthly outflow. It is not an income stream.

If my daughter goes to daycare for $1,000 a month, when she starts kindergarten, we wouldn't say that we now have a $1,000 monthly income stream, nor would our asset allocation change because of it.

If we say that with lower monthly expenses or outflows, we could afford a more aggressive allocation, sure. I can go along with that. But we could also say one could afford a more conservative allocation because he has lower expenses to cover. The whole need and ability to take risk thing.
the_wiki
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Re: Treat home value as bonds?

Post by the_wiki »

Triple digit golfer wrote: Sun Dec 04, 2022 3:53 pm I don't agree with the notion that a paid off home is a monthly income stream. It's a reduction of an expense or reduction in monthly outflow. It is not an income stream.

If my daughter goes to daycare for $1,000 a month, when she starts kindergarten, we wouldn't say that we now have a $1,000 monthly income stream, nor would our asset allocation change because of it.

If we say that with lower monthly expenses or outflows, we could afford a more aggressive allocation, sure. I can go along with that. But we could also say one could afford a more conservative allocation because he has lower expenses to cover. The whole need and ability to take risk thing.

I never called it income, I said it was “as good as income”

You will now have $1000 more to spend each month by eliminating daycare. That is the same outcome as if you got a $1000 (after tax) raise. That is not income, but it “as good” as income. You can spend or save it like income. If you were living off savings, you could withdraw less.

Of course you wouldn’t change your allocations at this phase of life, just as you would not if you got a raise at work.
invest4
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Re: Treat home value as bonds?

Post by invest4 »

nisiprius wrote: Fri Dec 02, 2022 5:21 pm
the_wiki wrote: Fri Dec 02, 2022 5:20 pm If your house is paid off and you stop having to pay rent or a mortgage, that is as good as an extra income stream. So I wouldn't consider it to be a bond, but you would need less bond income to cover expenses if you pay off your home loan.

but in general terms, I barely even register the value of my house. I need to live in it. I cannot extract the value of my house unless I want to start sleeping in my car or taking on additional debt payments.
Well said.
This is also more along the lines of my thinking.

* I do not count my house as far as net worth. Of course, it doesn't really matter since I stopped tracking net worth many years ago.

* My home has no impact on my chosen AA as far as investments go.

* A paid off house reduces expenses (great!). In an emergency, the house may also be able to make cash available to you...HELOC for example. (also nice).
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Re: Treat home value as bonds?

Post by coachd50 »

lakpr wrote: Sun Dec 04, 2022 8:48 am
coachd50 wrote: Sun Dec 04, 2022 8:41 am Does it provide cashflows though? If I own a house outright, but have no job, no savings, no investments no dividends etc, can I go buy groceries? Pay electric bills? Property tax bill?

I understand the concept of imputed rent- but I still wouldn't say that it is a "cashflow"
A person with no job, no savings, no investments but having a home owned outright is better off than another person with no job, no savings, no investments AND no home or mortgaged home. The first person at least has the option of selling the home, renting another place and survive for a few more months or years; the second person is totally bankrupt. Actually the first person also can claim bankruptcy but retain his home under homestead exemption. The second person will lose his home to the bank who carries the mortgage under bankruptcy

In that sense, yes there is an imputed cash flow by the home, the first person continues to benefit by owning the home outright.
Respectfully, while it is obvious that the hypothetical person I described is better without a mortgage than with a mortgage (for the reasons you point out) that does not make imputed rent "cashflow"

It is a curious but common phenomenon on bogelheads: members seem to love to call or treat some things like other things.
lakpr
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Re: Treat home value as bonds?

Post by lakpr »

coachd50 wrote: Sun Dec 04, 2022 6:24 pm Respectfully, while it is obvious that the hypothetical person I described is better without a mortgage than with a mortgage (for the reasons you point out) that does not make imputed rent "cashflow"

It is a curious but common phenomenon on bogelheads: members seem to love to call or treat some things like other things.
Equally respectfully -- all I am saying is that the term "imputed cashflow" itself implies that while no cash is actually 'flowing' from one party to another, it can be implicitly computed. In this example you gave and I elaborated, the first person is enjoying an imputed cash flow equal to what the house would have rented for; the second person did not have that luxury. Thus, the house is paying monthly dividends equal to what it would have rented for.
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JoMoney
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Re: Treat home value as bonds?

Post by JoMoney »

lakpr wrote: Sun Dec 04, 2022 6:34 pm...Thus, the house is paying monthly dividends equal to what it would have rented for.
The imputed value of owner's equivalent rent is potentially more valuable. Under current U.S. tax law "imputed rent" is not taxed but receiving rental income from renting the place out would be taxable income.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
bartl007
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Re: Treat home value as bonds?

Post by bartl007 »

Good article here on the subject if you carry a mortgage :

https://www.kitces.com/blog/why-is-it-r ... -mortgage/
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