Asset Allocation Ideas when you have a Mortgage

[Greg]

All,
I've been digging through the forum while thinking about Tyler's Golden Butterfly portfolio. Tyler's Portfolio is 40% Stocks (20% Total Stock Market and 20% Small-Cap Value), 20% Long-Term U.S. Treasury Bonds, 20% Short-Term Treasury Bonds, and 20% Gold.

I'm going to be getting a mortgage in a few days and trying to figure how mortgages fit into the investing schema. Looks like some people say you shouldn't be replacing your gold portion or your LT bond positions with Mortgages (see various links to posts below).
• real estate - the elephant in the (PP) room https://gyroscopicinvesting.com/forum/v ... 92&p=31869
• Does Mortgage Reduce Need For Gold Holdings? (Inflation Protection) https://gyroscopicinvesting.com/forum/v ... 53&p=19780
• LTT's vs Mortgage viewtopic.php?t=918
• Go full in or pay off mortgage? viewtopic.php?f=1&t=7382&hilit=5th+asse ... e&start=12

Gold has been traditionally held for economic uncertainty and a semi-inflation hedge. If a mortgage acts as a semi-inflation hedge itself and is a real asset during economic uncertainty does it make sense to rearrange the asset allocations?
• If interest rates go up, there's a loss for LT Bonds but not for a House.
• If there's sustained deflation/interest rates going down, then it helps to have LT bonds over a Mortgage, but you could also refinance a mortgage with lower rates.
• If inflation goes up, that eats away at the interest on your mortgage (which normally is good for a borrower)
• If inflation goes down, ideally the money you decided to invest versus putting money into the house would continue to grow nicely.

So based on all of this, does it make sense to have an asset allocation (with +/- 10% Re-balancing Bands) like this while you have your mortgage?:
- 50% Stocks
- 15% LT U.S. Treasury Bonds
- 20% ST U.S. Treasury Bonds
- 15% Gold
Note: LT bond and Gold allocations go down due to the mortgage benefits, and therefore stocks and perhaps ST bonds go up instead.

Once you pay off the mortgage, you can go back to a standard Golden Butterfly asset allocation after that. Let me know if this thought process is way off base of having a different asset allocation when you have a mortgage versus when you don’t. Thanks!

[Cortopassi]

I don't figure my house's value into the PP, so I personally wouldn't figure any mortgage into it either. My opinion.

And being who I am, all our extra cash went to paying off the house ASAP. Mortgage free for 11 years.

Since I was not in the PP at the time and playing the market stupidly, having all extra money going to the mortgage was the smartest investment I made during those years.

[whatchamacallit]

Do you know yet if your mortgage will be a recourse mortgage?

I am a new recourse mortgage borrower and was thinking I would use it as a lever but changed my mind once in it.

I felt the effect of realizing the mortgage is a negative bond and increased bond/cash holdings to counter it.


https://www.bogleheads.org/forum/viewtopic.php?t=11861


If my mortgage was non recourse I don't think I would have worried about it.


See if you can calculate this given your tax deduction:

What would your return be if you bought a bond for same amount and maturity as your mortgage?


The liquidity is worth a price but I plan to pay my mortgage down much sooner that I thought I would going into it.

[sophie]

It's probably easiest & safest to consider your home a consumption item rather than an investment.

You can't liquidate it easily, you'll always need someplace to live, and you definitely can't liquidate part of it e.g. you can't just sell the driveway. It's more like your car than your brokerage account, and the decision to buy vs. rent is sort of like the decision to buy vs. lease a car. You bought the house because having your own place is nicer than renting, and it's cheaper than renting given a long enough time horizon.

Good luck with your closing! It's a bit intimidating and you'll get tired of signing documents, but it'll feel so good to walk away with the keys to your new home.

[Greg]

whatchamacallit,

I read through your bogleheads link. Some of it as interesting information. Looks like there are a few things:

If you didn't have it part of your portfolio, it still does put you in different life situations.

For example, two people:

Person #1
$300,000 in Investments (Stocks/Bonds/Gold)
Rent for a 3 Bed/2 Bath House ($1800/month)

Person #2
$300,000 in Investments (Stocks/Bonds/Gold)
30-year Mortgage for a 3 Bed/2 Bath House ($1800/month)

Both Person #1 and Person #2 have the same asset allocation currently. Both Person #1 and Person #2 though have different risks to them as specified above (and quoted below). Person #2 has a different risks for rising/lowering interest rates and rising/lowering monetary supply (inflation/deflation).

• If interest rates go up, there's a loss for LT Bonds but not for a House.
• If there's sustained deflation/interest rates going down, then it helps to have LT bonds over a Mortgage, but you could also refinance a mortgage with lower rates.
• If inflation goes up, that eats away at the interest on your mortgage (which normally is good for a borrower)
• If inflation goes down, ideally the money you decided to invest versus putting money into the house would continue to grow nicely.

If both Person #1 and #2 have different risks that impact them differently, shouldn't their investment asset allocations be modified to account for these different risks profiles?

[eufo]

It's probably easiest & safest to consider your home a consumption item rather than an investment.

You can't liquidate it easily, you'll always need someplace to live, and you definitely can't liquidate part of it e.g. you can't just sell the driveway. It's more like your car than your brokerage account, and the decision to buy vs. rent is sort of like the decision to buy vs. lease a car. You bought the house because having your own place is nicer than renting, and it's cheaper than renting given a long enough time horizon.

Good luck with your closing! It's a bit intimidating and you'll get tired of signing documents, but it'll feel so good to walk away with the keys to your new home.

This post is full of wisdom. I like the car analogy.

[Hal]

This may be worth a read. Final of a 5 part series.

http://idiosyncraticwhisk.blogspot.com. ... eling.html

[ochotona]

The question I have not been able to answer is... Do you count Social Security and a pension a shadow bond allocations? Any opinions?

[Tyler]

It's probably easiest & safest to consider your home a consumption item rather than an investment.

+1

And to the extent that I track my home equity in my overall net worth, I don't bother trying to wedge it into the PP framework. I'm just happy to have another non-financial store of wealth that I can maybe tap into in the future if I decide to sell and move on.

[dualstow]

I'm very happy for you, Greg!

[bitcoininthevp]

What Harry says on the topic of real estate:

Some people think of real estate as an investment. And, of course, it is possible to buy a home and
later resell it at a higher price.

But no matter how much your home has appreciated when you sell it, it's quite possible that you'll
replace it with another home in the same higher price range. And real estate isn't in the same world
as stocks, bonds, gold, or cash. The differences between them and real estate are numerous and
important.

First, even if you buy a home primarily as an investment, you probably will select a particular
house based on its value as your residence—rather than by any standards of investment analysis.

Second, you can choose the dollar amount your Permanent Portfolio should have in stocks, bonds,
gold, and cash. But real estate doesn't work that way. You can't shop for a residence that happens to
fit exactly the dollar amount you've allocated for real estate in an investment portfolio.

Further, when price changes push the portfolio out of balance (too much of one investment and
too little of another), you can buy or sell a specific amount of stocks, bonds, or gold. But you can't sell
your front porch or build a back porch just to adjust your home's value to the amount allocated for it
in the portfolio.

The value of real estate in your portfolio is indivisible, and everything else must accommodate it.
Just like a 15-foot piano in the living room, you have to arrange the rest of the furniture around it.

Third, most investments trade in markets from which you can obtain price quotes whenever you
want them, so you know exactly what your holdings are worth. And when you want to sell, you can do
so immediately. But you can't know the value of a piece of real estate until you actually sell it, and a
sale can take a long, indefinite time.

For all these reasons, real estate—even your residence— sits in a Permanent Portfolio like a gorilla
at a banquet. Its manners may be good, but somehow it just doesn't fit in.

So if real estate isn't an investment, what is it? One of three things.

It can be a consumption item—the place where you live and enjoy your life. Or it can be a business
you go into— buying and selling properties, the way a furniture dealer buys and sells tables and
chairs. Or it can be a speculation—something you play around with, using money you can afford to
lose.

It can be any of those things. But it isn't an investment as we normally think of investments.

[DragonJoey3]

I agree with Harry 100% on this one. Housing is where you live, it's not an investment and shouldn't be treated as such.

What Harry says on the topic of real estate:

Some people think of real estate as an investment. And, of course, it is possible to buy a home and
later resell it at a higher price.

But no matter how much your home has appreciated when you sell it, it's quite possible that you'll
replace it with another home in the same higher price range. And real estate isn't in the same world
as stocks, bonds, gold, or cash. The differences between them and real estate are numerous and
important.

First, even if you buy a home primarily as an investment, you probably will select a particular
house based on its value as your residence—rather than by any standards of investment analysis.

Second, you can choose the dollar amount your Permanent Portfolio should have in stocks, bonds,
gold, and cash. But real estate doesn't work that way. You can't shop for a residence that happens to
fit exactly the dollar amount you've allocated for real estate in an investment portfolio.

Further, when price changes push the portfolio out of balance (too much of one investment and
too little of another), you can buy or sell a specific amount of stocks, bonds, or gold. But you can't sell
your front porch or build a back porch just to adjust your home's value to the amount allocated for it
in the portfolio.

The value of real estate in your portfolio is indivisible, and everything else must accommodate it.
Just like a 15-foot piano in the living room, you have to arrange the rest of the furniture around it.

Third, most investments trade in markets from which you can obtain price quotes whenever you
want them, so you know exactly what your holdings are worth. And when you want to sell, you can do
so immediately. But you can't know the value of a piece of real estate until you actually sell it, and a
sale can take a long, indefinite time.

For all these reasons, real estate—even your residence— sits in a Permanent Portfolio like a gorilla
at a banquet. Its manners may be good, but somehow it just doesn't fit in.

So if real estate isn't an investment, what is it? One of three things.

It can be a consumption item—the place where you live and enjoy your life. Or it can be a business
you go into— buying and selling properties, the way a furniture dealer buys and sells tables and
chairs. Or it can be a speculation—something you play around with, using money you can afford to
lose.

It can be any of those things. But it isn't an investment as we normally think of investments.

[jhogue]

It's probably easiest & safest to consider your home a consumption item rather than an investment.

+1

And to the extent that I track my home equity in my overall net worth, I don't bother trying to wedge it into the PP framework. I'm just happy to have another non-financial store of wealth that I can maybe tap into in the future if I decide to sell and move on.

+1+1

As I was taking a break from painting my garage this afternoon, I had a blinding glimpse of the obvious: How true it is that my house is a consumption item and not an investment!

It occurred to me that my cash does not need to be mudded. My bonds don’t need to be sanded. My stocks don’t need to be primed. My gold certainly doesn’t need to be painted.

Like Tyler, I track my home equity but do not include it in net worth. It is always nice to have a durable asset that can appreciate in the long term, as long as you don’t let your mortgage and other house bills crowd out your monthly budget in the short term.

P.S.: Some personal labor may be involved. Do you have a tool box?

[barrett]

I definitely consider our home to be a consumption item but I also consider it when calculating net worth. At some point that home equity can be tapped into either by selling a house or doing a reverse mortgage.

Check out this retirement planner:

https://www.i-orp.com/gamma/extended.html

It allows one to input home equity and also an age at which one would be likely to sell a home. While it's true that everyone needs a place to live, what form that takes can vary greatly (from living in a van down by the river to an upscale retirement facility).

I also like the idea of owning a home that is a relatively low percentage of one's net worth. In many places that's easier said than done but it can prevent a lot of money stress over time.

The other thing I wanted to throw into the mix is that recurring costs (in particular property taxes) should never be underestimated. I'd place a higher priority on trying to minimize those than getting one's exact AA-to-mortgage formula figured out... not that the two things are mutually exclusive.

[AnotherSwede]

I agree with Desert.

Considering the mortgage a fixed income asset seems most reasonable. In my country where "everyone" has a 3 month duration mortgage it is cash.

With a mortgage interest of about 1% and savings interest of 0.5% and gvmt bonds negative you pay down the mortgage before loading up on NIRP bonds.

[Dieter]

I don't include home in retirement savings, but shows up in net worth -- can be plan B or C -- sell and move someplace cheaper.

And payoff date impact on fixed monthly expenses.