Sunday, November 25, 2007

house value / total assets

Diversification is important for so many reasons. Diversification shields you from the risks of over concentration by spreading your risk out among investments. The success of one or more investments will hopefully outweigh the mediocrity of others. Some periods might see certain investments in favour while others stagnate.

The diversification balance works within a portfolio of stocks or mutual funds the same way it works for the sum of the assets that an individual owns. At this stage in our life, our home is the largest investment we have ever made. Our house is only one asset and only exists on a single plot of land in a single city, and belongs to a single class of assets: real estate. More specifically Canadian residential real estate.

Due to the fact that we needed a place to live when we bought our house about two years ago, we become grossly overweight in this single asset when compared to the rest of our assets. The rest of our assets include mainly investments in corporations, whether through mutual funds or through individual stocks. As we go along I would like to bring this over concentration of investment in our home down quite a bit.

In May of 2006 our house made up 83% of our total assets. As of the present time (November, 2007) our house now makes up 73.5% of our total assets. So we've been able to bring our weighting in our home down about 10% over the past 1 1/2 years. See the bar graph below.



Do you keep tabs on your house value / total assets? Why or why not?

10 comments:

Potato said...

Wow, congratulations! Those numbers look all the more impressive when you flip it around and see that you've built up your other assets from 17% to 26.5%, a substantial increase. Did you factor in the appreciation of your house?

Personally, my calculation is easy since I'm renting. However, the real estate market kind of scares me. I hope to buy a house in ~3 years, but it keeps going up faster than I can save. In fact, that's exactly what a friend of mine said when he bought a house this month: he was saving and saving and trying to buy a house with 20% down, but the market was going up faster than he could save, and eventually he "had" to just dive in and buy one with a smaller down payment because other wise the goalposts would just keep moving and he'd never become an owner.

So I may be rooting for a "correction" to happen in the next 3 years or so, but that of course would be bad for people with a majority of their assets in their real estate. It's good to see you keeping an eye on staying diversified.

pitz said...

potato, that is why its important to save for a downpayment in a correlated asset class. You wouldn't save for a long-term retirement in a savings account -- why would you save for a house, a long-term asset, in a cash savings account?

Had your friend stuck at least a decent portion of his house downpayment savings into investments that are highly interest rate sensitive, such as houses, he would have fared much better.

I suspect saving in cash right now probably isn't a bad idea though, as the market is deflating. But I still think that one should use a relatively balanced portfolio when saving for a house. Don't fall into the trap of keeping it all in a cash account.

FourPillars said...

Hi MG - great question.

I do think about our house value in terms of our total assets but I don't really sit down and calculate it except for when I read posts like this one.

You're absolutely correct that you don't want to have too much $$ in one asset but the reality of buying a house when you are relatively young makes it inevitable.

If you have good financial habits (like you do) eventually the numbers will correct themselves and your house value will be a rounding error compared to your portfolio! :)

Mike

Middle Class Millionaire said...

Personally I don’t keep track of my house value simply because I wouldn’t know what meaning I could extract from the number. I believe that the house value/total asset calculation is interesting however, if your house value was only 10% of your total assets would you move to a more expensive house? Or conversely would you down grade if your house was 95%? Like you I believe in being diversified but exclude my house as I view it as more of a necessity than an investment. Even if I believed that the real estate market was at a top I wouldn’t sell my house because then I’d have to either rent, store my stuff and hope the real estate market drops or buy into the same expensive market.

telly said...

Another great trend MG!

I've never actually sat down and did the calculations myself but your post inspired me so...
our home makes up 30% of our assets but that number would be significantly higher if we looked at real estate in general as we have two rental properties as well.

Dividends4Life said...

MG: You have made wonderful progress! The statement "a family's home is usually their single largest investment..." always got under my skin. It actually motivated me to build other assets to supplant my house as the single largest asset. Keep doing what you are doing - it is exciting when your home goes under 50%.

Best Wishes,
D4L

Jake said...

Good post. I'm wondering if you are considering your equity in the house or the total value of the house? It would seem to me that it is more important to consider just the equity in the house versus your other investments.

Jake

MG said...

Hi Jake,

Welcome to the personal finance blogosphere.

I use the total value of my house because that is what I consider to be the asset. I own my whole house not just the equity.

The fraction would actually be the same though if you did:

HV/ Total Assets
or
Equity / Total Assets (non unpaid home portion)

Rick said...

@mg

that last statement is incorrect

100K/200K != 20K/120K

Also, have you taken into account the loss of value in your home over the last 1-2 years? If so, your numbers look better than they are, if not, you can make your numbers look better. :-)

MG said...

When I own a home i have all the money growing power of the total value of the house, not just the equuity. If I borrowed to invest, I would use the full value of the investment as 'the investment' not the value less the loan.

My home has not lost value in the last few years, it has grown in value.