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Do you look at mortgage as part of overall asset allocation or as a separate entity?

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  • Do you look at mortgage as part of overall asset allocation or as a separate entity?

    Just read WCI article this morning - Debt is a Negative Bond ( The item that stood out to me was #2 - Different Pots of Money. I'm curious how others on the forum look at their other debts, specifically their mortgages. Do you factor that into your overall asset allocation or is it a distinct entity with its own financial goal?

    Case in point (another debt/invest question) - Now that I am a recent homeowner, I have wrestled with the idea of directing money towards my low interest rate mortgage (15yrs at 2.625%) instead of investing in bonds. This would subsequently change my current stock/bond asset allocation from 90/10 to 100/0 and thus alter my "retirement" financial goal but would make sense if I looked at all of my money as one big pot.

    I'm curious how smarter people than I (this forum) think about this.

  • #2
    I do view my mortgage like a bond so I currently don’t hold any bonds, however, unless I retire fairly early then we’ll have quite a bit more than we’ll need so my investing timeline is for more than one generation.


    • #3
      It makes sense to view it as a bond, but I do not.
      I suppose it depends what your long range plans are. I don't expect to be debt-free at any point in my life. My taxable accounts are about 10x the mortgage debt (7 yrs left on 3% loan), but I'm in no hurry to pay it off. Kids are 21 and 18, and hopefully will go out on their own before the mortgage ends. At that point, we are likely to move - probably a smaller house but likely more expensive. Probably would get another mortgage.
      So for me, it's not an asset or a liability - more of ongoing expense like rent would be.

      If you plan to be debt free at some point, it makes sense to include it in asset allocation and balance decreasing debt with more bonds. We don't - and we keep it separate.
      Last edited by molar roller; 02-26-2021, 06:33 AM.


      • #4
        It's really easy to just say your portfolio is 100% stocks or 90/10 stocks/bonds. The question that any investor has to do is ask why they're putting money into that particular investment/allocation. Do you have bonds in your portfolio for their relatively stable dividends? To make a 10% drop more like 5% to prevent panic selling and trying to time the market? To allow re-balancing on a regular basis?

        Paying off a 2.6% mortgage and investing in a bond yielding 2.6% will have relatively the same impact in net worth (but doesn't take into account taxes or deductions).

        One difference is it's a lot easier to sell bonds for cash flow, portfolio re-balancing than trying to take equity out of your house/HELOC.


        • #5
          If you consider the bond, you also need to consider the asset.
          This is true for allocations of NW. Your NW ilys impacted greatly and your cash flow risk is more personal capital (future earnings risk) as well.
          From a portfolio standpoint, your AA long term is the market risk, not the house appreciation and mortgage.
          WCI was referring to student debt, no asset attached. The other threads typically involve a HCOL residence.
          For actionable portfolio rebalancing keep them separate is my thought. Housing in one bucket (risk control is the cash flow) and investment AA in another bucket.


          • #6
            Your question: "Mortgage, Do you factor that into your overall asset allocation or is it a distinct entity with its own financial goal?"

            I think WCI is correct and it is a reasonable consideration. I had an interest rate of 3.375% and rather than increasing bonds in my AA I chose to pay it off..

            I am very happy with the decision. Now AA is 70:30 with zero debt.

            A house is a consumption item. But you must live some place. If it is paid for it is not likely to go to zero and if you have no mortgage your cashflow is better and your risk is lower. With a lower risk situation, I feel more comfortable having 70% stocks.

            I know 70:30 is not a very aggressive portfolio but I am in the wealth preservation stage or at lest cost to it

            I would rather gain less and take less risk = decrease my chances of a catastrophic loss.