Why include home equity in an asset allocation plan?
Investors should attempt to maximize their overall net worths — not simply the value of their financial portfolios. To do this, you need to consider the value of all your assets. In theory, this would include your cars, artwork, jewelry, collectibles, and more. More practically, this means treating home equity as another asset that diversifies a portfolio. Including home equity in an asset allocation mix modifies the optimal allocation to stocks and bonds. Why is real estate a valuable addition to a portfolio? It tends to behave differently than stocks and bonds. For example, while real estate does well in times of inflation, stocks and bonds often do not. So, by adding real estate to a portfolio, it’s possible to lower risk and still achieve the same return. How much should people ideally hold in stocks, bonds, and home equity? The answer depends on a number of factors. For a homeowner with a mortgage covering about one half of his home’s value — that’s close to the national average
