Sep 14, 2021

Too Many Eggs In One Basket

It is often said that owning a home is someone's most important investment and for many it is true.  However, for those with other investments as well, it is probably best that there be some balance between home ownership and stock or bond investments.  For example, if someone owns a home worth $300,000; but has $700,000 invested in stocks and or bonds, it could be that it would be better if the ratio was 50/50.  So just maybe some of that $700,000 should be invested in home ownership so that the family owns a home worth $500,000 and has a stock portfolio worth $500,000.

At the moment both the residential real estate market in many areas and the stock market are at record highs.  Having lived through at least three boom and bust cycles, this makes me very nervous.  It is never good to have too many eggs in one basket.  Even if the homeowner remains a bit under invested in home ownership, a diversified stock and bond portfolio is really important.  In terms of asset allocation, it is important to recognize that if you own 3 apples in real estate and 7 apples in the stock market and then you switch to 5 apples in real estate and 5 applies in the stock market, either way you own 10 apples. 

We have seen times where there have been wild swings in both real estate prices and the stock market.  They don't always happen at the same time.  When interest rates go up usually home values and the stock market tends to go down.  However, they don't always happen in the same ratio.  Supply and demand often determines home values.  Stock market prices can be predicted on various factors beyond just interest rates.  In any case, having a balanced portfolio that takes home value into consideration is a good idea.