We’re not discussing assets, we’re discussing asset allocation. If you’ve got home equity (and by extension, a mortgage) then you’ve also got a short bond position.
well its a question of what you mean by allocation. If you mean where you have specific $ amounts of current assets @ current mkt values what you are saying may make sence (although a balance sheet would show the mort. liability) BUT- if like most ppl here are assuming- you mean allocation as in where your capital is invested between different categories of rf/risky assets, it would be incorrect to not include leverage in the calc since it skews the effects of changes in value. As noted in my example above it would not be correct to say that portfolio is 80% cash and 20% stock because that would indicate you are mostly in “safe” RF assets when in fact you have a high risk profile.
SMIRK Wrote: ------------------------------------------------------- > The amount of leverage you have makes absolutely > no difference on your home equity amount. It > doesn’t matter if your mortgage is $100,000 or $1 > billion, your home equity balance is still the > same. Pet peeve = people who pass CFA Level 1 and > all of a sudden try to throw erroneous financial > jargon around and complicate otherwise simple > concepts like addition and subtraction. Many of the people that are currently underwater on their home had ‘home equity’ in 2005, but their home’s market value has fallen to a level less than their mortgage amount and, as a result, their home equity has evaporated.
Bankin’ Wrote: ------------------------------------------------------- > SMIRK Wrote: > -------------------------------------------------- > ----- > > The amount of leverage you have makes > absolutely > > no difference on your home equity amount. It > > doesn’t matter if your mortgage is $100,000 or > $1 > > billion, your home equity balance is still the > > same. Pet peeve = people who pass CFA Level 1 > and > > all of a sudden try to throw erroneous > financial > > jargon around and complicate otherwise simple > > concepts like addition and subtraction. > > > Many of the people that are currently underwater > on their home had ‘home equity’ in 2005, but their > home’s market value has fallen to a level less > than their mortgage amount and, as a result, their > home equity has evaporated. Well gee, stock and bond values gosh golly gee happened to, gasp!, go down too, I guess we should exclude those from asset allocation calculations as well then. Wake up, seriously.
no one said to not include it; bottom line is you asked for ASSET allocation ASSETS = Equity + LIABILITIES Doesn’t take a CFA anything to know that. Show me one 10k that doesn’t include liabilities and you win.
Bankin’ Wrote: ------------------------------------------------------- > SMIRK Wrote: > -------------------------------------------------- > ----- > > The amount of leverage you have makes > absolutely > > no difference on your home equity amount. It > > doesn’t matter if your mortgage is $100,000 or > $1 > > billion, your home equity balance is still the > > same. Pet peeve = people who pass CFA Level 1 > and > > all of a sudden try to throw erroneous > financial > > jargon around and complicate otherwise simple > > concepts like addition and subtraction. > > > Many of the people that are currently underwater > on their home had ‘home equity’ in 2005, but their > home’s market value has fallen to a level less > than their mortgage amount and, as a result, their > home equity has evaporated. Furthermore, the absolute size of the leverage does matter, and can give a good picture into someone’s overall financial health. Assume you’ve got $200,000 in a retirement account with stocks and bonds, and $100,000 in HE on a $200,000 house. Under smirk’s method, you’ve got 33% in HE, and 66% in stocks, bonds etc. Looks reasonable. Now let’s assume you’ve got $100,000 in HE on a $1,000,000 house (probably more than few people like that out there today). To smirk, this person has the same asset allocation as the one above. In reality, the guy above has 50% real estate, 50% liquid assets, and -50% bonds. The second guy has 83% real estate, 17% liquid assets and -75% bonds.
SMIRK Wrote: ------------------------------------------------------- > Bankin’ Wrote: > -------------------------------------------------- > ----- > > SMIRK Wrote: > > > -------------------------------------------------- > > > ----- > > > The amount of leverage you have makes > > absolutely > > > no difference on your home equity amount. It > > > doesn’t matter if your mortgage is $100,000 > or > > $1 > > > billion, your home equity balance is still > the > > > same. Pet peeve = people who pass CFA Level 1 > > and > > > all of a sudden try to throw erroneous > > financial > > > jargon around and complicate otherwise simple > > > concepts like addition and subtraction. > > > > > > Many of the people that are currently > underwater > > on their home had ‘home equity’ in 2005, but > their > > home’s market value has fallen to a level less > > than their mortgage amount and, as a result, > their > > home equity has evaporated. > > Well gee, stock and bond values gosh golly gee > happened to, gasp!, go down too, I guess we should > exclude those from asset allocation calculations > as well then. > > Wake up, seriously. I didn’t mean to hurt your feelings and I wasn’t even touching on asset allocations. I was just trying to show you, in very simple terms, that leverage does have an effect on home equity.
how are you doing bankin ?!? 
are you dfw cfa yet? wanna sponsor me?
akanska Wrote: ------------------------------------------------------- > how are you doing bankin ?!? are you dfw cfa > yet? wanna sponsor me? I’m doing great, how have you been? I am a dfw cfa and if you honestly need a sponsor shoot me an e-mail at BankinAF@gmail.com, or my real e-mail address if you have it, and I’ll be glad to sponsor you.
The whole short bond addition to asset allocation when counting home debt can be a little misleading. In truth, the borrower is most often short a callable bond. So with rising bond prices, he has refinance ability. His payoff does not rise past the principal due due to this implicit call. Plus, it is usually not an assumable position, so it isn’t exactly what I’d call a tradeable exposure. As well, he can’t go around and market this security for a gain if interest rates rise. Sometimes simple is just better. If I have a $500k house and have $150k of debt, I have $350k of home equity. If I have 650k in cash besides that, I then have a total NW of $1m. 35% home equity, 65% cash. Thats the methodology we should use. The ‘short agency bond’ position is kind of silly, since marketability isn’t there (95%? of the time)
Agreed, for the reasons you mentioned and because it’s not a position you can really make money on, or that you’re holding for investment purposes. But then again, you’re not holding your house for investment purposes either. If you want to talk net worth, then of course HE is relevant, but in the context of asset allocation it should be left out.
sc23 Wrote: ------------------------------------------------------- > The whole short bond addition to asset allocation > when counting home debt can be a little > misleading. In truth, the borrower is most often > short a callable bond. So with rising bond > prices, he has refinance ability. His payoff does > not rise past the principal due due to this > implicit call. Plus, it is usually not an > assumable position, so it isn’t exactly what I’d > call a tradeable exposure. As well, he can’t go > around and market this security for a gain if > interest rates rise. > > Sometimes simple is just better. If I have a > $500k house and have $150k of debt, I have $350k > of home equity. If I have 650k in cash besides > that, I then have a total NW of $1m. 35% home > equity, 65% cash. Thats the methodology we should > use. The ‘short agency bond’ position is kind of > silly, since marketability isn’t there (95%? of > the time) Finally someone with half a brain speaks some common sense on this thread. Silly is most definitely the appropriate word to describe all the Level I candidates trying to show off misguided knowledge.
artvandalay Wrote: ------------------------------------------------------- > Cocaine 113.8% HAHAHAAHA niiiiiiiiiiiiiiiiiiiiiiiiiiiiice
SMIRK Wrote: ------------------------------------------------------- > sc23 Wrote: > -------------------------------------------------- > ----- > > The whole short bond addition to asset > allocation > > when counting home debt can be a little > > misleading. In truth, the borrower is most > often > > short a callable bond. So with rising bond > > prices, he has refinance ability. His payoff > does > > not rise past the principal due due to this > > implicit call. Plus, it is usually not an > > assumable position, so it isn’t exactly what > I’d > > call a tradeable exposure. As well, he can’t > go > > around and market this security for a gain if > > interest rates rise. > > > > Sometimes simple is just better. If I have a > > $500k house and have $150k of debt, I have > $350k > > of home equity. If I have 650k in cash besides > > that, I then have a total NW of $1m. 35% home > > equity, 65% cash. Thats the methodology we > should > > use. The ‘short agency bond’ position is kind > of > > silly, since marketability isn’t there (95%? of > > the time) > > Finally someone with half a brain speaks some > common sense on this thread. Silly is most > definitely the appropriate word to describe all > the Level I candidates trying to show off > misguided knowledge. So you’re admitting you don’t understand the difference between asset allocation and net worth? When we run margin portfolios and show people the asset allocation, you better believe it adds to more than 100% of their equity. When then acknowledge, yes, there is debt here. Explain how this is different.
sc23 Wrote: ------------------------------------------------------- > I have a very justified fear of cash right now. > Assets will become king, especially as we’ll be > forced to pursue devaluation policy to solve real > economy problems. I’m loving my 71% allocation to cash this week.
-110% stocks and offshore accts
SMIRK Wrote: ------------------------------------------------------- > sc23 Wrote: > -------------------------------------------------- > ----- > > I have a very justified fear of cash right now. > > > Assets will become king, especially as we’ll be > > forced to pursue devaluation policy to solve > real > > economy problems. > > I’m loving my 71% allocation to cash this week. I’m thrilled I own some puts to hedge my portfolio… vol was cheap. no brainer to buy them.
Without doing the math, I’m at about - 30% EM Equity 5% EM Fixed Income 5% Developed Intl Equity 25% Domestic Equity 10% Domestic Fixed Income 5% Real Estate 20% Cash and Equivalents