Rebalancing A Portfolio Away From Real Estate
1 November 2006CNN has a profile of a couple who they suggest are far too heavy in real estate, and need to fix up their investments so that they’ve got a more diversified set of assets. If you’re not familiar with this, it’s called “rebalancing,” and the basic idea is just that if you’ve got too much money in any one thing (i.e. real estate), you need to put some of it into something else so that you can’t have all your money blown away if there are economic problems affecting one type of asset. The employees who had all their money in Enron stock are an extreme example of why you need to do this.
I’m not so sure this couple have as big a problem as the article suggests, however. While I agree with the general recommendations it makes about their non-real estate assets, it doesn’t treat a $40,000 pension from the U.S. military as what it is - as safe an investment as you can come by. That pension is an asset, and it’s not real estate. In fact, it’s probably worth close to the value of their properties - which means they’ve only got about half their money in real estate. Moreover, the rental properties are in two states, which is in itself diversification - it insulates you from the problem of one state market going south.
I say this because many people follow this strategy, and it’s a good one - buy up a few rentals, let them pay the mortgage, and in 30 years you own them outright and reap the income for yourself. If that’s your retirement plan, I wouldn’t sell one of the houses to put the money elsewhere (a common rebalancing move). Having all your money in one house would be risky - but spread it over several, and you can take a hit. The mistake this couple made in my book? Not taking advantage of 401(k)’s and the military equivalent. The tax savings are free money. There’s just no reason not to be maxing out those contributions if you can. And over time, if you put that money in a good fund (the article suggests several), you won’t be relying on real estate alone.
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